Security Analysis (Book)

Security Analysis is a book written by professors Benjamin Graham and David Dodd of
Columbia Business School, which laid the intellectual foundation for what would
later be called value investing. The first edition was published in 1934, shortly
after the Wall Street crash and start of the Great Depression. Among other terms,
Graham and Dodd coined the term margin of safety in Security Analysis.
Contents
1 History
2 Content
2.1 First edition
2.2 Later editions
3 Market application
4 Reception and impact
5 Domestic editions
6 See also
7 References
8 External links
History
Security Analysis was published by McGraw-Hill, and written by David Dodd and
Benjamin Graham in the early 1930s, when both authors taught at Columbia
University's business school. Writes The New York Times, "it was intended as a
common-sense guide for investors but turned out to be a thick textbook that went
through five editions and sold more than 250,000 copies [by 1988]."[1] Economist
Irving Kahn was one of Graham's teaching assistants at Columbia University in the
1930s, and made research contributions to Graham's texts for Security Analysis.[2]
Content
First edition
The work was first published in 1934, following unprecedented losses on Wall
Street. In summing up lessons learned, Graham and Dodd scolded Wall Street for its
focus on a company's reported earnings per share, and were particularly harsh on
the favored "earnings trends." They encouraged investors to take an entirely
different approach by gauging the rough value of the operating business that lay
behind the security. Graham and Dodd enumerated multiple actual examples of the
market's tendency to irrationally under-value certain out-of-favor securities. They
saw this tendency as an opportunity for the savvy.[citation needed]
In Security Analysis, Graham proposed a clear definition of investment that was

distinguished from what he deemed speculation. It read, "An investment operation is
one which, upon thorough analysis, promises safety of principal and an adequate
return. Operations not meeting these requirements are speculative."[3]
A number of financial terms were coined in the book. For example, Graham and Dodd
coined the term margin of safety in Security Analysis.[citation needed] It is not
known when the Period of financial distress phrase was first used or by whom.
However, it or phrases closely equivalent were almost certainly first used in
connection with the theory of value investing as developed initially by Graham in
Security Analysis in 1934.[citation needed]
Later editions
In The Intelligent Investor, Benjamin Graham describes a Benjamin Graham formula he
used to value stocks. The formula as described by Graham in the 1962 edition of
Security Analysis, is as follows:
{\displaystyle V={\text{EARNINGS}}\times (8.5+2g)}{\displaystyle

V={\text{EARNINGS}}\times (8.5+2g)}
V = Intrinsic Value
EARNINGS = Trailing Twelve Months Earnings
8.5 = P/E base for a no-growth company
g = reasonably expected 7 to 10 year growth rate
Where the expected annual growth rate "should be that expected over the next seven
to ten years." Graham’s formula took no account of prevailing interest rates.
Market application
The book represents the genesis of financial analysis and corporate finance.
However, by the 1970s, Graham stopped advocating a careful use of the techniques
described in his text for security analysts in selecting individual stock
investments, citing that "in the light of the enormous amount of research now being
carried on, I doubt whether in most cases such extensive efforts will generate
sufficiently superior selections to justify their cost. To that very limited extent
I'm on the side of the "efficient market" school of thought now generally accepted
by the professors."[4] Graham stated that the average manager of institutional
funds could not obtain better results than stock market indexes, since "that would
mean that the stock market experts as a whole could beat themselves — a logical
contradiction."[4] Regarding portfolio formation, Graham suggested that investors
use "a highly simplified" approach that applies one or two criteria to security
prices "to assure that full value is present," relying on the portfolio as a whole
rather than on individual securities.[4]
Reception and impact

"The Superinvestors of Graham-and-Doddsville" is a 1984 article by Warren Buffett
promoting value investing, which was based on a speech given on May 17, 1984, at
the Columbia University School of Business in honor of the 50th anniversary of the
publication of Security Analysis. Using case studies, the speech and article
challenged the idea that equity markets are efficient. Buffett brought up 9
investors whom he considered direct protegés of Graham and Dodd, and using their
finances, then argued that "these Graham-and-Doddsville investors have successfully
exploited gaps between price and value," despite the inefficiency and "nonsensical"
nature of the pricing of the overall market.[5] Buffett concluded in the 1984
article that "some of the more commercially minded among you may wonder why I am
writing this article. Adding many converts to the value approach will perforce
narrow the spreads between price and value. I can only tell you that the secret has
been out for 50 years, ever since Ben Graham and Dave Dodd wrote Security Analysis,
yet I have seen no trend toward value investing in the 35 years I've practiced it.
There seems to be some perverse human characteristic that likes to make easy things
difficult. The academic world, if anything, has actually backed away from the
teaching of value investing over the last 30 years. It's likely to continue that
way. Ships will sail around the world but the Flat Earth Society will flourish.
There will continue to be wide discrepancies between price and value in the
marketplace, and those who read their Graham & Dodd will continue to prosper."[5]
The CFA Institute in 2012 wrote that "The roots of value investing can be traced
back to the 1934 publication of Benjamin Graham and David Dodd’s classic, Security
Analysis. Graham later disseminated his views to the general public in the highly
regarded book The Intelligent Investor. The influence of Graham’s methodology is
indisputable."[6] In 2015, The Wall Street Journal wrote that Security Analysis "is
widely viewed as the urtext of modern value investing. The long-held idea is that
some stocks trade significantly below an identified “intrinsic value” and can be
bought at a discount, with a built-in margin of safety against a complete
washout."[7] In 2016, Fortune called the book "still the best investment guide" and
noted its "extraordinary endurance." The article states that "Graham, the primary
author, then an obscure professor and money manager, chose the Great Depression as
the time to assert his faith in patient security analysis and long-term investing.
Given that the market was in the throes of an epochal collapse, very few folks were
interested in investing. But Graham had the courage to see through the moment."
Fortune also argues that one reason the book remained popular is that "it proffered
an irreplaceable approach to investment. Stocks were to be valued as a shares of a
business, bought and sold on that basis. No one contemplating the purchase of a
family farm pondered the market trend or the latest jobs report; so should it be
with common stocks."[8]

Security Analysis (Book)

Uploaded by

Copyright:

Available Formats

Security Analysis (Book)

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Security Analysis (Book)

Uploaded by

Copyright:

Available Formats

What are some of the terms coined in the book?

How did Benjamin Graham value stocks?

Security Analysis is a book written by professors Benjamin Graham and David Dodd of

In Security Analysis, Graham proposed a clear definition of investment that was

{\displaystyle V={\text{EARNINGS}}\times (8.5+2g)}{\displaystyle

Reception and impact

You might also like