Security Analysis Summary

I will be starting something new in order to help myself and my readers understand a bit more about value investing and the field of security analysis. I will be providing reviews and notes of the book "Security Analysis" by the teacher of the Oracle, Mr Ben Graham. This is the book that quite possibly started it all and by reading it again I plan on understanding it better. I hope you enjoy this new series.

Disclaimer: The following material is composed of direct quotes and paraphrases of the "Security Analysis" book by Graham and Dodd. In no way or form do I seek any material gain from this articles as they are for academic purposes and all credit is given to the authors. My personal comments are put in parenthesis to differentiate from the book material.

Chapter 1 - Introduction. The array of securities. Economic background.

The objectives of security analysis are: to present info about a security and reach a dependable conclusion about the security.
An analyst needs to understand: corporate accounting, how basic businesses work, how the economy works, and the characteristics of the securities markets.
An analyst must be able to resist his/her own human nature to mistrusts his/her feelings when they are part of mass psychology (in other words: always stay cool regardless of the market conditions).

The soundness of a security purchase is determined by future developments and not by past history or statistics, but we cannot analyze the future so we have to prepare for it and anticipate it intelligently. The past, however, is an important tool in making investment decisions as business anticipations are closely related to past performance.

The 5 matters that concern investors most immediately are:

1) The general price level - It is long term inflationary but includes periods or recession.
(term real income- dollar income divided by the price level).

2) Interest rates - the artificiality of the interest rate may be the clue to the contrary action of stock yields.

3) Business conditions and business profits - there are wide cyclical swings of business. The Crash of 1929 was caused by the dizzy height attained by stock prices before the crash and not by a huge downturn in business levels. (In this section, Graham talks about the effect of an anti-business political climate on business levels. He mentions several elements that would affect businesses and coincidently these match the current Democratic platform). Anti-business sentiment: increase in personal taxes, growth of unions, and government red tape.
Graham and Dodd believe that the most important characteristic of large American corporations is their repeated pendulum swings from better to poorer results and back. (I could not help but think of Buffett's investment in BNI).

4) Dividends - dividends follow earnings; the recent 1951) need for capital has led to a decrease in their disbursement.

5) Security prices - the price history of high-grade bonds is the reverse for the course of interest rates. A charted history of stocks shows a promise of excellent gains when purchases are made in depressed markets and a warning of possible permanent loss if the investor buys when bullish sentiment is at its strongest.