How should a defensive investor construct their investment portfolio?

Ha, that's a fantastic question – clearly from someone who's seriously read The Intelligent Investor. Graham's philosophy is like the "Eighteen Dragon Subduing Palms" of the investment world: unadorned but incredibly powerful. I’ll break it down in simple terms, blending in my own understanding.

Imagine you're not a Wall Street elite. You don’t have the time or energy to study complex stock charts and financial reports every day. You just want to preserve and grow your money steadily, beat inflation, and sleep soundly at night. You—you are what Graham calls the Defensive Investor.

So, how do you build this "defensive" fortress?

Core Philosophy: Balance is King (The 50/50 Rule)

This is Graham’s simplest, most fundamental advice for the Defensive Investor:

Split your capital into two portions: one for bonds, one for stocks, roughly in a 50/50 ratio.

Stocks (The Offense): Like the forwards on your team. They attack, aiming for higher returns and fighting inflation. But they're volatile and higher-risk.
Bonds (The Defense): Like your defenders and goalkeeper. Their main job is defense—protecting your principal capital and providing steady interest income. They grow slowly but don't fall much either.

These two parts are like ends of a teeter-totter. When the stock market surges, your stock portion appreciates. When the stock market plummets, the stability of bonds protects your entire investment portfolio from severe damage.

Graham also said this ratio can be slightly flexible. For example, if you think stocks are too expensive and risky, you might reduce stocks to 25% and increase bonds to 75%. Conversely, if you think the stock market is full of golden opportunities and is cheap, you might increase stocks to 75% and reduce bonds to 25%.

But the key point: Never let your stock allocation fall below 25% or rise above 75%. This forces you to sell a little stock when the market is euphoric (highs) and buy a little stock when the market is panicked (lows), achieving the simplest form of "buy low, sell high."

How to Pick Your "Soldiers"? (Asset Selection)

Strategy alone isn't enough; you also need to know how to recruit.

1. How to Choose Bonds? (Prioritize Safety)

For ordinary folks, keep it simple. Primarily:

Government Bonds: These are the safest, backed by the national credit.
High-Grade Corporate Bonds: Bonds issued by very reputable large companies, also relatively low risk.

Modern Lazy Version: Directly buy a Bond Fund or Bond ETF. The fund manager will buy a basket of different bonds for you, diversifying risk and saving you effort.

2. How to Choose Stocks? (Strict Discipline)

This is crucial and where mistakes are easiest to make. Graham set several very strict screening criteria for defensive investors, designed to help you buy "good companies" at "good prices."

Graham's Seven Stock Selection Rules (Think of them as seven hard recruitment criteria):

Adequately Large Company Size: Avoid small, obscure companies. Choose industry leaders—brands you've heard of or used in daily life. They’re more resilient.
Strong Financial Condition: The company's current assets should be at least twice its current liabilities (Current Ratio > 2), and long-term debt should not exceed net current assets. Simply put, the company should have significantly more "liquid money" than short-term debts, without heavy long-term debt burdens.
Long-Term Stable Profitability: Review the company's financial reports for the past 10 years. It must have earned a profit every year, without losses. This screens out cyclical or unstable companies.
Uninterrupted Dividend Record: The company must have paid dividends to shareholders every year for the past 20 years. Companies that consistently pay dividends usually have healthy cash flow and are willing to share profits with owners.
Earnings Growth: Over the past 10 years, the company's earnings per share must have grown by at least one-third. While defensive, we still want progress, not stagnation.
Moderate P/E Ratio: The current stock price should not exceed 15 times the average earnings per share over the past three years. P/E can be simply understood as the "payback period." A lower number means you're buying cheaper.
Moderate P/B Ratio: The current stock price should not exceed 1.5 times the company's book value (net assets). Furthermore, the product of the P/E ratio and P/B ratio should not exceed 22.5 (a Graham empirical formula). P/B can be roughly understood as how many multiples you are paying for the company's tangible "stuff."

Does this sound daunting? Yes. For the average person, picking stocks one-by-one using these seven rules is a huge workload.

Modern Lazy Version: This is also what Warren Buffett strongly recommends—buy Broad-Based Index Funds!

For example, buy an index fund tracking the CSI 300 or the S&P 500. Why?

Automatically Meets Most Criteria: Index funds contain the largest, most established companies in the market (satisfies points 1, 2, 3).
Extreme Diversification: You instantly own shares in hundreds of companies, perfectly avoiding the risk of "putting all your eggs in one basket."
Very Low Cost: Management fees for index funds are much lower than for actively managed funds.

Therefore, a modern simplified Graham defensive portfolio could look like this:

[50% Bond Fund/Bond ETF + 50% Broad-Based Stock Index Fund/ETF]

Summary: Your Action Plan

As a Defensive Investor, building your portfolio is like stacking blocks: simple, solid, and avoiding mistakes is the win.

Set the Strategy: Adhere to the 50/50 stock/bond balance principle, making minor adjustments between 25/75 and 75/25 based on market conditions.
Select Assets (Simple Version):
- Bond Portion: Buy low-risk Bond Funds.
- Stock Portion: Buy low-cost Broad-Based Index Funds (e.g., CSI 300 index fund, S&P 500 index fund).
Maintain It: Review your stock/bond ratio yearly or semi-annually. If, for example, stocks surge to 60% of your portfolio, sell 10% of your stock funds and buy bond funds to rebalance back to 50/50. This action is called Rebalancing. It's the disciplined way to force you to "sell high" and "buy low."
Manage Your Mindset: Remember Graham’s "Mr. Market" analogy. The market is like an emotionally unstable fellow—sometimes exuberant, offering high prices (you can sell to him), sometimes depressed, offering low prices (you can buy from him). Don't be swayed by his mood; stick to your principles.

Investing is a marathon, not a sprint. The essence of a defensive strategy isn't about how much you make short-term. It's about "not losing big money" and "earning the market's average return over the long run." This "slow is fast" wisdom is what I hope helps you succeed.