Investments, tenth edition

   SUMMARY 

 No presentation of fundamental security analysis would be complete without a discussion 

of the ideas of Benjamin Graham, the greatest of the investment “gurus.” Until the evolu-

tion of modern portfolio theory in the latter half of the 20th century, Graham was the single 

most important thinker, writer, and teacher in the field of investment analysis. His influ-

ence on investment professionals remains very strong. 

 Graham’s magnum opus is  Security Analysis,  written with Columbia Professor David 

Dodd in 1934. Its message is similar to the ideas presented in this chapter. Graham 

believed careful analysis of a firm’s financial statements could turn up bargain stocks. Over 

the years, he developed many different rules for determining the most important financial 

ratios and the critical values for judging a stock to be undervalued. Through many editions, 

his book has been so influential and successful that widespread adoption of Graham’s tech-

niques has led to the elimination of the very bargains they are designed to identify. 

 In a 1976 seminar Graham said:  

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  I am no longer an advocate of elaborate techniques of security analysis in order to find 

superior value opportunities. This was a rewarding activity, say, forty years ago, when 

our textbook “Graham and Dodd” was first published; but the situation has changed a 

good deal since then. In the old days any well-trained security analyst could do a good 

professional job of selecting undervalued issues through detailed studies; but in the light 

of the enormous amount of research now being carried on, I doubt whether in most cases 

such extensive efforts will generate sufficiently superior selections to justify their cost. 

To that very limited extent I’m on the side of the “efficient market” school of thought 

now generally accepted by the professors.  

 Nonetheless, in that same seminar, Graham suggested a simplified approach to identify-

ing bargain stocks: 

  My first, more limited, technique confines itself to the purchase of common stocks at 

less than their working-capital value, or net current-asset value, giving no weight to the 

plant and other fixed assets, and deducting all liabilities in full from the current assets. 

We used this approach extensively in managing investment funds, and over a 30-odd-year 

period we must have earned an average of some 20 percent per year from this source. 

I consider it a foolproof method of systematic investment—once again, not on the basis 

of individual results but in terms of the expectable group income.  

 There are two convenient sources of information for those interested in trying out the 

Graham technique: Both Standard & Poor’s  Outlook  and  The Value Line Investment Survey  

carry lists of stocks selling below net working capital value.    

    19.7 

Value Investing: The Graham Technique  

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