November 10, 2022

Security Analysis - Chapters 37 and 38

Security Analysis by Benjamin Graham and David Dodd was first published in 1934. It is a fundamental book for serious students of value investing.

After discussing income statement accounts, the authors move on to the analyst's usage of past earning track records in chapters 37 and 38.

Mr. Graham and Mr. Dodd talk about using average and normalized earnings. However, quantitative track record usage should be based on sound qualitative reasoning.

Wall street emphasizes current earnings and trends of earnings for a company. However, the author's advice to guard against such thinking. A company can't keep on growing at a higher rate given the competition, regulatory pressures, and the law of diminishing returns. So, analysts should be careful here.

Through examples, the writers demonstrate that formalizing a qualitative view is subject to being incorrect. However, a strong margin of safety would not only protect the principal but can also generate decent profits on the investment.

It is critically important to analyze the key things that impact the operating results of the company. Through examples of mining companies, the authors depict how past earning record doesn't have any bearing on the future. The writers think it is important to have a businessman's viewpoint in not analyzing the future economics but also assessing how much premium or discount is baked into the market price of the company. 

Chapter 39

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