Value Investing

Notes To Ben Graham’s Book “Security Analysis”

Ronald R. Redfield: Notes To Book “Security Analysis” by Redfield Blonsky & Starinsky

I thought these quotes from Security Analysis: Sixth Edition, Foreword by Warren Buffett might be food for thought.

Benjamin Graham and David Dodd first wrote Security Analysis in 1934. The first edition was described by Graham as a “book that is intended for all those who have a serious interest in securities values.” The book was not designed for the investment novice. One must have an intermediate to advanced understanding of financial statements, accounting and finance for the book to be understood. The book emphasizes logical reasoning. Graham wrote, “It is the conservative investor who will need most of all to be reminded constantly of the lessons of 1931 –1933 and of previous collapses.”

On Page [xiv] Seth Klarman wrote:

”Losing money, as Graham noted, can also be psychologically unsettling. Anxiety from the financial damage caused by recently experienced loss or the fear of further loss can significantly impede our ability to take advantage of the next opportunity that comes along. If an undervalued stock falls by half while the fundamentals – after checking and rechecking – are confirmed to be unchanged, we should relish the opportunity to buy significantly more “on sale.” But if our net worth has tumbled along with the share price, it may be psychologically difficult to add to the position.”

On Page [xviii] Klarman wrote:

”Skepticism and judgment are always required.”

“Because the value of a business depends on numerous variables, it can typically be assessed only within a range.”

“In the end, the most successful value investors combine detailed business research and valuation work with endless discipline and patience, a well-considered sensitivity analysis, intellectual honesty, and years of analytical and investment experience.”

On Page [xx] Klarman wrote:

”Even in the worst of markets, Graham and Dodd remained faithful to their principles, including their view that the economy and markets sometimes go through painful cycles, which must simply be endured. They expressed confidence, in those dark days, the economy and stock market would eventually rebound: “While we were writing, we had to combat a widespread conviction that financial debacle was to be the permanent order.”

“It is always difficult to take a contrarian approach. Even highly capable investors can wither under the relentless message from the market that they are wrong.”

On Page [xxii] Klarman wrote:

”Of course, for those value investors who are truly long term oriented, it is a wonderful thing that many potential competitors are thrown off course by constraints that render them unable or unwilling to effectively compete.”

On Page [xxiv] Klarman wrote:

”When bargains are scarce, value investors must be patient; compromising standards is a slippery slope to disaster. New opportunities will emerge, even if we don’t know when or where.”

“Still value investors are bottom-up analysts, good at assessing securities one at a time based on the fundamentals. They don’t need the entire market to be bargained priced, just 20 or 25 unrelated securities – a number sufficient for diversification of risk. Even in an expensive market, value investors must keep analyzing securities and assessing businesses, gaining knowledge and experience that will be useful in the future.”

On Page [xxvi] Klarman wrote:

”In a bad real estate climate, tighter lending standards can cause even healthy properties to sell at distressed prices. Graham and Dodd’s principles – such as the stability of cash flow, sufficiency of return, and analysis of downside risk – allow us to identify real estate investments with a margin of safety in any market environment.”

On Page [xxxix] Klarman wrote:

”In a rising market, everyone makes money and a value philosophy is unnecessary. But because there is no certain way to predict what the market will do, one must follow a value philosophy at all times. By controlling risk and limiting loss through extensive fundamental analysis, strict discipline, and endless patience, value investors can expect good results with limited downside.”

On Page [xl] Klarman wrote:

”The real secret to investing is that there is no secret to investing.”

On Pages 22 and 23 there is an interesting table on Economic Data from 1911-1913, 1923-1925 and 1936-1938.

On Page 57 Roger Lownestein wrote:

”As a rule of thumb, investors should spend the bulk of their time on the disclosures of the security under study, and they should spend significant time on the reports of their competitors. The point is not just to memorize the numbers but to understand them; as we have seen, both the balance sheet and the statement of cash flow will throw significant light on the number that Wall Street pays the most attention to, the reported earnings.”

Security Analysis

Security Analysis: Sixth Edition, Foreword by Warren Buffett by Benjamin Graham

See full PDF below.