Finance
by Benjamin Graham and David Dodd
What is a security worth?
Benjamin Graham and David Dodd taught at Columbia. They published it in 1934, with the 1929 crash still fresh. Many investors had lost heavily buying on hope. Their book asks how to judge a bond or a share from the facts, and how to tell when its price makes sense.
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Graham and Dodd set a test. A true investment, after thorough analysis, promises safety of your money and an adequate return. Anything that fails is speculation, whatever it's called. So a bond can be a speculation, and a share can be an investment at the right price.
For Graham and Dodd, intrinsic value is what facts like assets, earnings and dividends justify. It needn't be exact. You can see a man is overweight without knowing his weight, they note. The analyst only needs to see the price is well above or below value.
Graham and Dodd describe the market as a voting machine rather than a weighing machine. Prices come from countless choices, some reasoned and some emotional. So price and value can drift far apart, and the gap can last much longer than the analyst would like.
After the crash, plenty of shares sold for less than the company's current assets, like cash and stock, minus every debt it had. Graham and Dodd saw two possible readings. Either the market was far too gloomy, or managers were sitting on assets that shareholders should ask to have back.
Investing
Without careful study, safety for your money and a fair return, Graham and Dodd say you're speculating.
Rough value
You rarely need an exact value. It's enough to see that the price is far above or below it.
Bonds
Judge a bond by whether the company can keep paying through bad years, more than by what backs the loan.
Many years
Look at profits over many years, since a single good or bad year can badly mislead you.
Market mood
In the short run prices follow popularity, but over time they follow what a business earns.
A story from the book
In the late 1920s investors decided the old rules no longer applied. They valued shares on the trend of recent earnings and ignored assets and long records. Graham and Dodd call it the new-era theory, and show how prices built on it fell apart after 1929.
One thing to try
Take a company you know and find its profits for each of the last ten years, not only the latest. Work out the average and note the worst year. Graham and Dodd judged a business on what it earned through good years and bad.
Knotd has the key ideas from 250+ non-fiction books, each in a few minutes, in plain words. Security Analysis comes with a Spot the Trap case to make it stick.
Get the whole book on KnotdOpen in the appWhat is a security worth? Benjamin Graham and David Dodd taught at Columbia. They published it in 1934, with the 1929 crash still fresh. Many investors had lost heavily buying on hope. Their book asks how to judge a bond or a share from the facts, and how to tell when its price makes sense.
Investment or speculation; Value is a rough figure; A voting machine; Cheaper than the cash.
Take a company you know and find its profits for each of the last ten years, not only the latest. Work out the average and note the worst year. Graham and Dodd judged a business on what it earned through good years and bad.
Yes. Knotd has the key ideas from Security Analysis in a few minutes, in plain words, plus a Spot the Trap case to test them. It's one of 250+ non-fiction books in the app.
