Fundamental Problem Of The Security Analysis

“Needless to say, the analyst cannot be right all the time. Furthermore, a conclusion may be logically right but work out badly in practice.” – Benjamin Graham.

Here is the abstract on the problem of the security analysis from the book “Security Analysis” by Benjamin Graham.

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The object of security analysis is to answer, or assist in answering, certain questions of a very practical nature. Of these, perhaps the most customary are the following: What securities should be bought for a given purpose? Should issue S be bought, or sold, or retained? In all such questions, four major factors may be said to enter, either expressly or by implication. These are:

  • The security.
  • The price.
  • The time.
  • The person.

The Person

Other personal characteristics that on occasion might properly influence the individual’s choice of securities are his financial training and competence, his temperament, and his preferences. But however vital these considerations may prove at times, they are not ordinarily determining factors in analysis. Most of the conclusions derived from analysis can be stated in impersonal terms, as applicable to investors or speculators as a class.

The Time

Finally, nearly all security commitments are influenced to some extent by the current view of the financial and business outlook. In speculative operations these considerations are of controlling importance; and while conservative investment is ordinarily supposed to disregard these elements, in times of stress and uncertainty they may not be ignored. Security analysis, as a study, must necessarily concern itself as much as possible with principles and methods which are valid at all times—or, at least, under all ordinary conditions.

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The Price

In the field of common stocks, the necessity of taking price into account is more compelling, because the danger of paying the wrong price is almost as great as that of buying the wrong issue. We shall point out later that the new-era theory of investment left price out of the reckoning, and that this omission was productive of most disastrous consequences.

The Security

An investment in the soundest type of enterprise may be made on unsound and unfavorable terms.

  • Our distinction between the character of the enterprise and the terms of the commitment suggests a question as to which element is the more important. Is it better to invest in an attractive enterprise on unattractive terms or in an unattractive enterprise on attractive terms? The popular view unhesitatingly prefers the former alternative, and in so doing it is instinctively, rather than logically, right. Over a long period, experience will undoubtedly show that less money has been lost by the great body of investors through paying too high a price for securities of the best regarded enterprises than by trying to secure a larger income or profit from commitments in enterprises of lower grade.
  • This distinction applies as well to the purchase of securities as to buying paints or watches. It results in two principles of quite opposite character, the one suitable for the untrained investor, the other useful only to the analyst.
    1. Principle for the untrained security buyer: Do not put money in a low-grade enterprise on any terms.
    2. Principle for the securities analyst: Nearly every issue might conceivably be cheap in one price range and dear in another.
  • The analyst must pay respectful attention to the judgment of the market place and to the enterprises which it strongly favors, but he must retain an independent and critical viewpoint. Nor should he hesitate to condemn the popular and espouse the unpopular when reasons sufficiently weighty and convincing are at hand.

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