November 13, 2022

Security Analysis - Chapters 42 and 43

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

From these two chapters, Mr. Graham and Mr. Dodd begin the discussion on the Balance sheet, which should be looked at together with the income statement. The authors primarily show instances where balance sheet-derived company value is higher than the market price. 

The authors recommend investors look at the book value to ascertain what is the actual cash invested in the business and the return on that. If the business sells at a premium to book value it must be earning a high return and vice versa. In either case, the investor has to be convinced about the logical reasoning on this subject.

The writers emphasize the importance of working capital over book value as that is a good estimate of liquidating value. If the common stock is selling below the liquidation value either that is an opportunity or management is not utilizing the company's resources efficiently. Various future developments could lead to closing the gap.

Chapter 44

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