A Journey Through Security Analysis
At 830 pages the size of The Classic 1940 Second Edition of Security Analysis Principles and Techniques by Benjamin Graham and David Dodd is daunting, let alone the depth of the subject matter. I’ve seldom seen let alone read a book this size! Like a squirrel storing its nuts for winter I’m going to breakdown the seemingly insurmountable task of reading Security Analysis into manageable chunks. I hope I’m as bright eyed and busy tailed when I’m finished. This series of posts will relay my thoughts and insights, presupposing I have some, as I work through this hallowed tomb. Plus there will be a fair swag of quotes.
On my first flick through to prepare my mind, as I prepare a garden bed prior to sowing seeds, I read the contents, the two prefaces, the introduction and this quote.
“Many shall be restored that now are fallen and many
Shall fall that are now in honor” Horace – Ars Poetica
I am sure the essence of that quote Graham and Dodd introduced their masterpiece with was not as clichéd then as it is now. Iterations of Horace’s wisdom are now common place in investors lexicon, perhaps most famously expressed with Buy Fear Sell Greed. Just yesterday I quoted Berkowitz’s most recent rendition, “Almost by definition we are running towards that which most people are running away from because how else are you gonna get a very reasonable, cheap price on a good company unless the marketplace believes something is terribly wrong?”
Though for all its clichéd use I see little evidence of true understanding from investors. The very nature of markets and individual stocks over-extensions in both direction is testament to the lack of true understanding by the majority. If you haven’t guessed already I’m arrogant enough to say I not only get it, but practice it. I’m not sure whether it was my upbringing by a coupon clipping mother and scavenging father, my love of sales or my strong desire for rebellion and differentiation, but what ever the reason I find trolling among the fallen a comfortable part of my investing philosophy. Almost all investors could benefit from finding their inner coupon clipper.
Security Analysis was first published in 1934, my skinny wrists are getting tired holding up the 1940 second edition. Here are my notes from my first flick through.
Preface to First Edition
p.X “fixed value investments can be soundly chosen only if they are approached – in the Spinozan phrase – “from the viewpoint of calamity“.”
guard “against overemphasis upon the superficial and the temporary” … “this overemphasis is at once the delusion and the nemesis of the world of finance”
Focus on the downside and let the upside take care of itself. Despite Never lose money being Buffett’s first two rules, many investors seem to only focus on the most optimistic of outcomes.
Contents
I’ll be reading the book slightly out of order, preferring to read Part II Fixed Value Investment last.
Introduction
The authors, hence forth referred to as Graham, highlight the growing instability of markets even in ‘normal times’. If I can find the data I’d like to look at current comparison to their data, though I’m confident the trend has not reversed. Instability should be viewed as an asset, a friendly storm who dashes fools against the rocks and lets you plunder their treasures.
p.4 “the times would seem to call for caution in embracing any theory as to the future and for flexible open-minded investment philosophies“. Like all I’ve read so far those words remain as true now as they were 70 years ago.
“Two serious depressions in the past twenty years, and the collapse of an enormous volume of railroad issues once thought safe beyond question” That was then, but with a few word substitutions it is now. Two serious bubbles and collapses in the past ten years and the collapse of an enormous volume of financial institutions once thought safe beyond question.
p.5 Future of interest rates and bond prices. “Rates stayed low longer than anticipated and even in the face of considerable business expansion in 1936 – 37“. Is this groundhog day or what? Will rates now stay low longer than anticipated? As I noted a few weeks back David Rosenberg commented:
Long-term investors should note the time-worn rule that bear markets in Treasuries do not occur until two things happen — and these two things are highly correlated:
(i) the unemployment rate begins a descent from its peak, and
(ii) the Fed signals its intent to tighten monetary policy.
p.9 Abbott Labs is an example of a well financed enterprise believed to have especially attractive prospects of increased earnings. Ge is that and a leading company with satisfactory records. Graham has a swipe at the P/E ratio and its unrealistic use. He comments on the “unrealistic pricing of favored stocks” As a starting point investors could do worse than to short companies in industries and groups that are in favour and buy those out of favour.
p.15 delivered my favourite quote thus far. Strangely I have only ever heard the first part of the sentence stated as Graham’s belief, while to me the second part is clearly more important.
“It is our view that stock-market timing cannot be done, with general success, unless the time to buy is related to an attractive price level, as measured by analytical standard of value.”
I believe I’m going to enjoy this book and no longer find it daunting, I hope you enjoy riding along.
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