Security Analysis
Encyclopedia
Security Analysis is a book written by professors Benjamin Graham
and David Dodd
of Columbia Business School
, which laid the intellectual foundation for what would later be called value investing
. The work was first published in 1934, following unprecedented losses on Wall Street
. In summing up lessons learned, Graham and Dodd chided Wall Street for its myopic focus on a company's reported earnings per share, and were particularly harsh on the favored "earnings trends." They encouraged investors to take an entirely different approach by gauging the rough value of the operating business that lay behind the security. Graham and Dodd enumerated multiple actual examples of the market's tendency to irrationally under-value certain out-of-favor securities. They saw this tendency as an opportunity for the savvy.
At bottom, Security Analysis stands for the proposition that a well-disciplined investor can determine a rough value for a company from all of its financial statements, make purchases when the market inevitably under-prices some of them, earn a satisfactory return, and never be in real danger of permanent loss. Warren Buffett
, the only student in Graham's investment seminar to earn an A+, made billions of dollars by methodically and rationally implementing the tenets of Graham and Dodd's book.
Security Analysis is still used as a textbook at Columbia
. Security Analysis also represents the genesis of financial analysis
and fundamental analysis
. However, in the 1970s Graham stopped advocating a careful use of the techniques described in his text in selecting individual stocks, citing the extensive efforts and costs required to generate superior returns in a modern efficient market
. Instead, Graham later suggested the use of one or two simple criteria to the investor's entire portfolio
, focusing on results of the group rather than on individual securities.
Benjamin Graham
Benjamin Graham was an American economist and professional investor. Graham is considered the first proponent of value investing, an investment approach he began teaching at Columbia Business School in 1928 and subsequently refined with David Dodd through various editions of their famous book...
and David Dodd
David Dodd
David LeFevre Dodd was an American educator, financial analyst, author, economist, professional investor, and in his student years, a of, and as a postgraduate, close colleague of Benjamin Graham at Columbia Business School.The Wall Street Crash of 1929 almost wiped out Graham, who had started...
of Columbia Business School
Columbia Business School
Columbia Business School is the business school of Columbia University in Manhattan, New York City. It was established in 1916 to provide business training and professional preparation for undergraduate and graduate Columbia University students...
, which laid the intellectual foundation for what would later be called value investing
Value investing
Value investing is an investment paradigm that derives from the ideas on investment and speculation that Ben Graham and David Dodd began teaching at Columbia Business School in 1928 and subsequently developed in their 1934 text Security Analysis...
. The work was first published in 1934, following unprecedented losses on Wall Street
Wall Street
Wall Street refers to the financial district of New York City, named after and centered on the eight-block-long street running from Broadway to South Street on the East River in Lower Manhattan. Over time, the term has become a metonym for the financial markets of the United States as a whole, or...
. In summing up lessons learned, Graham and Dodd chided Wall Street for its myopic focus on a company's reported earnings per share, and were particularly harsh on the favored "earnings trends." They encouraged investors to take an entirely different approach by gauging the rough value of the operating business that lay behind the security. Graham and Dodd enumerated multiple actual examples of the market's tendency to irrationally under-value certain out-of-favor securities. They saw this tendency as an opportunity for the savvy.
At bottom, Security Analysis stands for the proposition that a well-disciplined investor can determine a rough value for a company from all of its financial statements, make purchases when the market inevitably under-prices some of them, earn a satisfactory return, and never be in real danger of permanent loss. Warren Buffett
Warren Buffett
Warren Edward Buffett is an American business magnate, investor, and philanthropist. He is widely regarded as one of the most successful investors in the world. Often introduced as "legendary investor, Warren Buffett", he is the primary shareholder, chairman and CEO of Berkshire Hathaway. He is...
, the only student in Graham's investment seminar to earn an A+, made billions of dollars by methodically and rationally implementing the tenets of Graham and Dodd's book.
Security Analysis is still used as a textbook at Columbia
Columbia Business School
Columbia Business School is the business school of Columbia University in Manhattan, New York City. It was established in 1916 to provide business training and professional preparation for undergraduate and graduate Columbia University students...
. Security Analysis also represents the genesis of financial analysis
Financial analysis
Financial analysis refers to an assessment of the viability, stability and profitability of a business, sub-business or project....
and fundamental analysis
Fundamental analysis
Fundamental analysis of a business involves analyzing its financial statements and health, its management and competitive advantages, and its competitors and markets. When applied to futures and forex, it focuses on the overall state of the economy, interest rates, production, earnings, and...
. However, in the 1970s Graham stopped advocating a careful use of the techniques described in his text in selecting individual stocks, citing the extensive efforts and costs required to generate superior returns in a modern efficient market
Efficient market hypothesis
In finance, the efficient-market hypothesis asserts that financial markets are "informationally efficient". That is, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information available at the time the investment is made.There are...
. Instead, Graham later suggested the use of one or two simple criteria to the investor's entire portfolio
Portfolio (finance)
Portfolio is a financial term denoting a collection of investments held by an investment company, hedge fund, financial institution or individual.-Definition:The term portfolio refers to any collection of financial assets such as stocks, bonds and cash...
, focusing on results of the group rather than on individual securities.
Domestic editions of Security Analysis
- 1st ed. (1934) Whittlesey House (the trade division of McGraw-HillMcGraw-HillThe McGraw-Hill Companies, Inc., is a publicly traded corporation headquartered in Rockefeller Center in New York City. Its primary areas of business are financial, education, publishing, broadcasting, and business services...
) - LCCN: 34023635
-
- Black bound cover (1st printing) was printed by The Maple Press Co., York, PA, for a small distribution in the United StatesUnited StatesThe United States of America is a federal constitutional republic comprising fifty states and a federal district...
- Maroon bound cover (2nd printing) was published that same year for sale abroad, The Maple Press Co., York, PA
- 2nd ed. (1940) McGraw-HillMcGraw-HillThe McGraw-Hill Companies, Inc., is a publicly traded corporation headquartered in Rockefeller Center in New York City. Its primary areas of business are financial, education, publishing, broadcasting, and business services...
- LCCN: 40013028 - 3rd ed. (January 1, 1951) McGraw-HillMcGraw-HillThe McGraw-Hill Companies, Inc., is a publicly traded corporation headquartered in Rockefeller Center in New York City. Its primary areas of business are financial, education, publishing, broadcasting, and business services...
(last edition while Graham & Dodd were faculty members of Columbia) - LCCN: 2005270180 - 4th ed. (1962) McGraw-HillMcGraw-HillThe McGraw-Hill Companies, Inc., is a publicly traded corporation headquartered in Rockefeller Center in New York City. Its primary areas of business are financial, education, publishing, broadcasting, and business services...
(last edition by GrahamBenjamin GrahamBenjamin Graham was an American economist and professional investor. Graham is considered the first proponent of value investing, an investment approach he began teaching at Columbia Business School in 1928 and subsequently refined with David Dodd through various editions of their famous book...
& DoddDavid DoddDavid LeFevre Dodd was an American educator, financial analyst, author, economist, professional investor, and in his student years, a of, and as a postgraduate, close colleague of Benjamin Graham at Columbia Business School.The Wall Street Crash of 1929 almost wiped out Graham, who had started...
) Charles Sidney Cottle (1910–1987) joins as coauthor - LCCN: 62017368
- 2nd ed. (1940) McGraw-Hill
- Reprint 3rd ed. (May 1976) McGraw-HillMcGraw-HillThe McGraw-Hill Companies, Inc., is a publicly traded corporation headquartered in Rockefeller Center in New York City. Its primary areas of business are financial, education, publishing, broadcasting, and business services...
- ISBN 0-07-023957-6- 5th ed. (January 1, 1988) McGraw-HillMcGraw-HillThe McGraw-Hill Companies, Inc., is a publicly traded corporation headquartered in Rockefeller Center in New York City. Its primary areas of business are financial, education, publishing, broadcasting, and business services...
(updated by Cottle, Murray, and Block) - ISBN 0-07-013235-6
- 5th ed. (January 1, 1988) McGraw-Hill
- Reprint 1st ed. (October 1, 1996) McGraw-HillMcGraw-HillThe McGraw-Hill Companies, Inc., is a publicly traded corporation headquartered in Rockefeller Center in New York City. Its primary areas of business are financial, education, publishing, broadcasting, and business services...
- ISBN 0-07-024496-0 - Reprint 1st ed. (February 1, 1997) McGraw-HillMcGraw-HillThe McGraw-Hill Companies, Inc., is a publicly traded corporation headquartered in Rockefeller Center in New York City. Its primary areas of business are financial, education, publishing, broadcasting, and business services...
- ISBN 0-07-024497-9 - Reprint 2nd ed. (October 10, 2002) McGraw-HillMcGraw-HillThe McGraw-Hill Companies, Inc., is a publicly traded corporation headquartered in Rockefeller Center in New York City. Its primary areas of business are financial, education, publishing, broadcasting, and business services...
- ISBN 0-07-141228-X - Reprint 3rd ed. (December 10, 2004) McGraw-HillMcGraw-HillThe McGraw-Hill Companies, Inc., is a publicly traded corporation headquartered in Rockefeller Center in New York City. Its primary areas of business are financial, education, publishing, broadcasting, and business services...
- ISBN 0-07-144820-9- 6th ed. (September 4, 2008) McGraw-HillMcGraw-HillThe McGraw-Hill Companies, Inc., is a publicly traded corporation headquartered in Rockefeller Center in New York City. Its primary areas of business are financial, education, publishing, broadcasting, and business services...
(updated with commentary by 10 contributors) - ISBN 0-07-159253-9
- 6th ed. (September 4, 2008) McGraw-Hill
- Limited Leatherbound Edition (September 19, 2008) McGraw-HillMcGraw-HillThe McGraw-Hill Companies, Inc., is a publicly traded corporation headquartered in Rockefeller Center in New York City. Its primary areas of business are financial, education, publishing, broadcasting, and business services...
- ISBN 0-07-162357-4
- Black bound cover (1st printing) was printed by The Maple Press Co., York, PA, for a small distribution in the United States
See also
- David DoddDavid DoddDavid LeFevre Dodd was an American educator, financial analyst, author, economist, professional investor, and in his student years, a of, and as a postgraduate, close colleague of Benjamin Graham at Columbia Business School.The Wall Street Crash of 1929 almost wiped out Graham, who had started...
- The Intelligent InvestorThe Intelligent InvestorThe Intelligent Investor by Benjamin Graham, first published in 1949, is a widely acclaimed book on value investing, an investment approach Graham began teaching at Columbia Business School in 1928 and subsequently refined with David Dodd...
- Stock selection criterion