Monday, August 4, 2008

For a taste of your Whisky

"You got to know when to hold 'em, know when to fold 'em, know when to walk away and know when to run". Kenneth Donald Rogers -The Gambler

No truer words have been sung about gambling but Ken's advice is quite appropriate to today's investing environment as well.

I have been working my way through Benjamin Graham and David Dodd's 1934 investment bible Security Analysis and have rediscovered and sometimes discovered for the first time, some of the basic investment strategies that one should use when looking for good stocks at a good price, or Graham calls his "Intrinsic Value" approach and the relationship with the market price of a stock.

In today's turbulent marketplace these basic investment strategies are even more appropriate and will help an individual decide what to do when one is put in the position of the individual in the song that Kenny sings about.

Security Analysis was written at a time, in 1934, when the questions an investor had to ask themselves, in relation to buying good stocks at a good price, were more central to the decision to buy stocks at any time in the history of stockmarkets. The time of the Great Depression.

From that perspective then, lets take a look at some of the factors that Benjamin Graham has highlighted in terms of the relationship between intrinsic value to the market price of stocks.

The relationship of intrinsic value to market price is best explained in the chart from page 23 of Security Analysis.

Relationship of Intrinsic Value Factors to Market Price
I.General market factors

} Attitude of public toward the issue (leads to)

} Bids and offers (lead to)

} Market price
II.Individual factors
1.Market factors



2.Future value factors
a.Management and reputation

b.Competitive conditions and prospects

c.Possible and probably changes in volume, price, and costs

3.Intrinsic value



d.Capital structure

e.Terms of the issue


What Graham calls "analytical factors" determining the market price of stocks; company management, company earnings, long-term outlook for the company,returns for the shareholder, etc, are at odds and in competition with speculative factors influencing market price; the stock price, traders manipulating large tranches of stock artificially, and the general schizoid nature of "Mr Market" at times, and these factors, analytical and speculative, clearly influence stock prices in opposing directions.

Graham has called this approach to the stockmarket a "voting machine". That is, individual investors are making choices on the basis of part reason and part emotion.

As many stockmarket investors have found over the last year, speculative sentiment or emotion has reined supreme, while the analytical,reasoned approach seems to have gone the way of the dinosaur, Rubik's cube and backwards baseball cap.

The writers of Security Analysis have pointed out, lamentably so in my opinion, that the market should be more perhaps a "weighting machine", where the value of stocks is evaluated by a precise and unemotional means in accordance with the actual qualities that a company or stock has; positive or negative.

I would have to agree with the latter, although having said that I have made various emotional stock purchases in the past. Most of them much earlier on in my 11 years of stockmarket investing.

It is clear to most long term investors such as myself that the role of emotion and other speculative factors plays a big influence on stock investors when they are buying and selling stocks.

If investors took Benjamin Graham's intrinsic value approach to investing I think they would be more likely to buy and sell stocks at a reasonable and fair price for them.

Given that the stockmarket is currently volatile and in a technical bear market, with emotions on every investors sleeve, now is a better time than ever to grab the right stock for a good price and considering stock prices are at good price levels, now is a better time than any to use Benjamin Graham's intrinsic value approach to stockmarket investing.

Security Analysis was written at a time where stocks were at historical lows after the great depression, it seems to me that Graham may have been inspired to invest and write about the intrinsic value approach to investing, first, because of the frenzied great speculative bubble of the late 1920s, and the subsequent need in the years after 1929 stockmarket crash to take such a analytical and unemotional approach to investing in the stockmarket.

Graham's intrinsic value method of stock investing is just as relevant today as it was in the 1930s and will remain so for many years to come and will indeed help you to decide to whether to, hold em, fold em, walk away, or run.

Just don't count your money while your sittin' at the table though.

Related Share Investor reading

Some Bedtime Reading: Graham and Dodd's Security Analysis

10 Basic Buffett questions to ask before investing
Be an active investor
Stick to what you know
Investors can learn from my stupidity
Hard times make great businesses
Fear and Greed are lovely things
Research, Research, Research
Learn before you leap

The Intelligent Investor: Book review

c Share Investor 2008

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