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The Enduring Principles of Graham and Dodd

Why it's always wise to revisit the sound principles enumerated in 'Security Analysis,' regardless of the evanescent investment climate du jour


Although financial markets have been transformed in ways unimaginable since Benjamin Graham and David Dodd published the first edition of “Security Analysis” in 1934, the lessons that can be learned by gleaning its pages are timeless. A review of only a few of the underlying principles upon which their value investing philosophy is based will reveal whether the stock being analyzed is Facebook (NASDAQ:FB) or Boeing (NYSE:BA), whether the market is in the throes of a roaring bull market or in a cyclical downturn. Analysts can benefit greatly by incorporating these maxims in their quest for ascertaining a stock’s intrinsic value.

One of the underlying tenets of “Security Analysis” as Seth Klarman (Trades, Portfolio) appropriately noted in the Preface to the sixth edition is that, “The real secret to investing is that there is no secret to investing…that so many people fail to follow this timeless and almost foolproof approach enables those who adopt it to remain successful.”

For the past decade, with the caveat of exactly how one defines certain terms that form the basis of the analysis or comparison, many within the investment community contend that value investing has failed to keep up with growth or momentum investing.

A roaring, historically unprecedented, 10-year bull market that has heavily favored the tech stock sector would seem to validate such a proposition. However, there is nothing in the lessons enumerated in Security Analysis that contain any suggestion by its authors of an inherent bias towards one sector versus another. What is paramount for successful investing is the relationship between price and value.

A central thesis that underlies their entire treatise on value investing is Graham and Dodd’s approach or consistent methodology for apprising whether a contemplated purchase of a security can be characterized generally as either an exercise in speculation or a bona fide investment. Put another way, will the investor receive “value” for his money? This paradigm for investing is useful even today, regardless of which sector or particular stock is fancied by Wall

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