Security Analysis: The Classic 1940 Edition / Edition 2

Hardcover (Print)
Used and New from Other Sellers
Used and New from Other Sellers
from $31.80
Usually ships in 1-2 business days
(Save 51%)
Other sellers (Hardcover)
  • All (16) from $31.80   
  • New (8) from $37.95   
  • Used (8) from $31.80   

Overview

The Long-Awaited Reprint of Graham and Dodd's Masterful First Revision

The first edition of Security Analysis, published in 1934, forever changed the theory and practice of successful investing. Yet the remainder of that tumultuous decade brought unprecedented upheaval to the financial world, compelling Benjamin Graham and David Dodd to produce a comprehensively revised second edition.

It is that edition, out of print for decades, that you now hold in your hands. Security Analysis, Second Edition, published in 1940, is considered by many (including legendary Graham student Warren Buffett) to be vastly superior to the first. Yet after three subsequent editions and over six decades, the insightful and instructive second edition could be found only in rare bookshops and closely-guarded private collections.

McGraw-Hill, the book's original publisher, is honored to publish Security Analysis: The Classic 1940 Edition. Identical in every meaningful aspect to the classic original, this is the long-awaited book that set the tone for decades of value investors. Let it provide you with a greater understanding of this country's financial heritage, along with timeless value investing insights that have proven relevant and profitable in all types of markets and financial environments—and will never go out of style.

"The lapse of six years since first publication of this work supplies the excuse, if not the necessity, for the present comprehensive revision ... We have revised our text with a number of objectives in view. There are weaknesses to be corrected and some new judgments to be substituted."—From the Preface

The names Graham and Dodd have come to be inextricably linked in the minds of thoughtful, disciplined investors. Their 1934 book Security Analysis made the two synonymous with intelligent, long-term investing, and forever changed the face of Wall Street. While post-Crash traders and investors treasured the book for its rigorous honesty, determined logic, and unequalled track record of success, the authors saw only the "weaknesses to be corrected."

The second edition of Security Analysis, published in 1940, allowed Ben Graham and David Dodd to set the record straight. It was considered by many then, and is considered by many now—including Graham student and disciple Warren Buffett, to be superior in many ways to the first. Still, as subsequent revised editions appeared, the once-indispensable second edition fell out of print and became virtually impossible to locate.

With Security Analysis: The Classic 1940 Edition, McGraw-Hill returns this long-sought investment classic to the marketplace. While its timeless advice—that investors should ignore social trends, company prospects, and management styles to focus on the balance sheet—is as vital today as it was in 1940, it is the book's updated insights and observations that justify its importance in the annals of both investing and publishing.

Even as the financial world sang the praises of 1934's groundbreaking Security Analysis, Benjamin Graham and David Dodd knew they could improve it. And that they did, with the 1940 publication of a brilliant second edition. Now, after having been unavailable for decades, this influential book returns in Security Analysis: The Classic 1940 Edition. As powerful today as it was for investors six decades back, it will reacquaint you with the foundations of value investing—more relevant than ever in tumultuous 21st century markets—and allow you to own the only book that could rightfully claim to have improved upon the eloquent first edition of Security Analysis.

Read More Show Less

Product Details

  • ISBN-13: 9780071412285
  • Publisher: McGraw-Hill Professional Publishing
  • Publication date: 10/10/2002
  • Edition description: The Classic 1940 Second Edition
  • Edition number: 2
  • Pages: 752
  • Sales rank: 136,295
  • Product dimensions: 6.50 (w) x 9.20 (h) x 2.50 (d)

Meet the Author

Benjamin Graham was a seminal figure on Wall Street and is widely acknowledged to be the father of modern security analysis. The founder of the value school of investing and founder and former president of the Graham-Newman corporation investment fund, Graham taught at Columbia University's Graduate School of Business from 1928 through 1957. He popularized the examination of price-to-earnings (P/E) ratios, debt-to-equity ratios, dividend records, book values, and earnings growth, and also wrote the popular investors' guide The Intelligent Investor.

David Dodd was a colleague of Benjamin Graham's at Columbia University, where he was an assistant professor of finance.

Read More Show Less

Read an Excerpt

SECURITY ANALYSIS

Principles and Technique
By BENJAMIN GRAHAM DAVID L. DODD

McGraw-Hill

Copyright © 1934 The McGraw-Hill Companies, Inc.
All right reserved.

ISBN: 978-0-07-170757-2


Chapter One

THE SCOPE AND LIMITATIONS OF SECURITY ANALYSIS THE CONCEPT OF INTRINSIC VALUE

Analysis connotes the careful study of available facts with the attempt to draw conclusions therefrom based on established principles and sound logic. It is part of the scientific method. But in applying analysis to the field of securities we encounter the serious obstacle that investment is by nature not an exact science. The same is true, however, of law and medicine, for here also both individual skill (art) and chance are important factors in determining success or failure. Nevertheless, in these professions analysis is not only useful but indispensable, so that the same should probably be true in the field of investment and possibly in that of speculation.

In the last three decades the prestige of security analysis in Wall Street has experienced both a brilliant rise and an ignominious fall—a history related but by no means parallel to the course of stock prices. The advance of security analysis proceeded uninterruptedly until about 1927, covering a long period in which increasing attention was paid on all sides to financial reports and statistical data. But the "new era" commencing in 1927 involved at bottom the abandonment of the analytical approach; and while emphasis was still seemingly placed on facts and figures, these were manipulated by a sort of pseudoanalysis to support the delusions of the period. The market collapse in October 1929 was no surprise to such analysts as had kept their heads, but the extent of the business collapse which later developed, with its devastating effects on established earning power, again threw their calculations out of gear. Hence the ultimate result was that serious analysis suffered a double discrediting: the first—prior to the crash—due to the persistence of imaginary values, and the second—after the crash—due to the disappearance of real values.

The experiences of 1927–1933 were of so extraordinary a character that they scarcely provide a valid criterion for judging the usefulness of security analysis. As to the years since 1933, there is perhaps room for a difference of opinion. In the field of bonds and preferred stocks, we believe that sound principles of selection and rejection have justified themselves quite well. In the common-stock arena the partialities of the market have tended to confound the conservative viewpoint, and conversely many issues appearing cheap under analysis have given a disappointing performance. On the other hand, the analytical approach would have given strong grounds for believing representative stock prices to be too high in early 1937 and too low a year later.

THREE FUNCTIONS OF ANALYSIS: 1. DESCRIPTIVE FUNCTION

The functions of security analysis may be described under three headings: descriptive, selective, and critical. In its more obvious form, descriptive analysis consists of marshalling the important facts relating to an issue and presenting them in a coherent, readily intelligible manner. This function is adequately performed for the entire range of marketable corporate securities by the various manuals, the Standard Statistics and Fitch services, and others. A more penetrating type of description seeks to reveal the strong and weak points in the position of an issue, compare its exhibit with that of others of similar character, and appraise the factors which are likely to influence its future performance. Analysis of this kind is applicable to almost every corporate issue, and it may be regarded as an adjunct not only to investment but also to intelligent speculation in that it provides an organized factual basis for the application of judgment.

2. THE SELECTIVE FUNCTION OF SECURITY ANALYSIS

In its selective function, security analysis goes further and expresses specific judgments of its own. It seeks to determine whether a given issue should be bought, sold, retained, or exchanged for some other. What types of securities or situations lend themselves best to this more positive activity of the analyst, and to what handicaps or limitations is it subject? It may be well to start with a group of examples of analytical judgments, which could later serve as a basis for a more general inquiry.

Examples of Analytical Judgments.—In 1928 the public was offered a large issue of 6% noncumulative preferred stock of St. Louis-San Francisco Railway Company priced at 100. The record showed that in no year in the company's history had earnings been equivalent to as much as 1½ times the fixed charges and preferred dividends combined. The application of well-established standards of selection to the facts in this case would have led to the rejection of the issue as insufficiently protected.

A contrasting example: In June 1932 it was possible to purchase 5% bonds of Owens-Illinois Glass Company, due 1939, at 70, yielding 11% to maturity. The company's earnings were many times the interest requirements—not only on the average but even at that time of severe depression. The bond issue was amply covered by current assets alone, and it was followed by common and preferred stock with a very large aggregate market value, taking their lowest quotations. Here, analysis would have led to the recommendation of this issue as a strongly entrenched and attractively priced investment.

Let us take an example from the field of common stocks. In 1922, prior to the boom in aviation securities, Wright Aeronautical Corporation stock was selling on the New York Stock Exchange at only $8, although it was paying a $1 dividend, had for some time been earning over $2 a share, and showed more than $8 per share in cash assets in the treasury. In this case analysis would readily have established that the intrinsic value of the issue was substantially above the market price.

Again, consider the same issue in 1928 when it had advanced to $280 per share. It was then earning at the rate of $8 per share, as against $3.77 in 1927. The dividend rate was $2; the net-asset value was less than $50 per share. A study of this picture must have shown conclusively that the market price represented for the most part the capitalization of entirely conjectural future prospects—in other words, that the intrinsic value was far less than the market quotation.

A third kind of analytical conclusion may be illustrated by a comparison of Interborough Rapid Transit Company First and Refunding 5s with the same company's Collateral 7% Notes, when both issues were selling at the same price (say 62) in 1933. The 7% notes were clearly worth considerably more than the 5s. Each $1,000 note was secured by deposit of $1,736 face amount of 5s; the principal of the notes had matured; they were entitled either to be paid off in full or to a sale of the collateral for their benefit. The annual interest received on the collateral was equal to about $87 on each 7% note (which amount was actually being distributed to the note holders), so that the current income on the 7s was considerably greater than that on the 5s. Whatever technicalities might be invoked to prevent the note holders from asserting their contractual rights promptly and completely, it was difficult to imagine conditions under which the 7s would not be intrinsically worth considerably more than the 5s.

A more recent comparison of the same general type could have been drawn between Paramount Pictures First Convertible Preferred selling at 113 in October 1936 and the common stock concurrently selling at 15 7/8;. The preferred stock was convertible at the holders' option into seven times as many shares of common, and it carried accumulated dividends of about $11 per share. Obviously the preferred was cheaper than the common, since it would have to receive very substantial dividends before the common received anything, and it could also share fully in any rise of the common by reason of the conversion privilege. If a common stockholder had accepted this analysis and exchanged his shares for one-seventh as many preferred, he would soon have realized a large gain both in dividends received and in principal value.

Intrinsic Value vs. Price.—From the foregoing examples it will be seen that the work of the securities analyst is not without concrete results of considerable practical value, and that it is applicable to a wide variety of situations. In all of these instances he appears to be concerned with the intrinsic value of the security and more particularly with the discovery of discrepancies between the intrinsic value and the market price. We must recognize, however, that intrinsic value is an elusive concept. In general terms it is understood to be that value which is justified by the facts, e.g., the assets, earnings, dividends, definite prospects, as distinct, let us say, from market quotations established by artificial manipulation or distorted by psychological excesses. But it is a great mistake to imagine that intrinsic value is as definite and as determinable as is the market price. Some time ago intrinsic value (in the case of a common stock) was thought to be about the same thing as "book value," i.e., it was equal to the net assets of the business, fairly priced. This view of intrinsic value was quite definite, but it proved almost worthless as a practical matter because neither the average earnings nor the average market price evinced any tendency to be governed by the book value.

Intrinsic Value and "Earning Power."—Hence this idea was superseded by a newer view, viz., that the intrinsic value of a business was determined by its earning power. But the phrase "earning power" must imply a fairly confident expectation of certain future results. It is not sufficient to know what the past earnings have averaged, or even that they disclose a definite line of growth or decline. There must be plausible grounds for believing that this average or this trend is a dependable guide to the future. Experience has shown only too forcibly that in many instances this is far from true. This means that the concept of "earning power," expressed as a definite figure, and the derived concept of intrinsic value, as something equally definite and ascertainable, cannot be safely accepted as a general premise of security analysis.

Example: To make this reasoning clearer, let us consider a concrete and typical example. What would we mean by the intrinsic value of J. I. Case Company common, as analyzed, say, early in 1933? The market price was $30; the asset value per share was $176; no dividend was being paid; the average earnings for ten years had been $9.50 per share; the results for 1932 had shown a deficit of $17 per share. If we followed a customary method of appraisal, we might take the average earnings per share of common for ten years, multiply this average by ten, and arrive at an intrinsic value of $95. But let us examine the individual figures which make up this ten-year average. They are as shown in the table on page 22. The average of $9.50 is obviously nothing more than an arithmetical resultant from 10 unrelated figures. It can hardly be urged that this average is in any way representative of typical conditions in the past or representative of what may be expected in the future. Hence any figure of "real" or intrinsic value derived from this average must be characterized as equally accidental or artificial.

The Role of Intrinsic Value in the Work of the Analyst.—Let us try to formulate a statement of the role of intrinsic value in the work of the analyst which will reconcile the rather conflicting implications of our various examples. The essential point is that security analysis does not seek to determine exactly what is the intrinsic value of a given security. It needs only to establish either that the value is adequate—e.g., to protect a bond or to justify a stock purchase—or else that the value is considerably higher or considerably lower than the market price. For such purposes an indefinite and approximate measure of the intrinsic value may be sufficient. To use a homely simile, it is quite possible to decide by inspection that a woman is old enough to vote without knowing her age or that a man is heavier than he should be without knowing his exact weight.

This statement of the case may be made clearer by a brief return to our examples. The rejection of St. Louis-San Francisco Preferred did not require an exact calculation of the intrinsic value of this railroad system. It was enough to show, very simply from the earnings record, that the margin of value above the bondholders' and preferred stockholders' claims was too small to assure safety. Exactly the opposite was true for the Owens-Illinois Glass 5s. In this instance, also, it would undoubtedly have been difficult to arrive at a fair valuation of the business; but it was quite easy to decide that this value in any event was far in excess of the company's debt.

In the Wright Aeronautical example, the earlier situation presented a set of facts which demonstrated that the business was worth substantially more than $8 per share, or $1,800,000. In the later year, the facts were equally conclusive that the business did not have a reasonable value of $280 per share, or $70,000,000 in all. It would have been difficult for the analyst to determine whether Wright Aeronautical was actually worth $20 or $40 a share in 1922—or actually worth $50 or $80 in 1929. But fortunately it was not necessary to decide these points in order to conclude that the shares were attractive at $8 and unattractive, intrinsically, at $280.

The J. I. Case example illustrates the far more typical commonstock situation, in which the analyst cannot reach a dependable conclusion as to the relation of intrinsic value to market price. But even here, if the price had been low or high enough, a conclusion might have been warranted. To express the uncertainty of the picture, we might say that it was difficult to determine in early 1933 whether the intrinsic value of Case common was nearer $30 or $130. Yet if the stock had been selling at as low as $10, the analyst would undoubtedly have been justified in declaring that it was worth more than the market price.

Flexibility of the Concept of Intrinsic Value.—This should indicate how flexible is the concept of intrinsic value as applied to security analysis. Our notion of the intrinsic value may be more or less distinct, depending on the particular case. The degree of indistinctness may be expressed by a very hypothetical "range of approximate value," which would grow wider as the uncertainty of the picture increased, e.g., $20 to $40 for Wright Aeronautical in 1922 as against $30 to $130 for Case in 1933. It would follow that even a very indefinite idea of the intrinsic value may still justify a conclusion if the current price falls far outside either the maximum or minimum appraisal.

More Definite Concept in Special Cases.—The Interborough Rapid Transit example permits a more precise line of reasoning than any of the others. Here a given market price for the 5% bonds results in a very definite valuation for the 7% notes. If it were certain that the collateral securing the notes would be acquired for and distributed to the note holders, than the mathematical relationship—viz., $1,736 of value for the 7s against $1,000 of value for the 5s—would eventually be established at this ratio in the market. But because of quasi-political complications in the picture, this normal procedure could not be expected with certainty. As a practical matter, therefore, it is not possible to say that the 7s are actually worth 74% more than the 5s, but it may be said with assurance that the 7s are worth substantially more—which is a very useful conclusion to arrive at when both issues are selling at the same price.

The Interborough issues are an example of a rather special group of situations in which analysis may reach more definite conclusions respecting intrinsic value than in the ordinary case. These situations may involve a liquidation or give rise to technical operations known as "arbitrage" or "hedging." While, viewed in the abstract, they are probably the most satisfactory field for the analyst's work, the fact that they are specialized in character and of infrequent occurrence makes them relatively unimportant from the broader standpoint of investment theory and practice.

(Continues...)



Excerpted from SECURITY ANALYSIS by BENJAMIN GRAHAM DAVID L. DODD Copyright © 1934 by The McGraw-Hill Companies, Inc.. Excerpted by permission of McGraw-Hill. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

Read More Show Less

Table of Contents

Contents

Read More Show Less

Customer Reviews

Average Rating 3.5
( 3 )
Rating Distribution

5 Star

(2)

4 Star

(0)

3 Star

(0)

2 Star

(0)

1 Star

(1)

Your Rating:

Your Name: Create a Pen Name or

Barnes & Noble.com Review Rules

Our reader reviews allow you to share your comments on titles you liked, or didn't, with others. By submitting an online review, you are representing to Barnes & Noble.com that all information contained in your review is original and accurate in all respects, and that the submission of such content by you and the posting of such content by Barnes & Noble.com does not and will not violate the rights of any third party. Please follow the rules below to help ensure that your review can be posted.

Reviews by Our Customers Under the Age of 13

We highly value and respect everyone's opinion concerning the titles we offer. However, we cannot allow persons under the age of 13 to have accounts at BN.com or to post customer reviews. Please see our Terms of Use for more details.

What to exclude from your review:

Please do not write about reviews, commentary, or information posted on the product page. If you see any errors in the information on the product page, please send us an email.

Reviews should not contain any of the following:

  • - HTML tags, profanity, obscenities, vulgarities, or comments that defame anyone
  • - Time-sensitive information such as tour dates, signings, lectures, etc.
  • - Single-word reviews. Other people will read your review to discover why you liked or didn't like the title. Be descriptive.
  • - Comments focusing on the author or that may ruin the ending for others
  • - Phone numbers, addresses, URLs
  • - Pricing and availability information or alternative ordering information
  • - Advertisements or commercial solicitation

Reminder:

  • - By submitting a review, you grant to Barnes & Noble.com and its sublicensees the royalty-free, perpetual, irrevocable right and license to use the review in accordance with the Barnes & Noble.com Terms of Use.
  • - Barnes & Noble.com reserves the right not to post any review -- particularly those that do not follow the terms and conditions of these Rules. Barnes & Noble.com also reserves the right to remove any review at any time without notice.
  • - See Terms of Use for other conditions and disclaimers.
Search for Products You'd Like to Recommend

Recommend other products that relate to your review. Just search for them below and share!

Create a Pen Name

Your Pen Name is your unique identity on BN.com. It will appear on the reviews you write and other website activities. Your Pen Name cannot be edited, changed or deleted once submitted.

 
Your Pen Name can be any combination of alphanumeric characters (plus - and _), and must be at least two characters long.

Continue Anonymously
Sort by: Showing all of 3 Customer Reviews
  • Anonymous

    Posted March 12, 2013

    Security Analysis is a great book, I highly recommend you read i

    Security Analysis is a great book, I highly recommend you read it.  However, this format is not really usable on the Nook Simple Touch.  The comparison tables are all Pictures and you cannot enlarge them.  Without being able to look closely at the examples in the book, you are getting very little of value out of it.  B&N really shouldn't see a book like this (or any other book with pictures, maps, charts etc.) for the Simple Touch without some kind of warning.

    3 out of 3 people found this review helpful.

    Was this review helpful? Yes  No   Report this review
  • Anonymous

    Posted August 20, 2011

    No text was provided for this review.

  • Anonymous

    Posted March 8, 2010

    No text was provided for this review.

Sort by: Showing all of 3 Customer Reviews

If you find inappropriate content, please report it to Barnes & Noble
Why is this product inappropriate?
Comments (optional)