Security Analysis: The Classic 1934 Edition

Most people claim that they don't have the time to read. So here is a way you can still improve your investment skills: buy the Audio version of Security Analysis (1934 Edition) and listen to it in your car or while at the gym. That way you will have no excuse for ignorance when it comes to investments. This timeless tale written in 1934 by Benjamin Graham and David Dodd on how to invest in stock and bond market is more timely today than many other times in history if you plan to invest in the US financial market. I will give you my reasons why at the end but first you have to know some historical trends, facts and statistics. Before Benjamin Graham, the financial market mostly meant a place for speculators to gamble their money. Ironically in the last few years, the financial market has again become a place for people to gamble--the more it changes, the more it remains the same--this time especially with other peoples' money. Graham after suffering losses in the 1929 crash decided to write his experience in choosing stocks and bonds perhaps to redeem himself for not being able to recognize the power of the market place to destroy even good stocks when the deluge begins. The focus is on how to analyze stock, purchasing the right stock at the right price and then finally selling them when they reach over valued territory. Without a doubt no other person in the world of investment has done such a generous service to the posterity. If you read "Security Analysis" and have the discipline to follow his advice you will not lose money in the market. This is probably one of the only guarantees anyone can make when it comes to investing in the financial markets. No one before or after has written a better book on how to invest. Don't take my word ask Warren Buffett, the greatest investor of our time and also the greatest beneficiary of Graham's advice. "Security Analysis" is about coming up with the value of a stock as opposed to the price of a stock. People who want to invest in the market should not go along with the most popular stock that is going up in price at a breakneck speed and being promoted in the media but should analyze the stock using its fundamentals and measure its intrinsic value. The intrinsic value of a stock is the discounted cash flow to the present using an appropriate rate of interest. Graham advocated buying the stock at a price bit lower than the intrinsic value to maintain a margin of safety because the speculative market could still push the stock price even lower than its intrinsic value causing sleepless nights for an investor even temporarily. It has been clear that most investors do not find excellent stocks, perhaps because it is a time consuming task. So they wait till others find it by doing the hard work and then jump aboard with full vigor as those stocks begin the early advancements. At the next stage the speculators jump in and run the stock price to overpriced levels. It is at this overpriced point that Graham suggests you sell the stock and move onto another undervalued stock. Warren Buffett was the most favorite student of Ben Graham. Buffett attributes his success to his chanced reading books written by Graham and then following up with not only learning under Graham but also working for Graham (for free because Graham would not hire young buffett otherwise). Other students of Graham also have gone to become celebrated and successful investors. No other school of thought has brought such incredible results. Buffett became the richest man on earth mostly by following the principles of Graham yet Graham never became super wealthy. There is a very good reason for that. Graham was living at a different time in the history of the USA. During that time Stock Market was a place for genuine businesses to raise funds to expand their operations. Keep in mind that in the 1920s market turned out to be a gambling casino but after the 1929 crash, with the new regulations enforced, the market returned to being what it meant to be under a pure capitalistic system. So from mid 1930s--as one of the greatest Presidents, Franklin D Roosevelt, cleaned up corruption in the country bringing back credibility to the stock market--till the early 1970s the stock market remained lackluster. For that matter, that is the way it should be under a pure capitalistic system since stock market should not be a place for gamblers but for authentic business people to raise money for real businesses regardless of their place in the society. In other words in should not be a place for a handful to be filthy rich at the expense of the society, as it is now. As you recall this is the period when America was gaining acceptance in the world as the most admired nation. This idealistic period in the USA turned out to be the period that Graham was working as a professional investor. Those days a successful medical doctor or an engineer made the same amount of income as an investment banker or an investor. So relative to the times, Ben Graham lived a wealthy life. Also Graham on principle rejected any inside information of a company he invested and also did not entertain any involvement as a director of a company. He wanted to have a fair field, where he would be treated just like any other citizen in the nation. You have to understand the man and what drove him in life to understand why he wrote such a valuable book to give away precious knowledge that could make the common person wealth. Lesser being would have secretly guarded that knowledge knowing well that knowledge is power However, beginning the late 1970s and in early 1980s activities in the stock market radically changed--or it went back to the way it was to the time leading to the 1920s proving that people have short memories. The Federal Reserve stood up to the occasion (as if no one would notice) and created trillions of dollars while the US treasury went on a borrowing binge turning the USA from the greatest creditor to the biggest debtor. It appears that most of that glut of money went to the financial market and to those few hands that controlled the market. This is the reason why only less than 5% of the USA have more wealth than the rest of the 95% in the country. Buffett turned to investment during this period of excess and that explains how Buffett's wealth went up billionths of percent making him the richest man on earth. Would Graham turn the richest man on earth had he begun investment during the same time as Buffett? I could be wrong, but my belief is Graham would not have been, because he would have done all in his power to stop the excess of the Federal Reserve by exposing it instead of capitalizing on it. I doubt Graham cared much for money or he wouldn't have given away knowledge that cheaply. To return to the point of near future being an ideal time to use Graham's advice on "Security Analysis," the Federal Reserve under Ben Bernanke cannot carry on the way Greenspan ran the Fed. To do so would be to devalue the dollar (or devalue every major currency, if they choose to follow the footsteps of the USA) against gold and other commodities. The danger of this is to create hyperinflation unless the money being created is placed only in the hands of a few people at the top (in that case they will be running more asset bubbles again). If the money does not trickle down to the majority then there won't be hyperinflation since too much money won't be chasing too few goods. But to have that alternative is to take most countries in the world to an era of pre-Revolutionary France or pre-Second-World-War Germany. I doubt even the bankers would be that clueless not to learn from the wakeup call we got in 2007 and 2008. In short Bernanke's Fed would be compelled to going back to the days of post-1929 crash for the next few decades or until the next generation with amnesia raises its ugly head. If so, in the US stock market there won't be runaway speculative stocks that go on for the duration without being crashed. Thus those adherents to Graham/Dodd principles of investment will have their days again. However, there could be an exception. If Bernanke and the bankers not seeing the writings on the wall destructively carry on the activities as that was in the last few decades then it would be too difficult to predict what will come of this world But it won't be anything positive. However, we have to expect rationality to prevail and the stock market in the USA again to be a place for authentic businesses to raise money and serve the people and the hardworking people to make money using Graham/Dodd principles by investing and not by speculating.