Value Investing

The Best Of Graham And Dodd’s Security Analysis: Part I

The Best Of Graham And Dodd’s Security Analysis: Part I by Total Goon Move

View the best quotes from the investment book that Warren Buffett says, “changed my life.”

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This is part one of a seven part series and contains quotes from the Sixth Edition of Security Analysis.

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The Best Of Graham & Dodd’s Security Analysis Part I: Survey And Approach

Chapter 1 The Scope And Limits Of Security Analysis. The Concept Of Intrinsic Value

“Analysis connotes the careful study of available facts with the attempt to draw conclusions therefrom based on established principles and sound logic. It is part of the scientific method. But in applying analysis to the field of securities we encounter the serious obstacle that investment is by nature not an exact science.”

-- p.61 --

 We must recognize…that intrinsic value is an elusive concept. In general terms it is understood to be that value which is justified by the facts, e.g., the assets, earnings, dividends, definite prospects, as distinct, let us say, from market quotations established by artificial manipulation or distorted by psychological excesses. But it is a great mistake to imagine that intrinsic value is as definite and as determinable as is the market price.”

-- p.64 --

“The essential point is that security analysis does not seek to determine exactly what is the intrinsic value of a given security. It needs only to establish either that the value is adequate... or else that the value is considerably higher or considerably lower than the market price. For such purposes an indefinite and approximate measure of the intrinsic value may be sufficient. To use a homely simile, it is quite possible to decide by inspection that a woman is old enough to vote without knowing her age or that a man is heavier than he should be without knowing his exact weight.”

-- p.66 --

“Undervaluations caused by neglect or prejudice may persist for an inconveniently long time, and the same applies to inflated prices caused by overenthusiasm or artificial stimulants.”

 -- p.70 --

“In other words, the market is not a weighing machine, on which the value of each issue is recorded by an exact and impersonal mechanism, in accordance with its specific qualities. Rather should we say that the market is a voting machine, whereon countless individuals register choices which are the product partly of reason and partly of emotion.”

 -- p.70 --

“It is only where chance plays a subordinate role that the analyst can properly speak in an authoritative voice and accept responsibility for the results of his judgments.”

 -- p.73 --

Chapter 2 Fundamental Elements In The Problem Of Analysis. Quantitative And Qualitative Factors

“Nearly every issue might conceivably be cheap in one price range and dear in another.”

 -- p.80 --

“The analyst must pay respectful attention to the judgment of the market place and to the enterprises which it strongly favors, but he must retain an independent and critical viewpoint. Nor should he hesitate to condemn the popular and espouse the unpopular when reasons sufficiently weighty and convincing are at hand.”

-- p.81 --

“It is natural to assume that industries which have fared worse than the average are 'unfavorably situated' and therefore to be avoided. The converse would be assumed, of course, for those with superior records. But this conclusion may often prove quite erroneous. Abnormally good or abnormally bad conditions do not last forever. This is true not only of general business but of particular industries as well. Corrective forces are often set in motion which tend to restore profits where they have disappeared, or to reduce them where they are excessive in relation to capital.”

 -- p.83 --

“Objective tests of managerial ability are few and far from scientific. In most cases the investor must rely upon a reputation which may or may not be deserved. The most convincing proof of capable management lies in a superior comparative record over a period of time.”

 -- p.84 --

“But while a trend shown in the past is a fact, a 'future trend' is only an assumption.”

 -- p.84 --

“Analysis is concerned primarily with values which are supported by the facts and not with those which depend largely upon expectations. In this respect the analyst's approach is diametrically opposed to that of the speculator, meaning thereby one whose success turns upon his ability to forecast or to guess future developments. Needless to say, the analyst must take possible future changes into account, but his primary aim is not so much to profit from them as to guard against them. Broadly speaking, he views the business future as a hazard which his conclusions must encounter rather than as the source of his vindication.”

 -- p.86 --

Chapter 3 Sources Of Information

“Although it is true that the registration statements are undoubtedly too bulky to be read by the typical investor, and although it is doubtful if he is even careful to digest the material in the abbreviated prospectus (which still may cover more than 100 pages), there is no doubt that this material is proving of the greatest value to the analyst and through him to the investing public.”

 -- p.96 --

18. “It must never be forgotten that a stockholder is an owner of the business and an employer of its officers. He is entitled not only to ask legitimate questions but also to have them answered, unless there is some persuasive reason to the contrary.”

-- p.98 --

Chapter 4 Distinctions Between Investment And Speculation

“An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”

 -- p.106 --

“An investment operation is one that can be justified on both qualitative and quantitative grounds.”

 -- p.107 --

Chapter 5 Classification Of Securities

“From the foregoing discussion [Graham's case for a new classification of securities] the real character and purpose of our classification should now be more evident. Its basis is not the title of the issue, but the practical significance of its specific terms and status to the owner. Nor is the primary emphasis placed upon what the owner is legally entitled to demand, but upon what he is likely to get, or is justified in expecting, under conditions which appear to be probable at the time of purchase or analysis.”

 -- p.119 --

This concludes part I of VII.

Security Analysis

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