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Security Analysis, Part I - Survey and Approach
This chapter is from Security Analysis , which has withstood the test of time as well or better than any investment book ever published. Now the Sixth Edition updates the masters' ideas and adapts them for the 21st century's markets. This second edition, which was published in 1940 and still considered the definitive edition, has been updated by a dream team of some of today's leading value investors. Featuring a foreword by Warren E. Buffett (in which he reveals that he has read the 1940 masterwork "at least four times"), this new edition of Security Analysis will reacquaint you with the foundations of value investing--more relevant than ever in the tumultuous 21st century markets.
157 pages, Kindle Edition
Published January 13, 2009
38 people are currently reading
1223 people want to read
About the author
Benjamin Graham
79 books1,838 followersBenjamin Graham was a British-born American financial analyst, investor and professor. He is widely known as the "father of value investing", and wrote two of the discipline's founding texts: Security Analysis (1934) with David L. Dodd, and The Intelligent Investor (1949). His investment philosophy stressed independent thinking, emotional detachment, and careful security analysis, emphasizing the importance of distinguishing the price of a stock from the value of its underlying business.
After graduating from Columbia University at age 20, Graham started his career on Wall Street, eventually founding Graham–Newman Corp., a successful mutual fund. He also taught investing for many years at Columbia Business School, where one of his students was Warren Buffett. Graham later taught at UCLA Anderson School of Management at the University of California, Los Angeles.
Graham laid the groundwork for value investing at mutual funds, hedge funds, diversified holding companies, and other investment vehicles. He was the driving force behind the establishment of the profession of security analysis and the Chartered Financial Analyst designation. He also advocated the creation of index funds decades before they were introduced. Throughout his career, Graham had many notable disciples who went on to earn substantial success as investors, including Irving Kahn and Warren Buffett, who described Graham as the second most influential person in his life after his own father. Among other well-known investors influenced by Graham were Charles D. Ellis, Mario Gabelli, Seth A. Klarman, Howard Marks, John Neff and John Marks Templeton.
After graduating from Columbia University at age 20, Graham started his career on Wall Street, eventually founding Graham–Newman Corp., a successful mutual fund. He also taught investing for many years at Columbia Business School, where one of his students was Warren Buffett. Graham later taught at UCLA Anderson School of Management at the University of California, Los Angeles.
Graham laid the groundwork for value investing at mutual funds, hedge funds, diversified holding companies, and other investment vehicles. He was the driving force behind the establishment of the profession of security analysis and the Chartered Financial Analyst designation. He also advocated the creation of index funds decades before they were introduced. Throughout his career, Graham had many notable disciples who went on to earn substantial success as investors, including Irving Kahn and Warren Buffett, who described Graham as the second most influential person in his life after his own father. Among other well-known investors influenced by Graham were Charles D. Ellis, Mario Gabelli, Seth A. Klarman, Howard Marks, John Neff and John Marks Templeton.
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Displaying 1 - 4 of 4 reviews
October 21, 2022
The first part of a big book.
Everyone interested in investing must've heard of the term 'value investing', and if you've heard of that term, there's no other book that explains it like 'Security Analysis'. It has been considered the bible of value investing.
This first part deals mostly with definitions and what to expect. Some of the most important notes in this part are:
1.- Investment and speculation are not the same. Although hard to define both, it's considered that investment has more 'safety' than speculation. The term 'safety' is also defined.
2.- The future, for the investor, is not something to get profit from, but something to be guarded against losses.
3.- New classification of securities: Securities of fixed-value (High-grade bond and high-grade preferred stocks), securities of variable-value (divided into two parts, the first being appropriately secured with financial instruments and the second one inadequately secured), and common-stocks type.
There are two main problems that one might get when starting to read this book: the first one is the type of book. It's considered 'dry', but in my experience, it mostly resembles a college textbook, the type of book that you might read in a bachelor's degree. The explanations are as clear and concise as possible, and they provide examples to support their statements, just like a physics book one could say.
The second problem is precisely the examples given. The reader must understand that this book was written originally in 1934 and mostly changed in 1940. After that, editions did change some things in prefaces and introductions but did not change the examples, therefore, the reader will encounter enormous amounts of railroad bonds examples and practices common in the 1920-1930s. This means that the focus of this book is high-grade bonds and high-grade preferred stocks, although nowadays common stocks can be more frequently considered a value investment than those days, and in the book, they do mention that an operation done with common stocks can indeed be considered that, it was less much frequent those days so they mostly disregard it.
Everyone interested in investing must've heard of the term 'value investing', and if you've heard of that term, there's no other book that explains it like 'Security Analysis'. It has been considered the bible of value investing.
This first part deals mostly with definitions and what to expect. Some of the most important notes in this part are:
1.- Investment and speculation are not the same. Although hard to define both, it's considered that investment has more 'safety' than speculation. The term 'safety' is also defined.
2.- The future, for the investor, is not something to get profit from, but something to be guarded against losses.
3.- New classification of securities: Securities of fixed-value (High-grade bond and high-grade preferred stocks), securities of variable-value (divided into two parts, the first being appropriately secured with financial instruments and the second one inadequately secured), and common-stocks type.
There are two main problems that one might get when starting to read this book: the first one is the type of book. It's considered 'dry', but in my experience, it mostly resembles a college textbook, the type of book that you might read in a bachelor's degree. The explanations are as clear and concise as possible, and they provide examples to support their statements, just like a physics book one could say.
The second problem is precisely the examples given. The reader must understand that this book was written originally in 1934 and mostly changed in 1940. After that, editions did change some things in prefaces and introductions but did not change the examples, therefore, the reader will encounter enormous amounts of railroad bonds examples and practices common in the 1920-1930s. This means that the focus of this book is high-grade bonds and high-grade preferred stocks, although nowadays common stocks can be more frequently considered a value investment than those days, and in the book, they do mention that an operation done with common stocks can indeed be considered that, it was less much frequent those days so they mostly disregard it.
April 28, 2025
Security Analysis - Benjamin Graham & David L. Dodd
Jan - Mar, 2025
Patience.
Margin of safety.
Sentiment play is also valid. For example, when Trump was elected for 2nd term, Elon Musk was a big contributor in Trump's victory, this meant Tesla stock price could go up a lot due to sentiment that Elon is in the power circle, and indeed, Tesla went up more than doubled.
Astute observers of corporate balance sheets are often the first to see business deterioration or vulnerability as inventories and receivables build, debt grows, and cash evaporates.
Value investors typically begin selling at a 10% to 20% discount to their assessment of underlying value. Assessment based on the liquidity of the security, the possible presence of a catalyst for value realization, the quality of management, the riskiness and leverage of the underlying business, and the investor's confidence level regarding the assumptions underlying the investment.
The true key to material happiness lay in a modest standard of living which could be achieved with little difficulty under almost all economic conditions
Good stocks are those of either (1) leading companies with satisfactory records, a combination relied on to produce favorable results in the future; or (2) any well-financed enterprise believed to have especially attractive prospects of increased future earnings.
Investors should spend the bulk of their time on the disclosures of the security under study, and they should spend significant time on the reports of competitors.
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, e.g., to protect a bond or to justify a stock purchase, or else that the value is considerably higher or considerably lower than the market price.
The main obstacles to the success of the analyst's work are, (1) the inadequacy or incorrectness of the data, (2) the uncertainties of the future, (3) the irrational behavior of the market.
Market is not a weighing machine but rather a voting machine. Countless individuals register choices which are the product partly of reason and partly of emotion.
Relationship of Intrinsic Value Factors to Market Price
Four fundamental elements for answering questions like 'What securities should be bought for a given purpose? Should issue S be bought, or sold, or retained at price P, at this timeT, by individual I?'
The security. Character of the enterprise and the terms of the commitment.
Principle for the untrained security buyer: Do not put money in a low-grade enterprise on any terms.
Principle for the securities analyst: Nearly every issue might conceivably be cheap in one price range and dear in another.
The price. The danger of paying the wrong price is almost as great as that of buying the wrong issue.
The time. Financial and business outlook at the time; stress and uncertainty.
The person. His financial training, competence, temperament, preferences.
Quantitative & Qualitative Factors in Analysis
Definitions
Quantitative
Company's statistical exhibit. Included in it would be things like income account and balance sheet, production data, unit prices, costs, capacity, unfilled orders, etc.
Generally classified under (1) capitalization, (2) earnings and dividends, (3) assets and liabilities, (4) operating statistics.
Qualitative
Nature of the business and its future prospects. Relative position of the individual company in the industry; its physical, geographical, and operating characteristics; the character of the managements; the outlook for the unit, for the industry, and for business in general.
The Trend
The trend of future earnings doesn't necessarily mean it'll happen, it's an assumption/prediction. By the time the upward or downward trend has become clearly noticeable, condition may well be ripe for a change.
Net income is more important than earnings/revenue.
A consistent trend may give a guideline that the next year earning may not fall far off from current.
Trend essentially a qualitative factor.
An investment operation is one which , upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.
An investment operation is one that can be justified on both qualitative and quantitative grounds.
Bond selection is primarily a negative art. It's a process of exclusion and rejection, rather than of search and acceptance.
The creditworthiness of every issuer represented in the portfolio must be revisited no less than quarterly. There are no permanent investments.
Free Cash Flow
FCF is crucial, trust Warren Buffett's choices.
FCF can either be returned to shareholders, via dividends or share repurchases, or it can be reinvested in the business.
Share Buyback
Share buyback at discounted prices are clearly preferable to dividends. If the company buys back undervalued stock, sellers suffer while long-term shareholders benefit. If the company buys its stock at inflated price, sellers benefit and long-term holders lose out.
Value investors generally look for companies that consistently repurchase their stocks during periods of undervaluation.
Jan - Mar, 2025
Patience.
Margin of safety.
Sentiment play is also valid. For example, when Trump was elected for 2nd term, Elon Musk was a big contributor in Trump's victory, this meant Tesla stock price could go up a lot due to sentiment that Elon is in the power circle, and indeed, Tesla went up more than doubled.
Astute observers of corporate balance sheets are often the first to see business deterioration or vulnerability as inventories and receivables build, debt grows, and cash evaporates.
Value investors typically begin selling at a 10% to 20% discount to their assessment of underlying value. Assessment based on the liquidity of the security, the possible presence of a catalyst for value realization, the quality of management, the riskiness and leverage of the underlying business, and the investor's confidence level regarding the assumptions underlying the investment.
The true key to material happiness lay in a modest standard of living which could be achieved with little difficulty under almost all economic conditions
Good stocks are those of either (1) leading companies with satisfactory records, a combination relied on to produce favorable results in the future; or (2) any well-financed enterprise believed to have especially attractive prospects of increased future earnings.
Investors should spend the bulk of their time on the disclosures of the security under study, and they should spend significant time on the reports of competitors.
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, e.g., to protect a bond or to justify a stock purchase, or else that the value is considerably higher or considerably lower than the market price.
The main obstacles to the success of the analyst's work are, (1) the inadequacy or incorrectness of the data, (2) the uncertainties of the future, (3) the irrational behavior of the market.
Market is not a weighing machine but rather a voting machine. Countless individuals register choices which are the product partly of reason and partly of emotion.
Relationship of Intrinsic Value Factors to Market Price
Four fundamental elements for answering questions like 'What securities should be bought for a given purpose? Should issue S be bought, or sold, or retained at price P, at this timeT, by individual I?'
The security. Character of the enterprise and the terms of the commitment.
Principle for the untrained security buyer: Do not put money in a low-grade enterprise on any terms.
Principle for the securities analyst: Nearly every issue might conceivably be cheap in one price range and dear in another.
The price. The danger of paying the wrong price is almost as great as that of buying the wrong issue.
The time. Financial and business outlook at the time; stress and uncertainty.
The person. His financial training, competence, temperament, preferences.
Quantitative & Qualitative Factors in Analysis
Definitions
Quantitative
Company's statistical exhibit. Included in it would be things like income account and balance sheet, production data, unit prices, costs, capacity, unfilled orders, etc.
Generally classified under (1) capitalization, (2) earnings and dividends, (3) assets and liabilities, (4) operating statistics.
Qualitative
Nature of the business and its future prospects. Relative position of the individual company in the industry; its physical, geographical, and operating characteristics; the character of the managements; the outlook for the unit, for the industry, and for business in general.
The Trend
The trend of future earnings doesn't necessarily mean it'll happen, it's an assumption/prediction. By the time the upward or downward trend has become clearly noticeable, condition may well be ripe for a change.
Net income is more important than earnings/revenue.
A consistent trend may give a guideline that the next year earning may not fall far off from current.
Trend essentially a qualitative factor.
An investment operation is one which , upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.
An investment operation is one that can be justified on both qualitative and quantitative grounds.
Bond selection is primarily a negative art. It's a process of exclusion and rejection, rather than of search and acceptance.
The creditworthiness of every issuer represented in the portfolio must be revisited no less than quarterly. There are no permanent investments.
Free Cash Flow
FCF is crucial, trust Warren Buffett's choices.
FCF can either be returned to shareholders, via dividends or share repurchases, or it can be reinvested in the business.
Share Buyback
Share buyback at discounted prices are clearly preferable to dividends. If the company buys back undervalued stock, sellers suffer while long-term shareholders benefit. If the company buys its stock at inflated price, sellers benefit and long-term holders lose out.
Value investors generally look for companies that consistently repurchase their stocks during periods of undervaluation.
July 9, 2023
A thoroughly satisfying read on the basics of investment and how it is different from speculation.
As was the case with Intelligent Investor, many examples are dated and American. That's not an issue though as you can look them up in Google very easily.
As was the case with Intelligent Investor, many examples are dated and American. That's not an issue though as you can look them up in Google very easily.
October 6, 2018
Definitely a must read for a value investor. Teaches you to keep a cool head and after thorough analysis of an enterprise should you make an investment if it promises the safety of your principal and a satisfactory return on the investment. The book was originally published in 1934 but the basic knowledge in here is timeless. I gave it 4 stars because it puts a lot of emphasis on bond investing which was a good investment back then but recent studies have shown that combining a well diversified stock portfolio beats a bond portfolio in the long run. So for me stocks are the way to go and that is why i wasn't very interested in the bond department.
Displaying 1 - 4 of 4 reviews