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.



Related Reading

Share Investor Forum - Discuss this topic





c Share Investor 2008 & 2016

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
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

Mr Market gets his Groove on

I have commented over the last week or so on the irrational selling of most of the stocks on global sharemarkets. Stocks have gotten cheaper and yet people still continue to dump good stocks for no other reason than because others have sold and presumably because they might be lonely so they join the flock.

I found this reasoning strange. Why would you sell a company that was providing a good financial return, cheaply simply because your neighbour was selling his?

Dumb right?!

I would have to answer yes and then add further elucidation regarding the "spectacular" 180 degree turn in the US markets Wednesday 23 and say that I find the US market rise and frenzied buying as even more bizarre than the selling frenzy of the weeks and days before.

Why would you buy today as stocks are going up in price, while you were selling yesterday as stock prices slumped?

What has actually changed in one day to turn the market around?

Nothing folks!!

The reason the Dow did an impression of a roller coaster was simply talk of a bailout of US sub prime bond insurers, nothing really material at all except on the negative side.

With this latest depression and irrational exuberance of global markets I am reminded instantly of Benjamin Graham's "Mr Market" parable:

Think of yourself as owning a share in a business in partners with others. One of your partners, say Mr Market, is somewhat of a neurotic who on any given day will offer to buy your share or sell you his at a specific price. His moods can fluctuate anywhere between incredible optimism and overwhelming depression. One day he will nominate a higher price to buy or sell, the next day he might increase it, lower it, or even appear uninterested in whether he buys or sells.

Ben Graham, The Intelligent Investor

The point that Graham makes is that Mr Market’s judgment is formed more by mood swings that by rational thought and that this gives the wise investor buying and selling opportunities. If Mr Market’s price is unreasonably high, then wise investors have the opportunity to sell. On the other hand, if it is unreasonably low, then they have the opportunity to buy.

Right now Mr Market is in a schizophrenic mood and his intentions are not necessarily to be trusted. The important thing is that a successful and careful investor makes her or his own decision, based on their own ideas of the worth of the investment.

I'm still amazed at the utter stupidity of some people who ignore what they have bought when they buy a share in a company. You are buying part or a business, that you own.

You don't buy and sell your business on a day to day basis otherwise you would drive yourself mental and you certainly don't sell it because there are outside negative influences (like the subprime mess and associated credit crunch) that are beyond your control and wont impact on the business to any large effect.

It is time to start thinking clearly before pushing that button.

Related Share Investor Reading

"Mr Market" gets his groove on
A sensible approach to global market volatility
Global Market's dropping and your portfolio
Research, research, research
Watch for dead cats bouncing

From Fishpond.co.nz - Buy Toughen Up: What I've Learned About Surviving Tough Times



Toughen Up - Fishpond.co.nz

c Share Investor 2008

Global Market Meltdown: What is Warren Buffett Doing?

As we approach Global Stock Markets, the volatility that surrounds them can create opportunities for making a purchase rather than a reason to sell.

I am reminded of what Warren Buffett looks for when buying companies and the cheaper share prices that we are now experiencing are making one of Buffett's tenants of investing more focused as the markets get lower:

His investment criteria included companies with "good returns on equity", little or no debt, "simple" businesses that he could understand, and consistent earnings, Mr Buffett said in his latest annual report. (Warren Buffett 2007 Berkshire Hathaway Annual Report)

Sure , Buffett is talking about companies that he buys having a good return on equity as an operating business. As an investor in cheaper shares though one can use falling share values to buy good companies and as an investor make better returns on your "bargain" purchase therefore making your returns all that much better.


Buffett has been hoarding his cash like your grandma over the last few years and many potential targets would have revealed themselves over the last few weeks of turmoil:

Warren Buffett says the current market chaos and turmoil will probably create buying opportunities for him and Berkshire Hathaway:
"You get more excited when there's a lot going on, you can't help it. And frankly, it will probably present more opportunity to us because when dislocations occur things get more mispriced and that sort of thing...
"So it can be a time of opportunity. It won't be for sure, but generally speaking, when there's a certain amount of chaos in certain sections, the fallout, and its unpredictable where the fallout will be, but the fallout sometimes offers some real opportunities." (CNBC Aug 15 2007)

Shares of health insurers, steel makers and department stores are down by as much as 18 per cent than they were in May, when Buffett said he would "figure out a way" to raise up to $US60 billion for the right deal. WellPoint Inc, Nucor Corp, Kohl's Corp and dozens more companies are now closer to meeting his investment criteria.

He has disclosed purchases a few days ago that his company has bought a new stake in Bank Of America and increased his stakes in Wells Fargo and Bancorp in the last quarters SEC filings.

As these companies have been beaten down over recent times you might expect the Sage of Omaha to be sniffing around them again.

Warren Buffett's history shows that he has done well during market turmoils as he tends to be doing the opposite to everyone else.

He bought beaten down stocks during the 1970s bear market lull and it paid off handsomely as the 1980s began a bull market not seen since the likes of the 1920s. His mentor Benjamin Graham made money off the 1930s bear market by doing exactly the same thing.

I guess we just have to learn from history. Markets have always had these volatile "corrections". Currently most investors seem gripped in the fear mode and it looks unlikely that the slide will be ended until some certainty comes back to the market.

Buffett and his mentor Benjamin Graham were able to ride these market blowouts and actually make it a positive. Their history and reputations as value investors are largely made during these times of turmoil.

Take a lesson from Warren. Keep cool, keep your head, keep your shares(if they were good ones to begin with!) and look for the bargains that will come.

c Share Investor 2007

The Intelligent Investor: Book Review

If you don’t have this book in your library, then you should not even be contemplating an investment in shares directly, or even indirectly, though a mutual fund.

It is surely not a co-incidence, as Warren Buffett graphically illustrates in his Appendix to this book, that some of the world’s most successful investors learned at the feet of Benjamin Graham and have applied his principles with great success.

This book, like all of Graham’s writings, is easy enough to understand for even lay investors. Graham sets the scene early in the book by explaining the difference between intelligent investing and mere speculation. Using the history of stock market booms and crashes and illustrating them with real life examples, Graham explains how an intelligent investor can stay ahead of the market.

Graham sets out investment principles for both the defensive investor and one who is more enterprising and shows how investor can identify under priced stocks.

As Warren Buffett has said, the two most important chapters in the book are Chapter 8, The Investor and Market Fluctuations, where Graham develops his concept of Mr Market, and Chapter 20, Margin of Safety where he preaches the wisdom of leaving enough room to cover mistakes in judgment of a share’s intrinsic value.

A must buy book, worth every penny, especially during turbulent times.






c Share Investor 2007

Long Vs Short Term Investing

An interesting debate that was carried out on my share investor forum


The 2 opposing sides of this debate are encapsulated perfectly by a third entrant:

Brut wrote

Macdunk & Snoopy

I am new on this tread but I thought I'll add my 2 cents worth... It's great to have two opposing views on investing in the share market, if everyone agreed there wouldn't be a market. By this i mean, if everyone agreed (bulls & the bears) that XYZ stock was worth $5 a share, there wouldn't be a market (nobody would be buying or selling)

I personally like to invest 90% of my portfollio in long term stocks & I have 10% in speculative stocks that I trade. I'm probably not as experience as you guys, but I've learnt that you find a system that works for you & stick to it.
Goodluck to both of you!!!


... It's great to have two opposing views on investing in the share market, if everyone agreed there wouldn't be a market...

Share Investor

Exactly, I couldn't have said it better myself. Snoopy and Macca are examples of the 2 opposite sides of your quote Brut.

Welcome to Share Investor!



The debate over the long and short-term thing rages on. I have a go at both approaches and both can be used in one's arsenal of investing tools, a Benjamin Graham and Warren Buffett approach if you like!!

Many investors say on or the other of these methods is right or wrong. Remember though, when investing do what is right for you dear reader.

Happy Investing,


From Amazon

How to Make Money in Stocks: A Winning System in Good Times and Bad, Fourth Edition (Personal Finance & Investment) by William O'Neil Buy new: $16.82 / Used from: $3.57 Usually ships in 24 hours

c Share Investor 2007