January 28, 2023

Security Analysis - Chapter 52

Security Analysis by Benjamin Graham and David Dodd was first published in 1934. It is a fundamental book for serious students of value investing.
In the last chapter of the book, the authors delve into whether market analysis could generate dependable profits and how that compares to security analysis.

The authors discuss the two types of market analysis - chart reading and using mechanistic methods. Chart reading is not based on any rules thus it is difficult to predict any real economic events. While that is the case for security analysis as well to an extent, however, a security analyst can benefit from the margin of safety that market analysts can't enjoy. 

Any kind of mechanical forecasting of stock is also impossible. While various backtesting could be done using multiple factors it is difficult to answer when will it work in the future. 

Both market analysis methods are disadvantaged compared to security analysis in multiple ways. First, the inability to employ margin of safety. Second, market analysis will involve frequent trading resulting in gambling behavior. Third, market analysis involves being continuously superior to other people but in security analysis, you are buying from a person who hasn't done deep work on security.

In addition, Mr. Graham and Mr. Dodd emphasized that forecasting short-term stock price movements based either on a general market view, general business view, or specific view of the company is difficult. Analysts should confine their activities in securities where a margin of safety is present, are selling below intrinsic value, or in hedging or arbitrage operations.

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