Walter Schloss: The Hippocratic Method In Security Analysis

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That excellent compendium of reflective thinking known as The Practical Cogitator from which our own pseudonym may have been filched - contains an interesting account by L.J.Henderson of the method of Hippocrates, "the most famous of physicians." This procedure is described as follows:

"The first element of that method is hard, persistent, intelligent, responsible, unremitting labor in the sick-room, not in the library; the complete adaptation of the doctor to his task, an adaptation that is far from being merely intellectual. The second element of that method is accurate observation of things and events; selection, guided by judgment born of familiarity and experience, of the salient and the recurrent phenomena, and their classification and methodical exploitation, The third element of that method is the judicious construction of a theory ~ not a philosophical theory, nor a grand effort of the imagination, nor a quasi-religious dogma, but a modest pedestrian affair, or perhaps I had better say, a useful walking~stick to help on thereof."

Henderson goes on to suggest that this procedure, so successful in the study of sickness, may well be employed in studying " the other experiences of everyday life." That phrase would scarcely suggest our special line of endeavor; yet the temptation to draw parallels between security analysis and medicine is almost irresistible. Both medicine and security analysis partake of the mixed nature of an art and a science; in both the outcome is strongly influenced by unknown and unpredictable factors; in both we may find - in Henderson‘s phrase - "the concealment of ignorance, probably more or less unconsciously, with a show of knowledge."

If we give our imagination a little rein we can develop systematic analogs between the work of the physician and that of the analyst. We can set off the client, with his cash resources and his security holdings, good and bad, against the patient with his constitution and his physical vigor or ailments. This suggests that the typical doctor who ministers only to the sick is fulfilling but a part of his function, as would a security analyst who was consulted only when investments went wrong. The full duty of the physician as of the analyst, should be to assist the patient-client to make the most effective use of all his resources - in one case physical, in the other financial.

Another analogy, more forced yet perhaps more useful, may be drawn between the individual patient and the individual security. Suppose doctors were asked by insurance companies to tell at what rate they should insure given applicants‘ against sickness and death. This would involve an appraisal of each applicant's health factors in quantitative terms, perhaps.gs a per cent of "par." Is not this at bottom.what the security analyst does, or should do, with respect to the stock or bond issues he examines? He must judge whether they are good risks at going prices; or conversely, name the price at which they would be good risks. Both the physician and the analyst must consider a host of factors in arriving at these judgments; they must expect unforeseeable events to play hob with some of them; they must rely on sound methods, experience and the law of averages to vindicate their work.

We have pursued our analogies farther than is prudent, in order to gain a better hearing from security analysts for the Hippocratic method. The first element listed at the outset - "unremitting labor in the sick-room" - we shall concede is followed by our responsible analysts. We do work hard and persistently; we do gain our knowledge of securities at first hand - in the board room, if not in the sick room.

Walter Schloss

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