Is value investing relevant even today when market movements are becoming increasingly speculative due to the respective Central Banks’ monetary policy? Truth is, value investing isn’t a method whereby its effectiveness depends on the circumstances. Instead, it is a process whereby you filter out resilient businesses with price below their intrinsic value regardless of the dynamic economy. The results of value investing over the past decades have been impeccable (I’m sure you know) and many prominent investors learnt much of value investing through studying Benjamin Graham.

Doesn’t matter whether you’re a technical investor or a value investor. In this article, I’ll endeavor to share with you guys what I’ve managed to underline in Benjamin Graham and David Dodd famous value investing bible titled “Security Analysis Sixth Edition”. Before you start reading, let me first state that whatever I’ve wrote is 100% from the text of Ben Graham and Dodd Security Analysis and the purpose of these posts is to serve as a reminder and summary of this very particular book. The whole review of the book will be split into 3 posts so… stay tune!!

1. Good businesses are generally considered those with strong barriers to entry, limited capital requirements, reliable customers, low risk of technological obsolescence, abundant growth possibilities, and thus significant and growing free cash flow
2. Four factors:
   1. The general future of corporation profits
   2. The differential in quality between one type of company and another
   3. The influence of interest rates on the dividends or earnings return that he should demand
   4. The extent to which his purchases and sales should be governed by the factor of timing as distinct from price
3. The bondholder’s claim cannot be worth more than the company’s net worth would be to an owner who held it free and clear of debt
4. Book value is an arithmetic computation of what has been invested into it – Eg. Toyota and General Motors: The book values would be equal, but their intrinsic or economic values would be very different (Think in a range of values for intrinsic value)
5. Sales may be booked into earnings, but cash flow statement don’t lie (Pg. 56)
6. Double counting: Investors buy the stock on the basis of their faith in management and then, seeing the stock has risen, take it as additional proof of management’s powers and bid the stock up further
7. Example 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 the company’s history and earnings had been equivalent to as much as 1.5 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 rejection of the issue as insufficiently protected.
8. A contrasting example: In June 1932, it was possible to purchase 5% of 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 also 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.
9. Neither the average earnings nor the average market price evinced any tendency to be governed by the book value
10. Example: J.I case company was picked at $30 in early 1933. Asset value per share was $176, no dividend was being recorded, and average earnings for ten years had been $9.50 per share, the results for 1932 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. The average of $9.50 is obviously nothing more than an arithmetical resultant from ten unrelated figures. It can hardly be argued that this average is in any way representative of typical conditions in the past or representative of what may be expected in the future. (Pg. 65)
11. The most convincing proof of capable management lies in a superior comparative record over a period of time.
12. Stock prices reflect the large earnings, which the good management has produced, plus a substantial increment for its “good management” considered separately. This amounts to “counting the same trick twice” and it proves a frequent cause of over valuation
13. Analyst must penetrate beyond the mere figures and consider the inherent character of the businesses. E.g.: Chain-store grocery contained within itself many elements of relative stability, such as stable demand, diversified locations and rapid inventory turn over.
14. Safety depends upon and is measured entirely by the ability of the debtor corporation to meet its obligation