Security Analysis | Benjamin Graham

Summary of: Security Analysis: Principles and Technique
By: Benjamin Graham


Embark on an insightful journey into the world of security analysis, as we delve into ‘Security Analysis: Principles and Technique’ by Benjamin Graham. This book summary highlights the essence of sound investments and the various methods used in the assessment of securities. It introduces fundamental concepts, such as intrinsic value and the classifications of securities, while also critiquing market analysis techniques. The book advises readers on the examination of company performance, dividend histories, earnings trends, and asset values to make informed investment decisions. Central to the book is the importance of keeping the principal safe and delivering an acceptable return, as well as adopting a well-organized and empowered approach to investment decisions.

The Three Functions of Security Analysis and Sound Investment

Security analysis is a process that determines sound investments, keeping principal safe and yielding acceptable returns. It has three functions, descriptive, selective, and critical, that involve presenting, judging, and monitoring securities. In contrast, market analysis attempts to forecast prices without reference to underlying company facts. Technical analysis and index-based analysis promote speculation over reasoned investment. Intrinsic value is a crucial concept in security analysis, defined by assets, earnings, dividends, and prospects, distinct from market quotations driven by manipulation or psychology. The classification of securities into two categories, stocks and bonds, fails to address their safety and purpose, leading to a more accurate classification of fixed-value securities, variable-value senior securities, and common stocks. A security that meets stringent safety tests and sells below its intrinsic value often proves profitable, while poor securities should not be issued or accepted.

Unpacking Firm Financial Strength

Investors need to assess the financial strength of bond issuers to determine their investment safety and potential. Investors must ask whether a company can manage its debts in difficult financial times or a scenario of recession or depression. Companies with dominant size within their industries and a robust margin of safety are more resilient. Preferred stocks and income bonds can also be secure investments with stringent safety requirements. However, investors must evaluate the guarantor’s financial strength for guaranteed issues. Even though some bonds and preferred stocks do not qualify as safe investments, some issues in this category could still be worth buying if selling at a discount to their intrinsic value. Thus, investors should regularly assess their holdings to guarantee profitable returns.

Attractive Senior Securities

Senior securities offer privileges such as conversion to common stock, participation in increased dividends, and option warrants for purchasing common stock. These privileges provide increased safety and potential price appreciation. However, not all senior securities are safe, and only a limited number meet investment-grade safety requirements. When evaluating these issues, investors should consider the profit-sharing benefits, proximity of the event triggering benefits, and duration of the privileges. A diligent search can uncover undervalued investment issues.

Investing in Common Stocks

Common stocks are riskier than senior issues but crucial to the US financial system. The 1929 crash fueled the false belief that they were always a good buy, but in reality, their instability makes them a dubious investment. However, portfolio diversification can offset some risk. Investors should subject their common stocks portfolios to thorough analysis and consider three crucial factors.

Investigate Dividend Rate

Before investing in common stock, it’s crucial to investigate the firm’s dividend rate and history of paying dividends. Higher dividends often correlate with higher stock prices, but it’s important to remember that management can suspend common-stock dividends at any time. Surplus earnings paid as dividends are worth more to investors than reinvesting in the business, and periodic stock dividends represent a return to shareholders. Lastly, unusual stock dividends often give investors nothing they didn’t already own.

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