An investment contract is a promise to yourself that you will not speculate in stock unnecessarily. It also ensures that you buy and hold a stock as long as the underlying reasons for investing in it hold true. It is a promise you make to yourself that you will never involve in speculative activities and that you will keep on investing regularly through systematic investment plans.
The investment contract was first inspired by the book “The Intelligent Investor” where Graham had asked the readers to sign the contract. This contract stands valid only if a witness signs on it. It makes sure that you are abiding by the contract. Our modified version of the contract also makes sure that you pay X % of your portfolio or a fixed amount to the witness in case you fail to abide by the contract. The fact that the contract contains your signature along with a witness as a proof, makes you think twice before you terminate the contract.
A lot of value investors have been using this method to stay invested. They keep it at an accessible place so that it can be viewed whenever you feel like selling your stock for unnecessary reasons.
It makes you a disciplined investor and keeps you away from speculative activities. An exclusion is also provided that takes care of your emergency needs. In that case, you will have to prove to your witness that you are really in an emergency and in dire need of cash. This makes the contract even more robust and I certainly advise all my readers to use it whenever you make a new investment, be it a mutual fund or a new stock.
For every new investment, here will be a separate contract so that you don’t have to add new investments in the same contract. This will also make sure that the witness is aware of the new investments that you make.
The witness is also supposed to be educated on the topic of value investing. He/she must be able to validate your proposal of selling the invesmrnt whenever you provide a justification for it. Upon presenting an emergency the witness must reasonably evaluate the sitations. A witness can be anyone from your family or a close friend who acts in your good faith.
So without talking much, download your investment contract here and start using it every time you make a new investment.