Interesting Facts You’ve Never Known From A Legendary Investment Book

Most serious investors with a penchant for finding cheap stocks would have heard of the legendary investment text, Security Analysis, written by Benjamin Graham and David Dodd.

Yet, it’s likely that not many have actually been able to finish the book (I have to admit – I belong to that group too). That’s because the book is –in my opinion – extremely dull, and it contains examples and valuation techniques that are outdated and hard to apply in today’s financial markets.

But, upon a recent re-read of Security Analysis, I discovered some interesting gems that I’d like to share.

On the difference between investing and speculating

“We are inclined to make the rash statement that a common stock that cannot be appraised with confidence cannot be analyzed with confidence”

Graham and Dodd made it a point to clearly define the difference between investing and speculation. And they do so because without proper guidelines and categorization, it’s easy for us as investors to think that we’re investing when we’re in fact just speculating.

For any company that we are unable to confidently value, it is quite likely that any investment decision with regard to that company is pure speculation.

For example, newly-listed companies (or companies in the process of a reverse takeover) might not provide sufficient data and information for investors to make an informed decision on the company. Thus, any valuation and analysis done on those companies have to be based on many assumptions that might not be accurate, rendering the whole study speculative.

On the investing strategy that’s most suited for lay people

“… investor who can successfully identify such “growth companies” when their shares are available at reasonable prices is certain to do superlatively well with his capital.

Nor can it be denied that there have been investors capable of making such selections with a high degree of accuracy and that they have benefited hugely from their foresight and good judgment. But the real question is whether or not all careful and intelligent investors can follow this policy with fair success. “ 

Graham understood that there are investors, like Philip Fisher for instance, who are really good at picking great growth companies. But, Graham was worried that the average investor cannot follow a “growth investing” strategy well as he would tend to get carried away by wild optimism when he sees a company with presumably sky-high prospects.

I am sure that there are people who are able to control their emotions very well (I personally know two such investors who work with me side by side every day). But for the rest of us, Graham’s strategy prevents us from tumbling into the trap of falling in love with our investments even when the valuations no longer make sense.

Foolish Summary

Graham’s investing strategy can be regarded by many as old-fashioned and boring. Even his most famous disciple, Warren Buffett, has switched from the hunting for dirt-cheap bargains to focusing on quality businesses that might be selling at more expensive prices.

But all that said, Graham’s style still provides a systematic and relatively safe method of investing for investors.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn't own shares in any companies mentioned.