Some bedtime reading: Graham and Dodd's "Security Analysis"

I am in the process of re-reading David Dodd and Benjamin Graham's 1934 bible on investing.

Security Analysis.

It deserves a re-read after a life changing event like a stroke and from what I have read so far it kind of reinforces the conclusions I came to before heading down its 725 pages.

This 725 page giant of a book was written at a time where the global economy was in a depression brought on by the over exuberant roaring 20s and the subsequent 1929 stockmarket crash.

This book was initially looked at when were going through what they call, 'The Great Recession' in 2008 - you fill in your year for the finish.

It has had several updates since its original edition and is often hard to come by in your local bookstore. A sixth edition was out in 2008, when I originally wrote this. I wanted to read the original book to get a feeling for the markets and general investment outlook of the time. Its relation to today's market conditions is still important to me.

From the Amazon preview of the first edition of Security Analysis:


The original words of Benjamin Graham and David Dodd--put to paper not long after the disastrous Stock Market Crash of 1929--still have the mesmerizing qualities of rigorous honesty and diligent scrutiny, the same riveting power of disciplined thought and determined logic that gave the work its first distinction and began its illustrious career.

In their preface to this book, Graham and Dodd write that they hope their work "will stand the test of the ever enigmatic future." There is no doubt that it has.


Now I have other books on my reading list but I want to tackle this one first, principally because it was the text that Warren Buffett based much of his investing style on and as my regular readers know I am a Warren Buffett nut.

I have already read Benjamin Graham's The Intelligent Investor but I felt I needed a more detailed analysis of his investment style and his and Dodd's Security Analysis tome fits that bill to a tee.

Many stockbrokers in the past have used Security Analysis to go back to in times of doubt, and given current market turmoil investors might be wise to start reading.

It is clear the majority of stockbrokers in the United States and in other global markets haven't even turned a page of this essential investment tool and I know that is more than the case in New Zealand stockbroker circles.

My local ASB Securities broker said what? when I asked him during a related conversation if he had even heard of the book! Even The Intelligent Investor was another language to him.

You can get a physical copy of the book from the Share Investor Bookstore or download it free here.



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c Share Investor 2008 & 2016

Xero Ltd: Download full Company Analysis

Xero Ltd [XRO.NZ] financial's including a full collection of data out 23 February 2010 courtesy of Aspect Huntley/ASB Securities.

This is a series I will do for the Share Investor Portfolio and other NZX listed companies.

You will find balance sheets, ratios, charts, shareholder returns, 10 year analysis, broker recommendations, substantial shareholders, commentary and company details, forecasts and all the AIA info you could need to make a decision whether to invest or not. Download the full package at Share Investor Forum - you must join to download. It is free and takes less than a minute.


Share Investor Portfolio Company Analysis Series

Auckland Airport Ltd
Michael Hill International Ltd


Xero @ Share Investor

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Discuss XRO @ Share Investor Forum
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c Share Investor 2010

Learning from history

I haven't been purposely looking for an explanation of what is happening to global stockmarkets and what might happen to economies around the world but I stumbled on the following article from the Wall Street Journal when I was googling around for some info on Warren Buffett.

For me the following article puts the whole market frenzy and it current fear mode into sharp focus and gives some perspective, from history, about where we could be heading.

Here is a n extract from the article discussing Benjamin Graham's analysis of the US stockmarket in 1932:

Just eight days before the Dow hit rock-bottom, the brilliant investor Benjamin Graham -- who many years later would become Warren Buffett's personal mentor -- published "Should Rich but Losing Corporations Be Liquidated?" It was the last of a series of three incendiary articles in Forbes magazine in which Graham documented in stark detail the fact that many of America's great corporations were now worth more dead than alive.

More than one out of every 12 companies on the New York Stock Exchange, Graham calculated, were selling for less than the value of the cash and marketable securities on their balance sheets. "Banks no longer lend directly to big corporations," he reported, but operating companies were still flush with cash -- many of them so flush that a wealthy investor could theoretically take over, empty out the cash registers and the bank accounts, and own the remaining business for free.

Graham summarized it this way: "...stocks always sell at unduly low prices after a boom collapses. As the president of the New York Stock Exchange testified, 'in times like these frightened people give the United States of ours away.' Or stated differently, it happens because those with enterprise haven't the money, and those with money haven't the enterprise, to buy stocks when they are cheap."

After the epic bashing that stocks have taken in the past few weeks, investors can be forgiven for wondering whether they fell asleep only to emerge in the waking nightmare of July 1932 all over again. The only question worth asking seems to be: How low can it go?

Make no mistake about it; the worst-case scenario could indeed take us back to 1932 territory. But the likelihood of that scenario is very much in doubt.

WSJ.com

The great Crash of 1929 was not the low for the Dow though, that came 3 years latter, when on July 9 1932 the index hit 41.63. It was down 91% from its level exactly 3 years earlier.

Out of the 1929 crash came Benjamin Graham and David Dodds Security Analysis, the handbook or bible for subsequent Wall Street practitioners. It is a shame that modern Wall Street types seem to have ignored the main message of this book though:

While we were writing,we had to combat a widespread conviction that financial debacle was to be the permanent order; as we publish,we already see resurgent the age-old frailty of the investor-that his money burns a hole in his pocket. But 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.

Security Analysis - From the preface to the 1934 edition

Graham went on to say that "fixed value investments" can only soundly chosen if they are approached form a viewpoint of "calamity".

The last part of Benjamin Grahams advice is perhaps the most poignant and relevant to today's situation:

In dealing with other types of security commitments, we have striven throughout to guard the student against overemphasis upon the superficial and the temporary...this overemphasis is at once the delusion and the nemesis of the world of finance.

Quaint English but nevertheless well worth remembering.

I will finish this piece with something that I was watching on Voice of America last night.

It was from an individual which I cant remember but a female who has studied the 1929 crash and the subsequent depression.

She said that the crash itself needn't have caused a depression but the reaction of President Herbert Hoovers administration did. At first the government did nothing and then when it realised things might be bad it did all the wrong things.

It will be interesting if the current Bush administration has learnt from history and whether the next President, probably Barack Obama, will copy Democrat President Roosevelt's blanket socialism of the 1930s and spend taxpayers money to stimulate future prosperity.

Given this it would be curious to know why the current Labour Government in New Zealand are doing nothing in the face of massive economic uncertainty.

Related Links

Graham and Dodds Security Analysis: A review- buy it or download a free copy

Related Amazon reading

The Great Bust Ahead: The Greatest Depression in American and UK History is Just Several Short Years Away. This is your Concise Reference Guide to Understanding Why and How Best to Survive It by Daniel A. Arnold
Buy new: $8.95 / Used from: $22.19
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c Share Investor 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	A.Speculative	1.Market factors	a.Technical
			b.Manipulative
			c.Psychological
	A.Speculative B.Investment	2.Future value factors	a.Management and reputation
			b.Competitive conditions and prospects
			c.Possible and probably changes in volume, price, and costs
	B.Investment	3.Intrinsic value	a.Earnings
			b.Dividends
			c.Assets
			d.Capital structure
			e.Terms of the issue
			f.Others

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
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Research, Research, Research
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The Intelligent Investor: Book review






c Share Investor 2008