Chapters 1-3 Summary of Security
Analysis by Benjamin Graham and David Dodd (1934 edition)
On the nature of the stock market:
1)
Graham uses the metonymy of the stock market as
not a “weighing machine,” but instead, as a “voting machine.” As a voting machine, the market has “countless
individuals [who] register choices which are the product partly of reason and
partly of emotion” (Graham 23).
a.
It is this emotion that the stock analyst refers
to as the irrational behavior of the stock market.
2)
The sources of information on all companies that
issue stocks/bonds can be simplified to the following list and are required to
provide some basic information to the NYSE/Nasdaq/Other stock exchanges:
a.
Monthly statements (not all companies issue this
and the following mentioned except the last one).
b.
Quarterly statements.
c.
Semiannual reports.
d.
Annual reports (all companies issue these).
3)
Most companies do not break the law when
providing the facts so just assume that they will not.
4)
All predictions made by other reputable brokerage
firms are done by solely (as well as some
qualitative research) looking at the above reports made by companies to
their stockholders. Usually you can find
this information on their website.
Important points made throughout the aforementioned
chapters:
1)
Always consider investing with the intention to
minimize loss and not to maximize profits.
2)
Any kind of analysis of a stock or bond will
always need to be updated upon itself; in other words, do your analytic work of
a stock frequently: do not count on a single analysis made, say, one month ago,
since circumstances and environments change.
3)
There are two kinds of analysis: quantitative
and qualitative.
a.
Quantitative data includes: “capitalization,
earnings and dividends, assets and liabilities, and operating statistics
b.
Qualitative data includes: “the nature of the business;
the relative position of the individual company in the industry; its physical,
geographical, and operating characteristics; the character of the management;
and finally, the outlook for the unit, for the industry, and for business in
general” (Graham 34).
4)
In the many types of reports that companies
provide to investors, you should paint a picture of the statistics of a
company. Look for this in a report:
5)
Not all companies have their information reports
made public, therefore, you should ask why you think they don’t? Is the business a seasonal business? Do they wish to conceal important
information?
6)
If a stock answers to another group, such as
OPEC/US. Government Trade Commission/any other institution, then it is
important to do research on the reports that these groups provide on the
company in question.
7)
You might learn something that most other people
do not know if you look for facts in hard-to-find locations.
8)
Graham’s interpretation of what it means to be a
security analyst:
9)
Deciding upon which stock to invest in by
looking rather than actual investing in a stock/bond can be more dangerous to
the stock analyst than to the thorough analysis through quantitative and
qualitative approaches.
10)
You must have standards of excellence when
making a judgment on a stock/bond of which typically concerns itself with its “soundness
and practicability.”
11)
Always ask the question: is the price of the
security (bond/stock) too high or is it low compared to its intrinsic
value? Also take into account the
irrational behavior of a stock market: try to predict what emotions people are
having about it.
12)
While doing research on potential candidates for
stocks, ask not about its name or brand nor dwell on its market price. Instead, ask, “In what enterprise?” meaning:
what industry does this security belong to?
Does the industry itself have a lot of potential? Is it going to experience a boon or is it
going downhill in terms of demand for its services?
General statistical tendencies in
the stock/bond market:
1)
If a stock is worth more than its market price,
it will correct itself; meaning, the stock will match its worth even though
this worth might be at a different value from one moment to the next.
