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Benjamin Graham, Building a Profession: The Early Writings of the Father of Security Analysis Paperback – 2010
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How One Man Created a Profession—and Entirely Transformed the World of Investing “The small list of investment books that must grace the library of any serious investor—not to gather dust, but to be opened over and over again—just grew by one. This wonderful compilation of the wit and wisdom of Benjamin Graham is the new addition. Savor it. Learn from it. Treasure it.” John C. Bogle, founder and former Chief Executive, The Vanguard Group “If youth is measured by creativity and excitement about new ideas and a thirst for learning, then Ben Graham-in his early 80s-was the youngest guy in the room when two-dozen stellar investment managers met for three days to explain the inner workings of investment management.” Charles D. Ellis, CFA, Bestselling Author of Winning the Loser's Game
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First, the book is divided into four parts, each with an introduction written by Jason Zweig and Rodney Sullivan. Included in each of the first three parts are a half-dozen essays, on average, that were written by Benjamin Graham from the 1930s to the early 1960s. These essays and some later speeches are the heart of the book, which is why Zweig and Sullivan are editors, not authors. (Indeed, over 80% of the words in the book were written by Graham.) The good majority of Graham's essays appeared as articles in The Analysts Journal. The fourth part of the book begins with another introduction by the two editors, followed by a series of speeches or interviews given by Graham. The general theme of the articles and speeches is Graham's observations and arguments for the establishment of a profession of securities analysis. The need for professional standards may seem obvious today, but it was a somewhat heretical idea 70 years ago.
Okay, so why might you want to buy this book? If you are like me, you'll likely read anything written by Graham that you can get your hands on. Though he wrote decades ago, the clarity and to-this-day timeliness of his writings are amazing. If you didn't know when these articles were written, in many cases you might have guessed they were written within the last 10 years. Further, although the main theme of this book is the establishment of a securities analysis profession, there is a lot of very pertinent and useful investment analysis in Graham's writings. For example, one of my favorite articles, "The New Speculation in Common Stocks," was written in 1958 and remains as clear, powerful and pertinent today as back then.
In sum, Benjamin Graham famously wrote about undiscovered investment gems. For many of those interested in securities analysis, this is one of them.
When Graham started in 1914, investors often had to go to the library of the NYSE to view annual reports. There was much less information, and what was available was harder to obtain. Of course, now the situation has inverted, and it is easier and cheaper to invest from somewhere else. Basing your investment operation in Manhattan is obsolete.
Investors were also much more skeptical of stocks: "[T]he determiners of price change were thought to be an entirely different set of factors - all of them very human," a concept which validates Prechter's theory of the market. In 1924, when Common Stocks as Long Term Investments was written, the title was intended to be provocative, as "no respectable person believed that stocks should be regarded as investments at all." Or, as we say on Credit Bubble Stocks, "stocks are for selling, bonds are for buying."
The most interesting takeaway was the extremely low valuations that prevailed during Graham's early years. There is an amazing story of IBM stock in 1916 (then known as CTR, Computer-Tabulating-Recording Co). At that time, the stock had a 7% dividend yield, traded at a third of book value, and less than ten times earnings! And people still said it was overpriced and they wouldn't "touch it with a ten-foot pole"!
Valuations were spectacularly low in 1932 at the stock market bottom. Graham studied 600 industrial companies listed on the NYSE and found that 200 were selling for less than their net quick assets. As he put it, businesses had come to be valued "on an entirely different basis from that applied to private enterprise." But, "if the commitment would be attractive as an ordinary business venture, it should be even more attractive as part of a publicly held enterprise, with the added advantage of... ready marketability."
Corporate governance is the same sad story it has always been; the intractable agency problem in human affairs. It is telling that by the end of his career, Graham basically gave up on it.
In the book you will be introduced to some items that main street is not that aware of in that Graham was not strictly a cigar-butt or a net-net investor only. One learns that his investment style was more nuanced than simply a statistically cheap asset, as he was not shy about arbitrage or good quality growth stocks. From `Toward a Science of Security Analysis', - "A case can be made for putting all your growth eggs in the one best or a relatively few best baskets."
However, one will no less get a heavy dose of the first do no harm aspect of investing. To stress this point with more gravitas, Warren Buffett loves quoting the following rules on investing which is "Rule #1: Don't Lose Money, and Rule #2: Don't Forget Rule #1". So, if wisdom comes either from Hippocrates of Kos, or by Warren Buffett of Omaha, this book will reinforce that the precondition for sustaining a high compound rate of growth is dictated by avoiding serious loss.
Security Analysis: Sixth Edition, Foreword by Warren Buffett (Security Analysis Prior Editions)