Thank you for running this course, I like to have my thinking challenged, and the first question did just that. Here is my list. It made me consider how useful, objective and valid each investment approach is, and which go together well, or not so well, with others.
A few things that stood out as I looked at the list
Some approaches cluster other approaches strongly:
Short time horizon clusters with Volatility, Momentum, Arbitrage, Volume and technical analysis.
Long time horizon clusters with Research, Quality, Growth, Value, Skin in the game
Others are always important whatever style you use:
Risk Management, diversification
Some are easy to measure and objective, so you can more likely assume they are "in the price":
Size, sector, value, income
Some the whole point is that they are not generally known:
Scuttlebutt information, non listed activities like retailers car park usage, or electricity use by measuring pylon temperature
Some are subjective or estimates, and therefore subject to interpretation and bias:
Quality, Ethics, Contrarian, Research, Special situations, growth
Question 1
it was written in 1934 with Dodds on the basis of his lectures at Colombia from 1928 to 1932 and his experiences in Wall St from 1914 when he graduated. Most people then regarded stocks as gambling, bonds were considered the only safe and respectable investment. Stocks were mostly bought on tips, especially driven by the activity of stock market pools that drove prices both up and down by corners and squeezes. He made his first great win in 1915 by a value play based on the now simple idea that 1 share of Guggenheim Exploration held about 10% more value in listed securities and other assets that it owned.
Question 2
His investment philosophy was of a "margin of safety" using analysis to evaluate the intrinsic value of a share based on it's fundamentals. A long track record of success is necessary and a very high margin of safety for growth projections. The market is not always efficient and this can be used to create value for the patient and disciplined investor.
Question 3
I consider this approach and knowledge necessary but not sufficient. It is always essential to understand accounts, to understand the risks you are taking on fundamentals, and how large they are, and to conduct your own analysis. Much of the information and the approach is timeless: people don't change, and neither do calculations of fundamental value. But some things do change. For example:
The information that Graham had to calculate himself is now generally easily available
The change in technology means that moats and competitive advantage are now both greater and give much larger returns in some cases.
The rise in market multiples make it hard to find good quality candidates with an adequate margin of safety
private equity (who did not exist in those days) frequently buys value plays in smaller companies for relatively modest premiums, resulting in significant losses for mistimed value purchases. Where I live in the UK this is a very common experience.
The greatly increased costs of employing top management talent, of professional advice, and listing of companies, can rapidly erode margins of safety in smaller companies, and significantly dent those in larger ones.
My biggest problem with a pure value approach is the intellectual objection that it always biased towards buying the cheapest companies not the best ones. And cheap does not work. Too often the company is cheap for good reason, and you only find out the reason after you have bought it. Management and sophisticated insiders always know more than you do and accounts are always backwards looking. Value investors often try and fudge this by applying "quality" measures, and other criteria, but this is both subjective, and also a tacit admission of the inadequacy of a wholly value approach.
Question 4
Invest only when there is a significant gap between intrinsic value and market price. Anything else is mere speculation.
I think your point about Graham's approach being necessary but not sufficient is insightful. Here is a thought question: how did cheap securities in the 1930s compare (purposefully leaving this broad/open-ended) with cheap securities today? How do the differences, if any, influence Graham's approach?
Good question. I'll answer this in 3 parts. First the historical context of both times, which is a study in contrasts. Then the general pricing of stocks then and now, and finally a look at the granular differences in the listings between the two periods.
The original crash in the autumn of 1929 was a 30% or so decline, which given the 20% rises of the previous 4 years back to back was neither surprising, nor particularly bad by standards before or since. The crushing bit came over the next two years and was driven by the combination of falling multiples and falling earnings. the earnings fell from 1.61 to 0.41. a 75% fall. The multiples paid fell from CAPE of 32.5 to a CAPE of 5.5. Hence the combination of this gave a 90% loss from peak to trough. The earnings took until 1948 to get back to the same level and prices not until 1954.
Today in 2025 the CAPE stands at 40, and earnings multiples have been growing since the trough in 1982 when it was around 7, and government bond yields reached a peak of 13% driven by inflation and high interest rates. Earnings have also been growing, and the combination is driving the reverse of the 1929-32 fall, as both rise, so the stock market tears upwards around 20% a year, just as it did between 1925 and 1929.
Part 2
As a result of this, the landscape of prices in the 30's was very different to today. This article shows this in stark relief, and puts it much better than I could:
1 in 3 of the 600 stocks at the time traded below NAV. Now the figure is about 7 or so out of 500
1 in 12 of them traded below their cash and marketable securities - the whole business was free. I can't find any examples of this in the UK and in the US there are only biotech companies, where they are committed to burning their customers money, and the chances of a return on it are low. (really low, really, really low...)
For a value investor the early 30's were a perfect time to operate, with margins of safety abounding, and plenty of choice to pick better bets. If they were liquidated the investor would make a return, and the knowledge that if their earnings were able to rebound even part way the returns would be very good.
However it still demanded courage, as the article says because of the fear of further losses leading to further falls. A little like the feeling that biotech companies give me now.
Part 3
Looking at the listings of the stockmarket in 1929 you are immediately struck by how many of the companies are amenable to a value approach. Manufacturers, real estate, rubber, gold, leather, copper, railroads, canning, chains, sugar, cotton, oil, chemicals, banks, bicycles, power, water, woolens, writing paper, fire engines, foundries, malt, spirits, steel, wire and so on. All of these need real assets of the "drop on your toe" type and large amounts of working capital.
Look at the listings now, and the top 40% or so by value are tech companies. Their value lies not in their assets, but in the earning power and market dominance of their tech. The very lightness of their capital requirements (AI may prove a different story) is one of their towering strengths. A value approach simply misses the wood for the trees. Nokia or Kodak were kings of the hill until smartphones and digital cameras came along and rendered them as quaint as the American Snuff Co.
James - excellent, thank you very much for adding your perspective and fascinating historical resources. This enriches the community and helps us all learn from one another.
Q0: Question 0: Come up with as many other dimensions of an investing style as you can and provide a scale for each of those dimensions (e.g. Diversification [high to low])
I looked at this form the perspective of asset class, which might not be correct, but some other dimensions might be:
Stocks/bonds, options or derivatives/equities, equities/ real estate, equities, commodities/cash, private credit/commercial credit etc this can be somewhat infinite. And From Graham “price and terms” (see below q2)
Other dimensions from Sec Analysis:
Investment : speculation
• Bonds/stocks
• Outright purchases/purchases on margin
• For permanent holdings/for a quick turn
• For income / for profit
• In safe securities / in risky issues
Question 1: When did Graham write the first edition of Security Analysis and how did the environment during which he was operating and writing influence his work?
I am referencing the 7th Edition of Security Analysis and what a wonderful edition it is, with Seth Klarman and a host of masters writing essays as preludes to each part.
1934 was edition 1 in depth of the depression, with many excellent examples of businesses going bust allowing him to hone his principles based on companies that survived.
Question 2: What’s Graham’s investment philosophy? Why does he think that’s best?
I interpret his philosophy as: Know the difference between an investment and a speculation, know thyself and circumstances; are you an untrained individual investor, analyst, money manager or trustee, are you investing your own or others’ money are you buying outright or on margin? Understand time; your time horizon and the impact of time and base your decisions on quantitive and qualitative factors, based of facts. In Grahams words:
“Instead of asking, (1) in what security? And (2) at what price? Let us ask (1) in what enterprise and (2) on what terms” p81 is a simple way of understanding Graham’s philosophy because he establishes clear dimensions for the reader/analyst and sets out 2 principles: “
1. Principle for the untrained security buyer: do not put money in a low-grade enterprise on any terms.
2. Principle for the securities analyst: Nearly every issue might conceivably be cheap in one price range and dear in another” p84.
Why is it the best? Because it allows the analyst to identify “an investment operation”… ”which, upon thorough analysis, promises safety of principle and satisfactory returns” p109 (and this philosophy is applicable irrespective of macro factors).
Question 3: Which parts of his approach do you think you want to imitate? Which ones do you think you would rather not? Why? (we will revisit this at the end of the book)
All of it and especially to better determine investment from speculation and to avoid speculation.
Question 4: What’s the difference between an investment and a speculation? Why did Graham choose the words that he did to define it, and what are the implications of his choices for investing?
“an investment operation is one which, upon thorough analysis, promises safety of principle and satisfactory returns. Operations not meeting these requirements are speculative” p109
The implications are that no one enterprise or issue will always be investment grade and without thorough, ongoing analysis and considering price, the analyst/investor may not realise the investment is actually a speculation instead.
The fact that he defines it at the level of "investment operation" rather than at a level of a single investment is both intentional and important. Our judgement, no matter how well-considered can be wrong.
Thanks for the assignment, Gary. I enjoyed the reading very much- this was a good nudge towards reading a book that I've been meaning to tackle for some time. I read only the 'original' Graham and Dodd sections of Part 1 and look forward to reading the various commentaries and introductions in the future.
Question 0: Come up with as many other dimensions of an investing style as you can and provide a scale for each of those dimensions (e.g. Diversification [high to low])
Valuation sensitivity (none to high)
Volatility (low to high)
Index correlation (low to high)
Dividend yield (low to high)
Risk (low to high)
Market Cap Focus (ambivalent/none to single/specific)
Size bias (micro- to mega- cap)
Holding period (short to long)
Portfolio turnover (low to high)
Trading frequency (low to high)
Geographic focus (none/ambivalent to single geography)
Sector focus (none/ambivalent to single sector)
Position sizing (uniform to varied)
Cyclicality (pro- to counter- cyclical)
Internal correlation (low to high)
Leverage/Gearing (none to high)
Asset backing (low to high)
Analytic focus (quantitative to qualitative)
Strategic focus (capital preservation to capital growth)
Return expectations (low to high)
Time horizon (short to long)
Research focus (narrow to broad)
Behavioural/Psychological (emotional to rational)
Discipline/Process (rigid to flexible)
Liquidity (low to high)
Question 1: When did Graham write the first edition of Security Analysis and how did the environment during which he was operating and writing influence his work?
Graham started work on Security Analysis in 1932 and the first edition was published in 1934. Hence, the book was written in the midst of the great depression and in the aftermath of the great crash of 1929.
Generally, this was a period of despondency, fear and uncertainty, and correspondingly in financial markets, depressed sentiment, extreme risk aversion and historically low valuations. As for Graham himself, he had participated in the prolonged bull market leading up to the crash and enjoyed the financial rewards (making more money than Babe Ruth one year) but also suffered from the crash (having to move his family from a penthouse to more modest accommodation). This likely reinforced the lesson that even the soundest of investment processes can not completely protect the investor from loss of capital.
This context goes some way to explaining Graham’s focus on,
1. What is knowable in the present moment (balance sheet) and in the past (reported earnings, dividends, interest and dividend cover, etc.) over forecasts
2. Reduced potential for loss above increased prospective return (guarding against rather than profiting from future developments)
3. ‘Inherent Stability’, effectively predictability and more or less a proxy for quality
All 3 are sources of relative safety in times of (perceived) heightened uncertainty/instability, but too easily ignored in times of times of (perceived) high certainty/stability. Note the distinction between inherent and (mere) perceived stability.
It should also be considered that a focus on balance sheet strength, asset-backing, etc. is also, in part, a product of the business environment of the time- in an environment where a greater share of corporate earnings was generated by the production of physical goods, it is natural to assume that a greater proportion of corporate value was underpinned by book value.
Finally, it’s telling that the emphasis when discussing securities invariably starts with fixed income. This reflects the depth of scepticism towards stocks at the time which would have grown even more pronounced in the aftermath of the crash.
Question 2: What’s Graham’s investment philosophy? Why does he think that’s best?
Graham’s posture is essentially defensive and prioritises resilience- guarding against future developments above profiting from them.
He has a scientific bias which leads him to regard quantitative analysis as more valuable than qualitative- while he doesn’t dismiss the importance of qualitative factors in the success of a given investment, he is sceptical that they can be appraised accurately and believes that they will eventually be reflected in the data anyway.
While he is valuation sensitive, he does not insist on precision, almost dismissing valuation as pseudo-science- ‘seemingly mathematical, in reality psychological and quite arbitrary’.
Graham believes that by focussing energy only on securities where there is sufficient data available; evaluating the available data thoroughly; and forming an opinion on the value of a security based on that data, the analyst can assess the attractiveness of an investment opportunity in terms of safety of principal and a satisfactory return.
Question 3: Which parts of his approach do you think you want to imitate? Which ones do you think you would rather not? Why?
I admire Graham’s clarity of thought, he knows and can clearly explain what the necessary conditions are for something to qualify as an investment. It is also strongly implied that he has a robust process, perhaps a checklist for evaluating investments. I would benefit from defining my investment philosophy more clearly and bringing more structure to my process.
One area where I suspect that an issue might arise is in finding investments in businesses with ‘inherent stability’ that are priced cheaply in absolute terms. I don’t disagree that these investments tend to deliver good returns, but much of the time such businesses are priced to deliver (see Costco, Autozone currently, for example). There are avenues available to mitigate- compromise on the degree of inherent stability required, accept a lower margin of safety or be able to endure long periods of inactivity/allow uninvested cash to pile up.
Question 4: What’s the difference between an investment and a speculation? Why did Graham choose the words that he did to define it, and what are the implications of his choices for investing?
To Graham, an investment is undertaken based on expected safety as assessed via study and standards as pertain to the available facts/data, hence the decision is backward-looking in nature. A speculation is undertaken based on expected returns as assessed via projected future developments or forecasts and is forward-looking in nature.
As a keen and talented classicist, it is likely that Graham chose his words with care and would have been acutely aware of their Latin roots, investire (to clothe) and speculari (to look at).
Without pushing the envelope too far, the process of clothing someone potentially involves assessing the fabric, fitting, measuring and cutting, stitching, finishing or at a minimum, examining the garment and trying it for size- the degree of effort tends to correlate with the expense of the garment.
Speculation falls short of this- the process only extends as far as looking at something and making a best guess as to whether it will work out or not. The distinction can be thought of as follows- buying a shirt from a tailor (high value investment), buying a shirt from a department store after browsing and trying for fit (lower value investment) and ordering a shirt from a catalogue in the hope that it will meet expectations (speculation).
The implications for Graham’s approach are that his investment universe is limited to those securities where a satisfactory appraisal can be made from the historical data, which must be sufficiently detailed and intelligible for his purposes; he will value known and provable facts over opinion or facts that can’t be straightforwardly appraised (quantitative over qualitative), and he has to be comfortable with sacrificing higher returns for reduced probability of significant losses.
Your point about the difficulty of finding companies that have the "inherent stability" characteristic + attractive valuation in the current market environment is very much on point. Thought question: how has a) the frequency of businesses with 'inherent stability' b) the degree of such inherent stability change since Graham's time?
P.S. Never knew about the Latin roots (investire/speculari) which shows a) how much less educated I am than Graham and b) how much I have to learn from all of you!
Without having found data to back it up, my guess is that there's less difference in percentage terms between the two eras than most would assume BUT the lifecycle has, on average, grown shorter. That implies that the degree of inherent stability is lower than Graham's time.
This adds colour to my earlier observation- taking Costco as an example, or Hermes would also work, these are inherently stable businesses with demonstrated staying power. Perhaps what the market is currently rewarding with very high multiples is enduring inherent stability, which would be more valuable in a world where inherent stability is more fleeting.
This train of thought also left me considering enterprise software providers- isn't it the inherent stability of recurring revenues that the market rewards with premium valuations? In certain cases, for example Adobe, the perception that AI will render that stability less enduring has seen multiples contract quite sharply.
* If I’ve not added a scale it’s is assumed to be High/Low
Portfolio Dimensions:
- Holding Period - Long/Short or alternatively number of days
- Borrowing
- Type of Return - Income/Price Appreciation
- Certainty of Return
- Magnitude of Returns - Low/High (Could the company 100x?)
- Tolerance to Loss of Investments
- Safety of Capital
- Shareholder Activism
- Specialization
- Volatility of Security Price
- Depth of Data used in analysis
- Breadth of Data used in analysis
- Uniqueness of Data used in analysis
Underlying Company/Investment Dimensions:
- Cash/Profits Generation - positive/negative
- Cash/Profits Growth - positive/negative
- Volatility of Cash/Profits
- Ability to reinvest Cash
- Need for additional funding for growth/survival
- Life cycle stage - Growing/Stable/Declining
- Assets - Tangible/Intangible
- Borrowing
- Durability of investment - Fixed Life/
- Competency of Management
- Distribution of Outcomes - Binary/Continuous (Not sure if this clear, so a binary example would be a oil exploration company where it would be worth nothing if no oil is found)
Question 1:
The first edition was published in 1934. This was 5 years after the Wall Street Crash with stock prices far below their peak. The crash also coincided with the start of the Great Depression, which was still ongoing at the time of writing. Whilst Graham doesn’t provide any explicit answers to this question in his writing, I would surmise that this was a big influence on his reluctance to value securities on the growth of future profits and the requirement to ensure the safety of an issues.
Question 2:
Graham’s approach was a data driven analytical approach, involving thorough analysis of an investment, understanding the underlying business and then buying when a security was fairly priced and selling when it was overvalued. He likes this approach as it reduces the chances of significant losses.
Question 3:
Which ones do you think you would rather not? Why? (we will revisit this at the end of the book)
I really like his analytical, data driven approach, his ability to conduct analysis from first principles and his effort to avoid behavioral biases. For example the section on analysing instruments based on their properties rather than their type, was a good lesson in avoiding categorisation bias. One area of his approach I don’t think I want to imitate is his ignoring the growth prospects of a business - I think if these are priced right they can be valuable.
Question 4:
Graham defines an investment as:
‘An investment operation is one in which, upon thorough analysis, promises safety of principle and a satisfactory return. Operations not meeting these requirements are speculative’.
He chose the wording investment operation intentionally for 2 reasons. Firstly because securities can be investible at one price and not at another and secondly a bundle of securities may be investable as a group, but not individually (I think he is referring to arbitrage opportunities?)
I think reducing significant losses, as you put it, is crucial to Graham's approach. This was probably strongly reinforced by his recent losses in the partnership during 1929/early 1930s.
0: A few dimensions that define an investing style are diversification, time horizon, valuation focus, growth versus value, market cap, liquidity, research depth, macro awareness, definition of risk, turnover, and temperament. I’m somewhere in the middle on most of these, fairly concentrated, long term, price driven, patient, and aware of cycles.
1: The first edition of Security Analysis came out in 1934, right after the 1929 crash and during the Depression. The market was chaotic, investors had lost trust, and financial statements were unreliable. Graham was trying to rebuild confidence by showing how to analyze businesses based on facts instead of stories.
2: Graham believed investing should be based on analysis and discipline, not emotions or forecasts. His key ideas are intrinsic value, margin of safety, and temperament. You don’t need to predict the future if you buy with enough cushion and focus on avoiding permanent loss.
3: I’d keep his margin of safety mindset and focus on downside protection. I’d probably skip or adapt the parts that rely on liquidation value or old school net net ideas. That approach made sense in the 1930s but not as much today. Most value now sits in cash flow and intangible assets. I’d also be more open to growth if reinvestment returns are strong.
4: Graham defined an investment as something that, after analysis, offers safety of principal and an adequate return. Anything else is speculation. I think he used those words carefully. Safety and adequate set the expectation that investing is about process and protection, not excitement or prediction.
2. Depth of Research: Shallow research -> Deep research
3. Conviction Building Tool: Pattern recognition (experienced investors) -> Bottom-up research (new investors)
4. Valuation: Deep value (Graham, Schloss, Early Buffett) -> Asset backed value (H. Marks, Klarman, Early Buffett) Business Value (Buffett, Greenwald) -> Franchise Value (Later Buffett, Munger) -> Tech Bro (Chamath) -> Delusional, Somatic Value, Value 3.0 (Chris Begg)
5. Circle of Competence: Sticks to Circle Of Competence (Buffett) -> Experiments with small positions outside circle of competence (Bruce Flatt, Ben Graham) -> Invests with little idea about but pretends to understand (deeply, thoughtfully) (Chris Begg) -> Invests in things with the most peripheral understanding (Robinhood investors)
6. Portfolio Turnover: Low (Nalanda Capital, Chuck Akre) -> Portfolio and stories change every season (Pabrai) -> Portfolio changes every two weeks based on whims and fancies (garden variety mutual fund managers)
7. Simplicity/Complexity: Investments in simple long only securities (Nalanda, Chuck Akre) -> Long/short strategies (Hedge Funds) -> Complex Investments (arbitrages, warrants, spin offs etc)
8. Capital Structure: Investments in Ownership (equities) -> Investments in preferred instruments -> Investments in debt
9. Cash Position/Leverage: Hedged + large amount of cash in portfolio (Klarman, Taleb/Spitznagel?) -> Excess Cash in Portfolio (Buffett now) -> Hedge + small leverage (Ackman) ->>95% in equities (Pabrai Wagons Fund) -> Levered long/short (garden variety hedge funds) -> Levered long (Archegos)
10. Investment Timeframe: Weeks (EPS soothsayers) -> Quarters (index hugging fund managers) -> 1-3 years (cyclical investors, special situation investors) -> 3-5 years (private equity style public market investors) -> Hold to maturity investors (Buffett, Tom Russo)
11. Portfolio Income Expectations: Dividend/yield investors -> Dividend + Growth investors -> Pure Growth Investors
Useful Combinations for Analysis of a Style:
1 & 2: Concentration vs Depth of Research
1 & 4: Concentration vs Valuation
1 & 5: Concentration vs Circle of Competence
1 & 6: Concentration vs Portfolio Turnover
1 & 7: Concentration vs Complexity of Investment Strategies
1 & 9: Concentration vs Cash Position/Leverage
1 & 10: Concentration vs Investment Timeframe
2 & 5: Depth of Research vs Circle of Competence
2 & 6: Depth of Research vs Portfolio Turnover
2 & 7: Depth of Research vs Simplicity/Complexity of Investment Instruments
2 & 10: Depth of Research vs Investment Timeframe
3 & 4: Conviction Building Tool vs Valuation
3 & 5: Conviction Building Tool vs Circle of Competence
3 & 6, 10: Conviction Building Tool vs Portfolio Turnover/Investment Horizon
4 & 5: Valuation vs Circle of Competence
4 & 7: Valuation vs Simplicity/Complexity
4 & 9: Valuation vs Cash Position/Leverage in Portfolio
4 & 11: Valuation vs Portfolio income/growth expectation
5 & 6,10: Circle of Competence vs Portfolio Turnover Ratio/Investment Timeframe
7 & 10: Simplicity/Complexity of Instruments vs Capital Structure
8 & 9: Capital Structure vs Cash/Leverage Position of Portfolio
8 & 11: Capital Structure vs Portfolio Income Expectations
9 & 11: Cash/Leverage Position of Portfolio vs Portfolio Income/Return Expectations
10 & 11: Investment timeframe vs Portfolio Income/Return Expectations
Focus on undervalued securities <-> focus on overvalued securities
simple <-> complex situations
Question 1) The first edition was published in 1934. Graham, like all of us, was a product of the time in which he lived. The 10 year treasury was paying around 3.00-3.25%. Earnings of companies were at historically low levels. Capital was very scare so share prices were largely trading at depressed valuations of those depressed earnings. I feel that this influenced him in that the investment environment typified the phrase “throwing the baby out with the bath water.” A moderate degree of sleuthing helped him find investment opportunities that were statistically very cheap and/or offered a very high short term return with very minimal risk relative to the annualized return.
Question 2) From page 69 “first the market price is frequently out of line with the true value, second there is an inherent tendency for these disparities to correct themselves.” So he believed that the market was prone to making mistakes in the short term, but prone to correct those mistakes over time. We see this in his discussion of various instances of arbitrage. So 1) there is a “true value” which can be known and capitalized on & 2) the means by which that true value is determined is via analysis. There are two quotes that are worth highlighting: 1) “how far is it the function of the security analyst to anticipate changed conditions?” and 2) “security analysis must ordinarily proceed on the assumption that the past record affords at least a rough guide to the future.” Which both highlight his preference for quantitative vs qualitative factors. Chapter 3 is essentially an excursion into his preferred sources of and forms of quantitative factors.
Question 3) I agree with his basic tenets regarding the nature of the market as I understood them in question 2. I prefer some of his discussions regarding a company’s accumulation of earnings power rather than an investor seeking opportunities for arbitrage. As an investor who doesn’t do so as my career, I have a shortage of time available to put toward an arbitrage grind.
Question 4) Speculations are “those subject to substantial uncertainty & risk”. Page 71. Then on page 106 “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.” It’s important to note that he is not anti-speculation rather he doesn’t want one to pretend be the other. He would clearly consider venture capital inherently speculative, but I don’t think that he would take issue with the business of venture capital in principle.
Thought question: How does "inherent tendency for these disparities to correct themselves" (referring to Graham's point about the gap between price and value closing) change over time a) over the long-term b) cyclically within a market cycle?
"how far is it the function of the security analyst to anticipate changed conditions?” is a key question. Perhaps it has no perfect answer and constitutes one of the dimension of an investment style. An alternative view could be that as the pace of business change accelerates one must place less reliance on the past and more reliance on one's own analysis of what the future holds.
Regarding the thought question: I think one of the questions an analyst must ask themselves is what is the root cause of this disparity between price and value? Perhaps these days abrupt and severe market dislocations may be closer to the market environment that Graham himself experienced. Albeit these dislocations are likely much shorter in duration than they were during his time (because the market has definitely become more efficient overall). But perhaps for most other disparities these days it depends more on how the analyst considers the differences between the market narrative about the company or sector vs. the analyst’s own narrative regarding the business or sector. So I’d say by necessity an analyst must inherently be more forward looking than Graham had to be in his day, except during exception circumstances.
I’ll keep thinking about it, but that’s my first consideration.
Right. Value is always about the future (even assets need to be sold at a certain future price), but the *degree* to which we rely on the future being different from the past vs. based on the past can vary greatly between different investments.
question 1: Security Analysis written just after the 1929 market crash when most investors lost almost everything invested.
Question 2: Grahams philosophy dominated by concept of STABLE returns, margin of safety and capital protection!
Question 3: Concerning my following Grahams concepts,
I focus on company level: earnings power, pricing power, free cash flow, margin of safety, safety of principle, PRICE PAID is really important.
I focus less on value of assets and whether dividends are paid. I also recognize that today changes occur very rapidly and Intrinsic value is a value that is susceptible to higher variation (i.e. the IV range can very large and the mean value can fluctuate. For example new information may change the company's future growth trajectory and have a major impact in IV. I also recognize that you have to take risk of losing a modest amount capital to get significant upsize returns. Today strictly following Grahams principles may mean you can't find enough to invest in and you have significant cash in your portfolio. In other words I may pay more for Quality companies.
Question 4: Speculation focuses on price and requires that you think/hope someone else will pay you more for the item in the future. Investment you expect the asset to provide you with a reliable and stable series of cashflows in the future. The net present value of those cashflows discounted at appropriate levels will exceed what you paid in todays dollars for the asset by a significant margin of safety. Furthermore the likelihood that those cashflows won't be forthcoming is LOW!
Thought question: Graham clearly puts investing based on facts (past results, current assets, etc) in the domain of speculation while he puts predicting the price of a security based on the opinion of others in the domain of speculation. Where does he/would he put the forecasting of a financial future that is different than the past but where that difference could be supported by some current evidence?
great question. I am not sure Graham would make investment decisions based on his forecast being more optimistic than the past data would dictate. Quite the contrary!, Consistent with his conservative disciplined nature, I think his investment decision is based on future is similar to the past...a neutral baseline. If future is better that is great upside. If future is worse that is where margin of safety gives him protection. Perhaps he would be more inclined to make the investment if he thought probability of upside is much higher than downside...but don't think he would count on it!
I appreciate your effort in starting something that could genuinely help individual investors. Initiatives like this often plant the seeds for lasting value.
Before we dive into the questions, I’d suggest we take a step back and introduce the book first. It’s always better when everyone has some context. A few hours spent understanding the book will make our discussion far more meaningful than jumping straight into answers.
Now, on to the idea of dimensional investing.
Dimensions:
X-axis: Management Integrity (Low to High)
Y-axis: Understanding of Business Dynamics (Low to High)
Accordingly, we can allocate as you mentioned in your example.
Answers to questions:
1)
2) It was a margin of safety.
In investing, you never put all your eggs in one basket, and you only buy when the price gives real downside protection, situations where the upside to downside is about 5 to 1. If one is roughly right, time helps; if I am wrong, the loss is limited. That philosophy lets one survive the cycles and still come out ahead.
Can you please tell me more about what you mean by introduce the book first? The expectation is that you do the reading before you answer the questions. So if you tell me more about what you mean by an introduction on top of what you read I can see how I can best help
By introducing the book first, I mean sharing the title, author, edition, and any specific chapters or sections we’ll focus on. I prefer reading a physical copy rather than a PDF or Kindle version. If you could please share the book details in advance, I’ll order the physical copy and complete the reading before answering the questions.
want to focus on quality rather than quantity, so I'm reluctant to add 20 different dimensions. I will just add these three which I think are very relevant in today's market.
Three Relevant Investing Style Dimensions
Time Horizon
Scale: Short-Term ↔ Long-Term
How long holdings are kept, from brief trades to multi-year commitments.
Risk Tolerance
Scale: Conservative ↔ Aggressive
Willingness to accept risk—stable, lower returns vs. bold, high-return bets.
Analytical Framework
Scale: Quantitative ↔ Qualitative
Reliance on hard numbers vs. subjective business factors.
These dimensions help shape portfolios and opportunity selection.image.jpg
When Did Graham Write Security Analysis & Its Context?
Graham published the first edition of Security Analysis in July 1934, writing amid the Great Depression. This era saw severe economic downturns, massive stock market losses, new federal regulations, and shaken investor confidence. The harsh environment shaped Graham’s emphasis on:
Capital safety (“margin of safety”)
Focusing on bargains below liquidation value
Standards rooted in company fundamentals—intrinsic value and quantitative analysis
Graham’s Investment Philosophy
Graham built the core of value investing:
Distinguishing investment from speculation
Focusing on intrinsic value, disciplined analysis, and safety first
His tests for true investment:
Careful business analysis
Safety of principal
Satisfactory return
He advocated buying well below intrinsic value to build in a safety margin, thoroughly analyzing businesses, and always prioritizing risk control.
Why is this “best”?
Psychological protection from market folly
Timeless, globally applicable
Supports steady, disciplined wealth-building
What to Imitate and Adapt
Imitate:
Discipline
Fundamental analysis
Risk aversion
Adapt:
Evolve methods for modern, high-growth or tech businesses where classic metrics don’t fit
Go beyond quantitative “net-net” hunting, considering qualitative factors and future potential
Investment vs. Speculation—Graham’s View
Investment = careful analysis, safety of principal, and satisfactory returns.
If any piece is missing, it’s speculation. Graham chose these terms to set clear boundaries amid post-crash confusion.
Implications:
Pay the right price for margin of safety
Prioritize risk control
Ignore market fads—think long term and analytically
Graham’s approach remains a powerful foundation for intelligent, risk-aware investing in any era.image.jpg
Graham wrote the first edition in 1934, during the Great Depression. Loss was real and it hurt; people were understandably not eager to jump back in and buy up securities that were now at low prices. His audience was at risk of sitting on the sidelines and needed encouragement to seize opportunities, but to do so in a thoughtful, disciplined manner. He had a practical understanding and personal experiences of risks and losses and could share the lessons they were all learning so that people would hopefully avoid similar mistakes.
Q2:
He operated from the belief that the market can be fickle and that prices often fluctuate for reasons that are not always logical. His approach was non-emotional and fact-based, almost like a scientific method, but he also treated it as an art. He carried an ownership mindset, looking for companies with intrinsic value grounded in performance and long-term potential. He believed that price would eventually align with value, and so he dug into each company to uncover specific strengths and weaknesses in areas such as financial health, management, products, and overall potential in an attempt to find hidden jewels.
Q3:
I need to take more time to go through Part 1 and more fully develop my understanding and perspectives. Here's where I'm at right now. I can embrace taking a long view of a situation and riding it out even when things look bad in the moment. I can partially relate to ways he seemed to make decisions in a fact- based, non-emotional way, using a scientific method. However, I also know that there are a few stocks that I would be less inclined to be cold about, especially ones that are in industries I'm interested and feel optimistic about. While I respect and know I would likely enjoy the deep research into individual companies, I see myself gravitating towards learning about industries and their supply chains first and then digging into companies that might look promising. Regardless, I do not see myself putting in the necessary time due to time constraints; I'm curious how AI may help with some of this research going forward.
Q4:
Graham sees both investments and speculations as operations, distinguishable by the behavior of the operator. He defines an investor as one who conducts his operation (buy and selling securities) according to standards of safety of principal and satisfactory return. A security purchase by one person without thorough consideration of the facts and discipline to hold to standards of safety is a speculation. The exact same purchase could be an investment by another who has conducted his operation in a thoughtful, intentional standards-based manner. By choosing to describe both investing and speculation as operations, he shifted the focus from the asset to the behavior.
First, thank you Prof. Gary for opening the Value Investing Seminar to the broader public. This is a wonderful opportunity for all of us lifelong learners with a passion in value investing to learn more about ourselves, the value investing philosophy and practice, and meeting people across the globe.
Q0
The concept of investing style is very interesting and can explain the vast variation among value investors, in terms of assets under management, number of positions, position size, rate of returns, holding periods, and turnover rates.
One dimension that naturally came to mind is location of workplace. One investor can choose to perform investment analysis in a big financial hub city like New York, London, or Hong Kong, or take the route of a less busy location. There are several examples of value investors that have chosen distant places away from the noise in order to caltivate their independent thinking and research. From Warren Buffett (Omaha) and John Templeton (Bahamas) to Chuck Akre (Middleburg) and Guy Spier (Zurich).
Workplace location: Financial center or Peripheral center
Q1
Graham and Dodd wrote the first edition of Security Analysis in 1934. It was a period following the October 1929 stock market crash in the United States and America’s Great Depression in the 1930s.
This period was at the lowest points of both market cycle and investor psychology. The authors of Security Analysis aimed to provide a roadmap for investors and as Seth Klarman puts it in the Preface to the Sixth Edition, tried to give some order in the uncharted financial wilderness of the times.
Q2
Graham and Dodd’s investment philosophy is value investing which aims at picking securities that have a deep discount to intrinsic value or high margin of safety. According to Klarman value investing is a comprehensive investment philosophy with the following characteristics: deep research, long term focus, risk limitation and contrarian thinking.
Buying securities at market prices that are much lower than their intrinsic value provides investors with protection against the probabilities of error, bad luck and one-time events. Mohnish Pabrai argues that the best way to minimize downside risk is to be aware of outliers and build a portfolio that can withstand six sigma events. Following an investment strategy that allows for high margin of safety increases the probability of surviving such events.
Q3
What I love in the value investing community is that there are many people that are generous with their time and knowledge without wanting anything back. In Greece we call this philotimo.
Prof. Gary is doing this great seminar for all of us. Mohnish Pabrai is so generous with all his YouTube videos. Warren Buffett Letters from both the Partnership and Berkshire Hathaway years are all available online. All BH annual meetings are available at CNBC. The value investing community is full of lifelong learners.
With value investing there are no secret mathematical formulas to success. It comes down to being analytical and contrarian, but at the same time humble and approachable. When Graham experienced a cumulative loss of 70% of the Graham-Newman partnership from 1929 to 1932 he realized that the key to material happiness is following a modest standard of living. He was not only formulating an investment roadmap, but also a personal philosophy for his readers.
I would like to imitate Graham’s appetite for sharing knowledge, his composed personality, and life philosophy.
In stock picking, I would concentrate more than having a highly diversified portfolio.
Q4
Investment is primarily based on intrinsic value factors (earnings, dividends, assets, capital structure, terms of issue) and secondarily on future value factors (management, competition, volume, price and costs). Ben Graham put more emphasis on the first factors. Phil Fisher, who pursued quality, leaned more towards the latter factors.
Speculation is determined by market factors such as technical, manipulative and psychological.
Investment aids towards safety of principal and promises adequate returns because its inputs are more rational and impersonal, especially the intrinsic value factors.
Speculation on the other hand derives its inputs from a more psychological nature and emotion leads to greater variability in performance and risk of permanent capital loss.
Thank you for the kind words. Here is a thought question: can a group of "intelligent speculations" as Graham defines them, taken together constitute and "investment operation"?
Going back to Graham's definition, "an investment operation is on which, upon thorough analysis, promises safety of principal and a satisfactory return". Graham added another criterion in his definition; "an investment operation is one that can be justified on both qualitative and quantitative grounds."
He then defined "intelligent speculation" as the taking of risk that appears justified after careful weighing of the pros and cons.
The above definitions seem to align, as a group of intelligent speculations involve careful analysis and their diversification offers safety. The intelligence aspect promises the return. What troubles me with speculation of any form, intelligent or not, is whether it can consistently outperform the market by at least 5% (Buffett in his Partnership years had a yardstick of outperforming the Dow by at least 10% over the long run). Another point, when intelligent speculation beats the market, can one measure the source of the performance. Was it skill or luck?
Howard Marks points out that the future is not knowable. He also maintains that if riskier investments reliably produced higher returns, they wouldn't be riskier. A group of investment speculations might look like an investment operation that promises safety of principal, but there is no guarantee that higher prospective returns will materialize. The probability distribution of returns becomes wider. Along with the promise of higher potential rewards increases the risk of permanent loss of capital due to the wider probability distribution.
The primary aim of speculation is higher returns (aggressiveness). The priority of long-term investing is capital preservation and satisfactory returns (defensiveness). To conclude, a group of intelligent speculations does not constitute an intelligent operation as it increases the risk of permanent capital loss due to the wider probability distribution of returns.
I may have interpreted wrong but towards the end of Part 1, I was a bit surprised to see that Graham accepted some forms of intelligent speculation page 110-111, if done with reasonable care, and seems to also acknowledge that the market can at times determine the best available fair intrinsic value of speculative issues
Thanks for running this course. Sorry my responses are quite late, it was not an easy read. I'll put my responses here in the event that you might see them.
0. I don’t know many dimensions, but I think of these different styles in relation to time. For example:
At one extreme if we are adopting a short term strategy with quick realization of profits – trading based on sentiment or other peoples’ trades like momentum trading or strategies at funds where the returns are measured monthly, I would think the diversification would be large, and research not as deep.
Comparatively, if we are adopting a longer term strategy, the research has to be deeper, as the opportunity cost grows – deciding to hold a position, is forfeiting your right to another assuming capital is limited.
1. The first edition was published in 1934, when he was around 40. His work was influenced by his family’s fall into poverty in 1907 and the subsequent years – war collapse, hectic prosperity, postwar hesitation, inflation, deep depression. He understood price and intrinsic value are different, and given the circumstance – booms or busts, prices can fluctuate greatly based on sentiment, but this had little to do with the value of an investment which is based on its fundamentals.
2. He looks to buy securities which are priced at a discount to their intrinsic value which is determined through thorough analysis. That is best because it offers safety of principal and some return over time.
3. I think I would keep most of his approaches, because principal protection is one of the tenents of investing. I would probably be mindful that the majority of companies operating in his period are more capex heavy –eg, industrials, railroads where most of the cash generated by the business is going towards the maintenance of these assets or purchasing other hard assets. The values of these assets could likely hold because the rate of change and progress in technology and thus obsolescence is much slower compared to now. Thus his thinking on placing trust in asset values holds.
As most of the cash in asset heavy businesses was going towards maintenance of the business with leftovers paying down debt and giving shareholders some returns, I think managements would be more occupied thinking about how to manage costs or capital structures more efficiently. Compared to now, where there are more businesses which are more asset light, with less reinvestment requirements, managements need to think about how to allocate excess cash and think in terms of its returns to maximise shareholder value. Perhaps more emphasis needs to be placed on managements compared to Graham’s time.
4. “ An investment operation is one which upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”
He chose the words as they were clear enough to prevent serious misunderstanding and yet were broadly applicable to different asset classes or situations.
Hi Gary, All. I've got the book and finished section 1. A bit late, but I wanted to start at the beginning. I've not yet read Gary's answers, he provided in his newsletter, so I could do this assignment.
Question 0: Rather than list investing styles (as Gary has done a comprehensive email on this), I thought a focus on the retail additional considerations.
1. certainty of return of both capital and interest. And the level of return. For example, putting the money in a bank, would enable this. However, Investing means less certainty, but potentially greater returns.
2. Level of consumer protection against the latest technological developments. For example, in the UK if a bank goes under, your money is protected up to £85K. However, if I invest in Crypto, I could lose all my money through theft, and it wouldn't be protected. This recognises that regulation usually takes money and time to put in place.
3. Cost v level of access. For example, online brokers are cheap, but may only offer a limited selection of stocks. While other brokers will cost more, but able to buy any shares in the market. This of course, influences your investing style...you may have to go for large stocks and only in certain countries.
4. tax saving V flexibility general trading account. Trade-off between saving on tax (potentially keeping capital growth) versus more flexibility a general account may offer both in terms of accessing cash, probably also what money can be invested in.
4. Position size, versus cost. If trading fees are expensive, I may want to have a larger position size to spread the cost.
5. Cost v frequency of trading. A similar one to the one above is the cost of trading, which also influences how frequently to trade. The cost of trading is high, I may choose to reduce the frequency.
6. trade (£) size v frequency of trading. Assuming investing in one stock, there is also a trade-off between position size, and frequency of trading. Therefore wish to have a smaller position size for each trade, but buy more frequently to take advantage in price changes.
7. Time-frame V speed of profits. There is a trade-off between time of money in the market, and having access to the profits/capital.
8. capital appreciation v dividends. How do you know if you're winning? Via a change in price of the stock or versus the income/dividends received.
Question 1:When did Graham write the first edition of Security Analysis and how did the environment during which he was operating and writing influence his work?
I thought I knew alot about the context, including depression, Graham losing his money during it, and looking to find ways to stop it happening again. What I hadn't realised was the infrastructure of finance as we know it was also being created. The set-up of the SEC and, requirements to publish data. The quality of data was improving. Government intervention and policies also influence companies and the stock market. So he was also responding to the challenge, with new data and standards coming into force, should I use this quantitative data? If so how, what weight should I give the past versus the future.
Question 2: What’s Graham’s investment philosophy? Why does he think that’s best?
-He wanted to focus on the data, and the realisation that price mattered. Yes, the company might be good, but that might be too high a price. Graham liked using data and analysis to identify hidden gems, where the odds of making a return were in his favour and very unlikely to loss money, even if the company went bankrupt. He wasn't a fan of speculation. Speculation also included future aspects, what the future could be like. He wanted an analyst to ideally go I value the company share a £X. I've added on £Y for growth prospects.
Question 3: Which parts of his approach do you think you want to imitate? Which ones do you think you would rather not? Why?
-I would like to emulate, using data to inform investment decisions. As Buffet says, learn how to look under rocks to find gems. I also like his systematic approach to breaking down a company, and being clear what is evidence, and it unknown/speculative factors.
I don't think I would emulate trying to price speculation/future prospects. But I might try to put it in a bucket (little, medium, alot, massive) to give me a feel of what I think it could be. I should also consider the risks.
-I disagree with Graham's definition of speculation....seems a bit too conservative. I'm investing as I want more money to grow more than is possible in a bank. (As I'm choosing one stock over another. As I'm not doing an index fund...could argue I'm speculating. I would simply say, I'm taking the road less travelled, and applying more effort for potential for greater return.
Question 4: What’s the difference between an investment and a speculation? Why did Graham choose the words that he did to define it, and what are the implications of his choices for investing?
For Graham, speculation is a lot about placing too much emphasis on the future, and essentially not enough emphasis on the data and evidence. He also wants to emphasise dividends rather than capital growth (again what is certain v uncertain.)
Due to the emphasis on data, Graham would only invest in companies and industries with a known track record. And be unlikely to chase the new/big thing. By default his investing could be seen as conservative. However, as he liked complex deals, I'm not sure it could be seen as conservative..more that, he wanted rich data to inform his decisions. (he would have loved google! for their emphasis on data to make decisions.)
I think your point on Graham's definition of speculation being too conservative is one worth thinking about over time. Especially as we study other investors, since you will see that one's "speculation" is another's "investment." The most important thing is that you are clear about where the line is for you.
Graham wrote the first edition of Security Analysis in 1934, in the depths of the Great Depression. The Dow Jones Industrial Average lost about ninety percent of its value from the peak in 1929. Graham’s approach was in question. He described a “double discrediting.” So, his approach prevented its followers from the upside during the euphoria and did not protect them from ruin. This did not stop with the followers of his approach; Graham himself was wounded by the crash. He was writing with a fresh personal wound, since his joint account lost about seventy percent of its value after he reduced hedges and maintained margin exposure on the mistaken belief that conditions were improving.
The influence of these events is clear in his writing. He described the future as something to be guarded against, not profited from. This paints a very dark picture of the environment at the time. However, if I was in his shoes, I would not look for the future or growth when many common stock issues were trading as net-nets or for less than cash. I would be worried about realizing the value available now, not tomorrow—especially since tomorrow was not promised during the Great Depression. Also, Graham had seen a forty-seven percent decline in the Dow Jones in 1921. So, if I had experienced a recession and a depression in less than ten years, I would not have been very optimistic about the future or its growth prospects either. I would focus my efforts on protecting against the highly uncertain future.
Question 2
I think the cynical definition of an investment that Graham quotes in the book is a good way to understand his philosophy—namely, that an investment is just a successful speculation, and a speculation is an unsuccessful investment. Graham’s philosophy is a way to defeat that cynic’s definition. He draws a hard line: an investment operation is one which, after thorough analysis, promises safety of principal and a satisfactory return. There is a difference between market price and intrinsic value, and value can be ascertained before capital is committed by analyzing present, verifiable facts—critical examination of accounts, comparison of related issues, and close reading of covenants—then buying only with a margin of safety between price and value.
He thinks this is best because the method is testable and repeatable: you can evaluate the process (facts → conservative value → margin of safety) regardless of the outcome of any single position. That keeps you out of the cynic’s trap where results alone rewrite definitions after the fact.
Question 3
I think the most important part of his approach to imitate is the use of clearly defined standards for selecting investments before committing capital, because this guards against behavioral biases. I also want to imitate his flexibility in comparison. Graham compares similar and related securities: stocks against stocks, stocks against bonds, and different securities within the same issuer. To me, this is his way of practicing a kind of variant perception for his time.
I will partially disagree with the idea that the future is only something to be guarded against. That is probably influenced by the fact that I did not live through the Depression, and because today a significant portion of value comes from intangibles. I still want to protect against uncertainty, but I also want to weigh how present facts connect to durable, forward drivers of value in modern businesses.
Question 4
An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.
We should note that Graham uses “speculative” as an adjective to describe the process, not to re-label any single holding after the fact. He does not draw a hard boundary between “an investment” and “a speculation” as static categories, because the same issue can be investment-grade in one set of conditions and speculative in another. Instead, he gives standards by which a decision is judged.
His choice of the word “operation” is intentional. He wants a comprehensive process that covers more than just bonds and common stocks. This lets the framework include hedging, liquidations, and arbitrage. It also scales to the portfolio level. Two issues, separately, might promise safety of principal and a satisfactory return, but taken together they could offset each other if they are negatively correlated. Looking at the operation allows for approaches like baskets of net-nets, where a single name may fail yet the basket makes sense at the portfolio level.
“Safety of principal” mattered especially in his time, when many assumed only bonds were investments. Graham insists that if a bond lacks adequate collateral or protection, it should not be called an investment. He uses “satisfactory return” to include all forms of return—interest, dividends, and especially capital gains—so that gains are not dismissed as mere speculation when they arise from sound analysis and a margin of safety.
The degree to which "the future is something to be guarded against" vs. "profited from" is a key dimension of an investment style. Keep on eye on that distinction as we study the different investors. There are successful masters at each end of the spectrum (and many failed attempts as well), so I would suggest that a big part of success lies in knowing yourself well and mastering the implementation of an approach that is within your own circle of competence.
Question 1: When did Graham write the first edition of Security Analysis and how did the environment during which he was operating and writing influence his work?
Graham wrote the first edition of Security Analysis in 1934, right after the 1929 crash and the Great Depression, one of the worst economic downturns ever. That backdrop shaped his conservatism, focus on margin of safety, and temperament with forecasting. Investors at the time had just seen what overconfidence and speculation could do, so his writing was really about bringing discipline and realism back into investing.
I think it’s worth remembering that context, but also asking what stops us from repeating the same mistakes today. I can’t say when/whether another major crash will happen, but Murphy’s Law still applies: anything that can go wrong will go wrong. Graham’s environment may have been unique, but his mindset still feels relevant now.
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Question 2: What’s Graham’s investment philosophy? Why does he think that’s best?
I think Graham’s investment philosophy can be captured in the saying “a bird in the hand is worth two in the bush.” He’s intellectually honest about what can be reasonably known and trusted, and adjusts his framework accordingly. He’s also critical of both quantitative and qualitative analysis, recognizing the limits of each. Ultimately, his philosophy is about building a reasonable margin of safety and protecting against an uncertain world.
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Question 3: Which parts of his approach do you think you want to imitate? Which ones do you think you would rather not? Why? (we will revisit this at the end of the book)
When I first tried reading The Intelligent Investor a few years ago, I couldn’t make it through because it felt dated. Looking back, that probably reflected my own bias. I’ve only really experienced markets shaped by 2008, 2020, and 2022 and I didn’t pay close attention at the time.
I’ve learned a lot from Graham’s focus on the margin of safety and the discipline of thinking through downside. That framework has helped me size positions more thoughtfully and avoid getting swept up in optimism. I’ll be honest — I’m still growing into a genuine love for value investing, as I’ve leaned more toward growth-oriented ideas lately. I was a bit surprised to read Graham’s acceptance of certain forms of intelligent speculation as part of intrinsic value (p.111), but I actually find that useful. The rest of his teaching (that he’s more commonly known for) helps me consider “the other side of the bet” and understand risk.
I used to view valuation as a hard science, and I’d get frustrated feeling like I needed to perfect every model. Graham helped me realize how imperfect valuation truly is, and that realization has grounded my expectations. That said, since much of the market still uses tools like DCFs, I think it’s important to understand how others are pricing risk and opportunity — just with the perspective that precision in modeling alone isn’t edge. As Graham wrote, “a satisfactory statistical exhibit is a necessary though by no means a sufficient condition for a favorable decision by the analyst” (p. 88). This reminds me of investors I follow who’ve said that, over time, a majority of their effort has shifted toward qualitative work rather than modeling.
I also appreciate Graham’s point that the level of analysis should match the scale and purpose of the investment: “A buyer of a $1,000 bond would not deem it worth his while to make as thorough an analysis of an issue as would a large insurance company considering the purchase of a $500,000 block” (p. 81). That perspective helps me focus my effort. I know I can always go deeper into research — and that’s valuable — but it’s equally important to accept uncertainty and recognize when additional analysis has diminishing returns (no pun intended).
Finally, I like Graham’s view that “trend,” while often expressed quantitatively, is ultimately a qualitative factor: “we consider the trend as a qualitative factor in its practical implications, even though it may be stated in quantitative terms” (p. 86). That idea resonates with how I think about forecasts — something I try to keep in mind and balance against conviction.
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Question 4: What’s the difference between an investment and a speculation? Why did Graham choose the words that he did to define it, and what are the implications of his choices for investing?
An investment is based on study and standards while speculation is driven more by psychology. In Graham’s words, “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative” (p.106).
I find Graham’s word choice deliberate and layered. He uses “investment operation” rather than “asset,” which I initially would have chosen, because his definition is meant to apply broadly: to a single stock, a basket of securities, or even strategies like arbitrage or hedging.
What stands out to me is how Graham acknowledges the “indefiniteness” of terms like thorough analysis, safety of principal, and satisfactory return. On the surface, these words seem to provide clarity, but in reality they raise additional questions given how subjective they are and vary by the investor’s judgment, skill, and objectives. For example, one investor’s “thorough analysis” might not meet accepted professional standards; similarly, “satisfactory return” depends on what the investor finds acceptable, given their risk tolerance.
It pushes me to think about my own process: what counts as “thorough,” how I assess the likelihood of permanent capital loss, and what a “satisfactory” return means to me. His definition, while seemingly straightforward, actually raises more questions than it answers. And that’s the point—it forces investors to think critically about their assumptions, standards, and the tradeoffs between risk and reward.
Thank you for running this course, I like to have my thinking challenged, and the first question did just that. Here is my list. It made me consider how useful, objective and valid each investment approach is, and which go together well, or not so well, with others.
Dimension Measurement
Diversification Correlation Matrix
Research Research Depth
Volatility VIX, Standard deviation
Quality Custom list of metrics
Momentum % Change in price
Arbitrage Price difference
Special situations value gap, risk
Risk management Sharp Ratio/VaR
Chart shape, technical analysis custom chart formations
Scuttlebutt – networking Non-public information
Activity custom measurement
Growth historical and projected growth
Size Market Cap
Sector Sector exposure %
Value NAV, PE
Income Dividend yield
Time Horizon Average investment time period
Ethics Custom list of metrics
Contrarian % change in price
Volume Trading volume
Skin in the game % Director ownership
Geographical % geographical exposure
A few things that stood out as I looked at the list
Some approaches cluster other approaches strongly:
Short time horizon clusters with Volatility, Momentum, Arbitrage, Volume and technical analysis.
Long time horizon clusters with Research, Quality, Growth, Value, Skin in the game
Others are always important whatever style you use:
Risk Management, diversification
Some are easy to measure and objective, so you can more likely assume they are "in the price":
Size, sector, value, income
Some the whole point is that they are not generally known:
Scuttlebutt information, non listed activities like retailers car park usage, or electricity use by measuring pylon temperature
Some are subjective or estimates, and therefore subject to interpretation and bias:
Quality, Ethics, Contrarian, Research, Special situations, growth
Question 1
it was written in 1934 with Dodds on the basis of his lectures at Colombia from 1928 to 1932 and his experiences in Wall St from 1914 when he graduated. Most people then regarded stocks as gambling, bonds were considered the only safe and respectable investment. Stocks were mostly bought on tips, especially driven by the activity of stock market pools that drove prices both up and down by corners and squeezes. He made his first great win in 1915 by a value play based on the now simple idea that 1 share of Guggenheim Exploration held about 10% more value in listed securities and other assets that it owned.
Question 2
His investment philosophy was of a "margin of safety" using analysis to evaluate the intrinsic value of a share based on it's fundamentals. A long track record of success is necessary and a very high margin of safety for growth projections. The market is not always efficient and this can be used to create value for the patient and disciplined investor.
Question 3
I consider this approach and knowledge necessary but not sufficient. It is always essential to understand accounts, to understand the risks you are taking on fundamentals, and how large they are, and to conduct your own analysis. Much of the information and the approach is timeless: people don't change, and neither do calculations of fundamental value. But some things do change. For example:
The information that Graham had to calculate himself is now generally easily available
The change in technology means that moats and competitive advantage are now both greater and give much larger returns in some cases.
The rise in market multiples make it hard to find good quality candidates with an adequate margin of safety
private equity (who did not exist in those days) frequently buys value plays in smaller companies for relatively modest premiums, resulting in significant losses for mistimed value purchases. Where I live in the UK this is a very common experience.
The greatly increased costs of employing top management talent, of professional advice, and listing of companies, can rapidly erode margins of safety in smaller companies, and significantly dent those in larger ones.
My biggest problem with a pure value approach is the intellectual objection that it always biased towards buying the cheapest companies not the best ones. And cheap does not work. Too often the company is cheap for good reason, and you only find out the reason after you have bought it. Management and sophisticated insiders always know more than you do and accounts are always backwards looking. Value investors often try and fudge this by applying "quality" measures, and other criteria, but this is both subjective, and also a tacit admission of the inadequacy of a wholly value approach.
Question 4
Invest only when there is a significant gap between intrinsic value and market price. Anything else is mere speculation.
I think your point about Graham's approach being necessary but not sufficient is insightful. Here is a thought question: how did cheap securities in the 1930s compare (purposefully leaving this broad/open-ended) with cheap securities today? How do the differences, if any, influence Graham's approach?
Good question. I'll answer this in 3 parts. First the historical context of both times, which is a study in contrasts. Then the general pricing of stocks then and now, and finally a look at the granular differences in the listings between the two periods.
The original crash in the autumn of 1929 was a 30% or so decline, which given the 20% rises of the previous 4 years back to back was neither surprising, nor particularly bad by standards before or since. The crushing bit came over the next two years and was driven by the combination of falling multiples and falling earnings. the earnings fell from 1.61 to 0.41. a 75% fall. The multiples paid fell from CAPE of 32.5 to a CAPE of 5.5. Hence the combination of this gave a 90% loss from peak to trough. The earnings took until 1948 to get back to the same level and prices not until 1954.
Today in 2025 the CAPE stands at 40, and earnings multiples have been growing since the trough in 1982 when it was around 7, and government bond yields reached a peak of 13% driven by inflation and high interest rates. Earnings have also been growing, and the combination is driving the reverse of the 1929-32 fall, as both rise, so the stock market tears upwards around 20% a year, just as it did between 1925 and 1929.
Part 2
As a result of this, the landscape of prices in the 30's was very different to today. This article shows this in stark relief, and puts it much better than I could:
https://www.grahamanddoddsville.net/wordpress/Files/Gurus/Benjamin%20Graham/Inflated%20Treasuries%20Deflated%20Stockholders%20-%20Ben%20Graham%20-%2006-01-1932.pdf
1 in 3 of the 600 stocks at the time traded below NAV. Now the figure is about 7 or so out of 500
1 in 12 of them traded below their cash and marketable securities - the whole business was free. I can't find any examples of this in the UK and in the US there are only biotech companies, where they are committed to burning their customers money, and the chances of a return on it are low. (really low, really, really low...)
For a value investor the early 30's were a perfect time to operate, with margins of safety abounding, and plenty of choice to pick better bets. If they were liquidated the investor would make a return, and the knowledge that if their earnings were able to rebound even part way the returns would be very good.
However it still demanded courage, as the article says because of the fear of further losses leading to further falls. A little like the feeling that biotech companies give me now.
Part 3
Looking at the listings of the stockmarket in 1929 you are immediately struck by how many of the companies are amenable to a value approach. Manufacturers, real estate, rubber, gold, leather, copper, railroads, canning, chains, sugar, cotton, oil, chemicals, banks, bicycles, power, water, woolens, writing paper, fire engines, foundries, malt, spirits, steel, wire and so on. All of these need real assets of the "drop on your toe" type and large amounts of working capital.
Look at the listings now, and the top 40% or so by value are tech companies. Their value lies not in their assets, but in the earning power and market dominance of their tech. The very lightness of their capital requirements (AI may prove a different story) is one of their towering strengths. A value approach simply misses the wood for the trees. Nokia or Kodak were kings of the hill until smartphones and digital cameras came along and rendered them as quaint as the American Snuff Co.
https://babel.hathitrust.org/cgi/pt?id=umn.31951d00132706g&seq=11
James - excellent, thank you very much for adding your perspective and fascinating historical resources. This enriches the community and helps us all learn from one another.
James, thanks for this insightful additional perspective.
Q0: Question 0: Come up with as many other dimensions of an investing style as you can and provide a scale for each of those dimensions (e.g. Diversification [high to low])
I looked at this form the perspective of asset class, which might not be correct, but some other dimensions might be:
Stocks/bonds, options or derivatives/equities, equities/ real estate, equities, commodities/cash, private credit/commercial credit etc this can be somewhat infinite. And From Graham “price and terms” (see below q2)
Other dimensions from Sec Analysis:
Investment : speculation
• Bonds/stocks
• Outright purchases/purchases on margin
• For permanent holdings/for a quick turn
• For income / for profit
• In safe securities / in risky issues
Question 1: When did Graham write the first edition of Security Analysis and how did the environment during which he was operating and writing influence his work?
I am referencing the 7th Edition of Security Analysis and what a wonderful edition it is, with Seth Klarman and a host of masters writing essays as preludes to each part.
1934 was edition 1 in depth of the depression, with many excellent examples of businesses going bust allowing him to hone his principles based on companies that survived.
Question 2: What’s Graham’s investment philosophy? Why does he think that’s best?
I interpret his philosophy as: Know the difference between an investment and a speculation, know thyself and circumstances; are you an untrained individual investor, analyst, money manager or trustee, are you investing your own or others’ money are you buying outright or on margin? Understand time; your time horizon and the impact of time and base your decisions on quantitive and qualitative factors, based of facts. In Grahams words:
“Instead of asking, (1) in what security? And (2) at what price? Let us ask (1) in what enterprise and (2) on what terms” p81 is a simple way of understanding Graham’s philosophy because he establishes clear dimensions for the reader/analyst and sets out 2 principles: “
1. Principle for the untrained security buyer: do not put money in a low-grade enterprise on any terms.
2. Principle for the securities analyst: Nearly every issue might conceivably be cheap in one price range and dear in another” p84.
Why is it the best? Because it allows the analyst to identify “an investment operation”… ”which, upon thorough analysis, promises safety of principle and satisfactory returns” p109 (and this philosophy is applicable irrespective of macro factors).
Question 3: Which parts of his approach do you think you want to imitate? Which ones do you think you would rather not? Why? (we will revisit this at the end of the book)
All of it and especially to better determine investment from speculation and to avoid speculation.
Question 4: What’s the difference between an investment and a speculation? Why did Graham choose the words that he did to define it, and what are the implications of his choices for investing?
“an investment operation is one which, upon thorough analysis, promises safety of principle and satisfactory returns. Operations not meeting these requirements are speculative” p109
The implications are that no one enterprise or issue will always be investment grade and without thorough, ongoing analysis and considering price, the analyst/investor may not realise the investment is actually a speculation instead.
The fact that he defines it at the level of "investment operation" rather than at a level of a single investment is both intentional and important. Our judgement, no matter how well-considered can be wrong.
Thanks for the assignment, Gary. I enjoyed the reading very much- this was a good nudge towards reading a book that I've been meaning to tackle for some time. I read only the 'original' Graham and Dodd sections of Part 1 and look forward to reading the various commentaries and introductions in the future.
Question 0: Come up with as many other dimensions of an investing style as you can and provide a scale for each of those dimensions (e.g. Diversification [high to low])
Valuation sensitivity (none to high)
Volatility (low to high)
Index correlation (low to high)
Dividend yield (low to high)
Risk (low to high)
Market Cap Focus (ambivalent/none to single/specific)
Size bias (micro- to mega- cap)
Holding period (short to long)
Portfolio turnover (low to high)
Trading frequency (low to high)
Geographic focus (none/ambivalent to single geography)
Sector focus (none/ambivalent to single sector)
Position sizing (uniform to varied)
Cyclicality (pro- to counter- cyclical)
Internal correlation (low to high)
Leverage/Gearing (none to high)
Asset backing (low to high)
Analytic focus (quantitative to qualitative)
Strategic focus (capital preservation to capital growth)
Return expectations (low to high)
Time horizon (short to long)
Research focus (narrow to broad)
Behavioural/Psychological (emotional to rational)
Discipline/Process (rigid to flexible)
Liquidity (low to high)
Question 1: When did Graham write the first edition of Security Analysis and how did the environment during which he was operating and writing influence his work?
Graham started work on Security Analysis in 1932 and the first edition was published in 1934. Hence, the book was written in the midst of the great depression and in the aftermath of the great crash of 1929.
Generally, this was a period of despondency, fear and uncertainty, and correspondingly in financial markets, depressed sentiment, extreme risk aversion and historically low valuations. As for Graham himself, he had participated in the prolonged bull market leading up to the crash and enjoyed the financial rewards (making more money than Babe Ruth one year) but also suffered from the crash (having to move his family from a penthouse to more modest accommodation). This likely reinforced the lesson that even the soundest of investment processes can not completely protect the investor from loss of capital.
This context goes some way to explaining Graham’s focus on,
1. What is knowable in the present moment (balance sheet) and in the past (reported earnings, dividends, interest and dividend cover, etc.) over forecasts
2. Reduced potential for loss above increased prospective return (guarding against rather than profiting from future developments)
3. ‘Inherent Stability’, effectively predictability and more or less a proxy for quality
All 3 are sources of relative safety in times of (perceived) heightened uncertainty/instability, but too easily ignored in times of times of (perceived) high certainty/stability. Note the distinction between inherent and (mere) perceived stability.
It should also be considered that a focus on balance sheet strength, asset-backing, etc. is also, in part, a product of the business environment of the time- in an environment where a greater share of corporate earnings was generated by the production of physical goods, it is natural to assume that a greater proportion of corporate value was underpinned by book value.
Finally, it’s telling that the emphasis when discussing securities invariably starts with fixed income. This reflects the depth of scepticism towards stocks at the time which would have grown even more pronounced in the aftermath of the crash.
Question 2: What’s Graham’s investment philosophy? Why does he think that’s best?
Graham’s posture is essentially defensive and prioritises resilience- guarding against future developments above profiting from them.
He has a scientific bias which leads him to regard quantitative analysis as more valuable than qualitative- while he doesn’t dismiss the importance of qualitative factors in the success of a given investment, he is sceptical that they can be appraised accurately and believes that they will eventually be reflected in the data anyway.
While he is valuation sensitive, he does not insist on precision, almost dismissing valuation as pseudo-science- ‘seemingly mathematical, in reality psychological and quite arbitrary’.
Graham believes that by focussing energy only on securities where there is sufficient data available; evaluating the available data thoroughly; and forming an opinion on the value of a security based on that data, the analyst can assess the attractiveness of an investment opportunity in terms of safety of principal and a satisfactory return.
Question 3: Which parts of his approach do you think you want to imitate? Which ones do you think you would rather not? Why?
I admire Graham’s clarity of thought, he knows and can clearly explain what the necessary conditions are for something to qualify as an investment. It is also strongly implied that he has a robust process, perhaps a checklist for evaluating investments. I would benefit from defining my investment philosophy more clearly and bringing more structure to my process.
One area where I suspect that an issue might arise is in finding investments in businesses with ‘inherent stability’ that are priced cheaply in absolute terms. I don’t disagree that these investments tend to deliver good returns, but much of the time such businesses are priced to deliver (see Costco, Autozone currently, for example). There are avenues available to mitigate- compromise on the degree of inherent stability required, accept a lower margin of safety or be able to endure long periods of inactivity/allow uninvested cash to pile up.
Question 4: What’s the difference between an investment and a speculation? Why did Graham choose the words that he did to define it, and what are the implications of his choices for investing?
To Graham, an investment is undertaken based on expected safety as assessed via study and standards as pertain to the available facts/data, hence the decision is backward-looking in nature. A speculation is undertaken based on expected returns as assessed via projected future developments or forecasts and is forward-looking in nature.
As a keen and talented classicist, it is likely that Graham chose his words with care and would have been acutely aware of their Latin roots, investire (to clothe) and speculari (to look at).
Without pushing the envelope too far, the process of clothing someone potentially involves assessing the fabric, fitting, measuring and cutting, stitching, finishing or at a minimum, examining the garment and trying it for size- the degree of effort tends to correlate with the expense of the garment.
Speculation falls short of this- the process only extends as far as looking at something and making a best guess as to whether it will work out or not. The distinction can be thought of as follows- buying a shirt from a tailor (high value investment), buying a shirt from a department store after browsing and trying for fit (lower value investment) and ordering a shirt from a catalogue in the hope that it will meet expectations (speculation).
The implications for Graham’s approach are that his investment universe is limited to those securities where a satisfactory appraisal can be made from the historical data, which must be sufficiently detailed and intelligible for his purposes; he will value known and provable facts over opinion or facts that can’t be straightforwardly appraised (quantitative over qualitative), and he has to be comfortable with sacrificing higher returns for reduced probability of significant losses.
Your point about the difficulty of finding companies that have the "inherent stability" characteristic + attractive valuation in the current market environment is very much on point. Thought question: how has a) the frequency of businesses with 'inherent stability' b) the degree of such inherent stability change since Graham's time?
P.S. Never knew about the Latin roots (investire/speculari) which shows a) how much less educated I am than Graham and b) how much I have to learn from all of you!
Without having found data to back it up, my guess is that there's less difference in percentage terms between the two eras than most would assume BUT the lifecycle has, on average, grown shorter. That implies that the degree of inherent stability is lower than Graham's time.
This adds colour to my earlier observation- taking Costco as an example, or Hermes would also work, these are inherently stable businesses with demonstrated staying power. Perhaps what the market is currently rewarding with very high multiples is enduring inherent stability, which would be more valuable in a world where inherent stability is more fleeting.
This train of thought also left me considering enterprise software providers- isn't it the inherent stability of recurring revenues that the market rewards with premium valuations? In certain cases, for example Adobe, the perception that AI will render that stability less enduring has seen multiples contract quite sharply.
Question 0:
* If I’ve not added a scale it’s is assumed to be High/Low
Portfolio Dimensions:
- Holding Period - Long/Short or alternatively number of days
- Borrowing
- Type of Return - Income/Price Appreciation
- Certainty of Return
- Magnitude of Returns - Low/High (Could the company 100x?)
- Tolerance to Loss of Investments
- Safety of Capital
- Shareholder Activism
- Specialization
- Volatility of Security Price
- Depth of Data used in analysis
- Breadth of Data used in analysis
- Uniqueness of Data used in analysis
Underlying Company/Investment Dimensions:
- Cash/Profits Generation - positive/negative
- Cash/Profits Growth - positive/negative
- Volatility of Cash/Profits
- Ability to reinvest Cash
- Need for additional funding for growth/survival
- Life cycle stage - Growing/Stable/Declining
- Assets - Tangible/Intangible
- Borrowing
- Durability of investment - Fixed Life/
- Competency of Management
- Distribution of Outcomes - Binary/Continuous (Not sure if this clear, so a binary example would be a oil exploration company where it would be worth nothing if no oil is found)
Question 1:
The first edition was published in 1934. This was 5 years after the Wall Street Crash with stock prices far below their peak. The crash also coincided with the start of the Great Depression, which was still ongoing at the time of writing. Whilst Graham doesn’t provide any explicit answers to this question in his writing, I would surmise that this was a big influence on his reluctance to value securities on the growth of future profits and the requirement to ensure the safety of an issues.
Question 2:
Graham’s approach was a data driven analytical approach, involving thorough analysis of an investment, understanding the underlying business and then buying when a security was fairly priced and selling when it was overvalued. He likes this approach as it reduces the chances of significant losses.
Question 3:
Which ones do you think you would rather not? Why? (we will revisit this at the end of the book)
I really like his analytical, data driven approach, his ability to conduct analysis from first principles and his effort to avoid behavioral biases. For example the section on analysing instruments based on their properties rather than their type, was a good lesson in avoiding categorisation bias. One area of his approach I don’t think I want to imitate is his ignoring the growth prospects of a business - I think if these are priced right they can be valuable.
Question 4:
Graham defines an investment as:
‘An investment operation is one in which, upon thorough analysis, promises safety of principle and a satisfactory return. Operations not meeting these requirements are speculative’.
He chose the wording investment operation intentionally for 2 reasons. Firstly because securities can be investible at one price and not at another and secondly a bundle of securities may be investable as a group, but not individually (I think he is referring to arbitrage opportunities?)
I think reducing significant losses, as you put it, is crucial to Graham's approach. This was probably strongly reinforced by his recent losses in the partnership during 1929/early 1930s.
0: A few dimensions that define an investing style are diversification, time horizon, valuation focus, growth versus value, market cap, liquidity, research depth, macro awareness, definition of risk, turnover, and temperament. I’m somewhere in the middle on most of these, fairly concentrated, long term, price driven, patient, and aware of cycles.
1: The first edition of Security Analysis came out in 1934, right after the 1929 crash and during the Depression. The market was chaotic, investors had lost trust, and financial statements were unreliable. Graham was trying to rebuild confidence by showing how to analyze businesses based on facts instead of stories.
2: Graham believed investing should be based on analysis and discipline, not emotions or forecasts. His key ideas are intrinsic value, margin of safety, and temperament. You don’t need to predict the future if you buy with enough cushion and focus on avoiding permanent loss.
3: I’d keep his margin of safety mindset and focus on downside protection. I’d probably skip or adapt the parts that rely on liquidation value or old school net net ideas. That approach made sense in the 1930s but not as much today. Most value now sits in cash flow and intangible assets. I’d also be more open to growth if reinvestment returns are strong.
4: Graham defined an investment as something that, after analysis, offers safety of principal and an adequate return. Anything else is speculation. I think he used those words carefully. Safety and adequate set the expectation that investing is about process and protection, not excitement or prediction.
Investing Styles
1. Concentration: Concentrated portfolio (Munger, Buffett, Li Lu) -> Diversified portfolio (Graham)
2. Depth of Research: Shallow research -> Deep research
3. Conviction Building Tool: Pattern recognition (experienced investors) -> Bottom-up research (new investors)
4. Valuation: Deep value (Graham, Schloss, Early Buffett) -> Asset backed value (H. Marks, Klarman, Early Buffett) Business Value (Buffett, Greenwald) -> Franchise Value (Later Buffett, Munger) -> Tech Bro (Chamath) -> Delusional, Somatic Value, Value 3.0 (Chris Begg)
5. Circle of Competence: Sticks to Circle Of Competence (Buffett) -> Experiments with small positions outside circle of competence (Bruce Flatt, Ben Graham) -> Invests with little idea about but pretends to understand (deeply, thoughtfully) (Chris Begg) -> Invests in things with the most peripheral understanding (Robinhood investors)
6. Portfolio Turnover: Low (Nalanda Capital, Chuck Akre) -> Portfolio and stories change every season (Pabrai) -> Portfolio changes every two weeks based on whims and fancies (garden variety mutual fund managers)
7. Simplicity/Complexity: Investments in simple long only securities (Nalanda, Chuck Akre) -> Long/short strategies (Hedge Funds) -> Complex Investments (arbitrages, warrants, spin offs etc)
8. Capital Structure: Investments in Ownership (equities) -> Investments in preferred instruments -> Investments in debt
9. Cash Position/Leverage: Hedged + large amount of cash in portfolio (Klarman, Taleb/Spitznagel?) -> Excess Cash in Portfolio (Buffett now) -> Hedge + small leverage (Ackman) ->>95% in equities (Pabrai Wagons Fund) -> Levered long/short (garden variety hedge funds) -> Levered long (Archegos)
10. Investment Timeframe: Weeks (EPS soothsayers) -> Quarters (index hugging fund managers) -> 1-3 years (cyclical investors, special situation investors) -> 3-5 years (private equity style public market investors) -> Hold to maturity investors (Buffett, Tom Russo)
11. Portfolio Income Expectations: Dividend/yield investors -> Dividend + Growth investors -> Pure Growth Investors
Useful Combinations for Analysis of a Style:
1 & 2: Concentration vs Depth of Research
1 & 4: Concentration vs Valuation
1 & 5: Concentration vs Circle of Competence
1 & 6: Concentration vs Portfolio Turnover
1 & 7: Concentration vs Complexity of Investment Strategies
1 & 9: Concentration vs Cash Position/Leverage
1 & 10: Concentration vs Investment Timeframe
2 & 5: Depth of Research vs Circle of Competence
2 & 6: Depth of Research vs Portfolio Turnover
2 & 7: Depth of Research vs Simplicity/Complexity of Investment Instruments
2 & 10: Depth of Research vs Investment Timeframe
3 & 4: Conviction Building Tool vs Valuation
3 & 5: Conviction Building Tool vs Circle of Competence
3 & 6, 10: Conviction Building Tool vs Portfolio Turnover/Investment Horizon
4 & 5: Valuation vs Circle of Competence
4 & 7: Valuation vs Simplicity/Complexity
4 & 9: Valuation vs Cash Position/Leverage in Portfolio
4 & 11: Valuation vs Portfolio income/growth expectation
5 & 6,10: Circle of Competence vs Portfolio Turnover Ratio/Investment Timeframe
7 & 10: Simplicity/Complexity of Instruments vs Capital Structure
8 & 9: Capital Structure vs Cash/Leverage Position of Portfolio
8 & 11: Capital Structure vs Portfolio Income Expectations
9 & 11: Cash/Leverage Position of Portfolio vs Portfolio Income/Return Expectations
10 & 11: Investment timeframe vs Portfolio Income/Return Expectations
The important thing for each investor is to put a lot of thought, based on good self-knowledge, of where they want to be and why on these dimensions.
Question 0)
stability seeking <-> volatility seeking
income oriented <-> capital appreciation
short term <-> long term
passive <-> active
indexing <-> arbitrage
lump sum <-> cost averaging
small <-> large
Ventures <-> stalwarts
Domestic only <-> foreign only
Concentrated <-> Diversified
Focus on undervalued securities <-> focus on overvalued securities
simple <-> complex situations
Question 1) The first edition was published in 1934. Graham, like all of us, was a product of the time in which he lived. The 10 year treasury was paying around 3.00-3.25%. Earnings of companies were at historically low levels. Capital was very scare so share prices were largely trading at depressed valuations of those depressed earnings. I feel that this influenced him in that the investment environment typified the phrase “throwing the baby out with the bath water.” A moderate degree of sleuthing helped him find investment opportunities that were statistically very cheap and/or offered a very high short term return with very minimal risk relative to the annualized return.
Question 2) From page 69 “first the market price is frequently out of line with the true value, second there is an inherent tendency for these disparities to correct themselves.” So he believed that the market was prone to making mistakes in the short term, but prone to correct those mistakes over time. We see this in his discussion of various instances of arbitrage. So 1) there is a “true value” which can be known and capitalized on & 2) the means by which that true value is determined is via analysis. There are two quotes that are worth highlighting: 1) “how far is it the function of the security analyst to anticipate changed conditions?” and 2) “security analysis must ordinarily proceed on the assumption that the past record affords at least a rough guide to the future.” Which both highlight his preference for quantitative vs qualitative factors. Chapter 3 is essentially an excursion into his preferred sources of and forms of quantitative factors.
Question 3) I agree with his basic tenets regarding the nature of the market as I understood them in question 2. I prefer some of his discussions regarding a company’s accumulation of earnings power rather than an investor seeking opportunities for arbitrage. As an investor who doesn’t do so as my career, I have a shortage of time available to put toward an arbitrage grind.
Question 4) Speculations are “those subject to substantial uncertainty & risk”. Page 71. Then on page 106 “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.” It’s important to note that he is not anti-speculation rather he doesn’t want one to pretend be the other. He would clearly consider venture capital inherently speculative, but I don’t think that he would take issue with the business of venture capital in principle.
Thought question: How does "inherent tendency for these disparities to correct themselves" (referring to Graham's point about the gap between price and value closing) change over time a) over the long-term b) cyclically within a market cycle?
"how far is it the function of the security analyst to anticipate changed conditions?” is a key question. Perhaps it has no perfect answer and constitutes one of the dimension of an investment style. An alternative view could be that as the pace of business change accelerates one must place less reliance on the past and more reliance on one's own analysis of what the future holds.
Regarding the thought question: I think one of the questions an analyst must ask themselves is what is the root cause of this disparity between price and value? Perhaps these days abrupt and severe market dislocations may be closer to the market environment that Graham himself experienced. Albeit these dislocations are likely much shorter in duration than they were during his time (because the market has definitely become more efficient overall). But perhaps for most other disparities these days it depends more on how the analyst considers the differences between the market narrative about the company or sector vs. the analyst’s own narrative regarding the business or sector. So I’d say by necessity an analyst must inherently be more forward looking than Graham had to be in his day, except during exception circumstances.
I’ll keep thinking about it, but that’s my first consideration.
Right. Value is always about the future (even assets need to be sold at a certain future price), but the *degree* to which we rely on the future being different from the past vs. based on the past can vary greatly between different investments.
question 1: Security Analysis written just after the 1929 market crash when most investors lost almost everything invested.
Question 2: Grahams philosophy dominated by concept of STABLE returns, margin of safety and capital protection!
Question 3: Concerning my following Grahams concepts,
I focus on company level: earnings power, pricing power, free cash flow, margin of safety, safety of principle, PRICE PAID is really important.
I focus less on value of assets and whether dividends are paid. I also recognize that today changes occur very rapidly and Intrinsic value is a value that is susceptible to higher variation (i.e. the IV range can very large and the mean value can fluctuate. For example new information may change the company's future growth trajectory and have a major impact in IV. I also recognize that you have to take risk of losing a modest amount capital to get significant upsize returns. Today strictly following Grahams principles may mean you can't find enough to invest in and you have significant cash in your portfolio. In other words I may pay more for Quality companies.
Question 4: Speculation focuses on price and requires that you think/hope someone else will pay you more for the item in the future. Investment you expect the asset to provide you with a reliable and stable series of cashflows in the future. The net present value of those cashflows discounted at appropriate levels will exceed what you paid in todays dollars for the asset by a significant margin of safety. Furthermore the likelihood that those cashflows won't be forthcoming is LOW!
Thought question: Graham clearly puts investing based on facts (past results, current assets, etc) in the domain of speculation while he puts predicting the price of a security based on the opinion of others in the domain of speculation. Where does he/would he put the forecasting of a financial future that is different than the past but where that difference could be supported by some current evidence?
great question. I am not sure Graham would make investment decisions based on his forecast being more optimistic than the past data would dictate. Quite the contrary!, Consistent with his conservative disciplined nature, I think his investment decision is based on future is similar to the past...a neutral baseline. If future is better that is great upside. If future is worse that is where margin of safety gives him protection. Perhaps he would be more inclined to make the investment if he thought probability of upside is much higher than downside...but don't think he would count on it!
Hi Gary,
I appreciate your effort in starting something that could genuinely help individual investors. Initiatives like this often plant the seeds for lasting value.
Before we dive into the questions, I’d suggest we take a step back and introduce the book first. It’s always better when everyone has some context. A few hours spent understanding the book will make our discussion far more meaningful than jumping straight into answers.
Now, on to the idea of dimensional investing.
Dimensions:
X-axis: Management Integrity (Low to High)
Y-axis: Understanding of Business Dynamics (Low to High)
Accordingly, we can allocate as you mentioned in your example.
Answers to questions:
1)
2) It was a margin of safety.
In investing, you never put all your eggs in one basket, and you only buy when the price gives real downside protection, situations where the upside to downside is about 5 to 1. If one is roughly right, time helps; if I am wrong, the loss is limited. That philosophy lets one survive the cycles and still come out ahead.
3)
4)
Can you please tell me more about what you mean by introduce the book first? The expectation is that you do the reading before you answer the questions. So if you tell me more about what you mean by an introduction on top of what you read I can see how I can best help
Sure,
By introducing the book first, I mean sharing the title, author, edition, and any specific chapters or sections we’ll focus on. I prefer reading a physical copy rather than a PDF or Kindle version. If you could please share the book details in advance, I’ll order the physical copy and complete the reading before answering the questions.
Got it, make sense.
want to focus on quality rather than quantity, so I'm reluctant to add 20 different dimensions. I will just add these three which I think are very relevant in today's market.
Three Relevant Investing Style Dimensions
Time Horizon
Scale: Short-Term ↔ Long-Term
How long holdings are kept, from brief trades to multi-year commitments.
Risk Tolerance
Scale: Conservative ↔ Aggressive
Willingness to accept risk—stable, lower returns vs. bold, high-return bets.
Analytical Framework
Scale: Quantitative ↔ Qualitative
Reliance on hard numbers vs. subjective business factors.
These dimensions help shape portfolios and opportunity selection.image.jpg
When Did Graham Write Security Analysis & Its Context?
Graham published the first edition of Security Analysis in July 1934, writing amid the Great Depression. This era saw severe economic downturns, massive stock market losses, new federal regulations, and shaken investor confidence. The harsh environment shaped Graham’s emphasis on:
Capital safety (“margin of safety”)
Focusing on bargains below liquidation value
Standards rooted in company fundamentals—intrinsic value and quantitative analysis
Graham’s Investment Philosophy
Graham built the core of value investing:
Distinguishing investment from speculation
Focusing on intrinsic value, disciplined analysis, and safety first
His tests for true investment:
Careful business analysis
Safety of principal
Satisfactory return
He advocated buying well below intrinsic value to build in a safety margin, thoroughly analyzing businesses, and always prioritizing risk control.
Why is this “best”?
Psychological protection from market folly
Timeless, globally applicable
Supports steady, disciplined wealth-building
What to Imitate and Adapt
Imitate:
Discipline
Fundamental analysis
Risk aversion
Adapt:
Evolve methods for modern, high-growth or tech businesses where classic metrics don’t fit
Go beyond quantitative “net-net” hunting, considering qualitative factors and future potential
Investment vs. Speculation—Graham’s View
Investment = careful analysis, safety of principal, and satisfactory returns.
If any piece is missing, it’s speculation. Graham chose these terms to set clear boundaries amid post-crash confusion.
Implications:
Pay the right price for margin of safety
Prioritize risk control
Ignore market fads—think long term and analytically
Graham’s approach remains a powerful foundation for intelligent, risk-aware investing in any era.image.jpg
I think your idea of using Graham's approach as a foundation to build on/customize is an important one.
Q0:
Will try to get to this soon.
Q1:
Graham wrote the first edition in 1934, during the Great Depression. Loss was real and it hurt; people were understandably not eager to jump back in and buy up securities that were now at low prices. His audience was at risk of sitting on the sidelines and needed encouragement to seize opportunities, but to do so in a thoughtful, disciplined manner. He had a practical understanding and personal experiences of risks and losses and could share the lessons they were all learning so that people would hopefully avoid similar mistakes.
Q2:
He operated from the belief that the market can be fickle and that prices often fluctuate for reasons that are not always logical. His approach was non-emotional and fact-based, almost like a scientific method, but he also treated it as an art. He carried an ownership mindset, looking for companies with intrinsic value grounded in performance and long-term potential. He believed that price would eventually align with value, and so he dug into each company to uncover specific strengths and weaknesses in areas such as financial health, management, products, and overall potential in an attempt to find hidden jewels.
Q3:
I need to take more time to go through Part 1 and more fully develop my understanding and perspectives. Here's where I'm at right now. I can embrace taking a long view of a situation and riding it out even when things look bad in the moment. I can partially relate to ways he seemed to make decisions in a fact- based, non-emotional way, using a scientific method. However, I also know that there are a few stocks that I would be less inclined to be cold about, especially ones that are in industries I'm interested and feel optimistic about. While I respect and know I would likely enjoy the deep research into individual companies, I see myself gravitating towards learning about industries and their supply chains first and then digging into companies that might look promising. Regardless, I do not see myself putting in the necessary time due to time constraints; I'm curious how AI may help with some of this research going forward.
Q4:
Graham sees both investments and speculations as operations, distinguishable by the behavior of the operator. He defines an investor as one who conducts his operation (buy and selling securities) according to standards of safety of principal and satisfactory return. A security purchase by one person without thorough consideration of the facts and discipline to hold to standards of safety is a speculation. The exact same purchase could be an investment by another who has conducted his operation in a thoughtful, intentional standards-based manner. By choosing to describe both investing and speculation as operations, he shifted the focus from the asset to the behavior.
First, thank you Prof. Gary for opening the Value Investing Seminar to the broader public. This is a wonderful opportunity for all of us lifelong learners with a passion in value investing to learn more about ourselves, the value investing philosophy and practice, and meeting people across the globe.
Q0
The concept of investing style is very interesting and can explain the vast variation among value investors, in terms of assets under management, number of positions, position size, rate of returns, holding periods, and turnover rates.
One dimension that naturally came to mind is location of workplace. One investor can choose to perform investment analysis in a big financial hub city like New York, London, or Hong Kong, or take the route of a less busy location. There are several examples of value investors that have chosen distant places away from the noise in order to caltivate their independent thinking and research. From Warren Buffett (Omaha) and John Templeton (Bahamas) to Chuck Akre (Middleburg) and Guy Spier (Zurich).
Workplace location: Financial center or Peripheral center
Q1
Graham and Dodd wrote the first edition of Security Analysis in 1934. It was a period following the October 1929 stock market crash in the United States and America’s Great Depression in the 1930s.
This period was at the lowest points of both market cycle and investor psychology. The authors of Security Analysis aimed to provide a roadmap for investors and as Seth Klarman puts it in the Preface to the Sixth Edition, tried to give some order in the uncharted financial wilderness of the times.
Q2
Graham and Dodd’s investment philosophy is value investing which aims at picking securities that have a deep discount to intrinsic value or high margin of safety. According to Klarman value investing is a comprehensive investment philosophy with the following characteristics: deep research, long term focus, risk limitation and contrarian thinking.
Buying securities at market prices that are much lower than their intrinsic value provides investors with protection against the probabilities of error, bad luck and one-time events. Mohnish Pabrai argues that the best way to minimize downside risk is to be aware of outliers and build a portfolio that can withstand six sigma events. Following an investment strategy that allows for high margin of safety increases the probability of surviving such events.
Q3
What I love in the value investing community is that there are many people that are generous with their time and knowledge without wanting anything back. In Greece we call this philotimo.
Prof. Gary is doing this great seminar for all of us. Mohnish Pabrai is so generous with all his YouTube videos. Warren Buffett Letters from both the Partnership and Berkshire Hathaway years are all available online. All BH annual meetings are available at CNBC. The value investing community is full of lifelong learners.
With value investing there are no secret mathematical formulas to success. It comes down to being analytical and contrarian, but at the same time humble and approachable. When Graham experienced a cumulative loss of 70% of the Graham-Newman partnership from 1929 to 1932 he realized that the key to material happiness is following a modest standard of living. He was not only formulating an investment roadmap, but also a personal philosophy for his readers.
I would like to imitate Graham’s appetite for sharing knowledge, his composed personality, and life philosophy.
In stock picking, I would concentrate more than having a highly diversified portfolio.
Q4
Investment is primarily based on intrinsic value factors (earnings, dividends, assets, capital structure, terms of issue) and secondarily on future value factors (management, competition, volume, price and costs). Ben Graham put more emphasis on the first factors. Phil Fisher, who pursued quality, leaned more towards the latter factors.
Speculation is determined by market factors such as technical, manipulative and psychological.
Investment aids towards safety of principal and promises adequate returns because its inputs are more rational and impersonal, especially the intrinsic value factors.
Speculation on the other hand derives its inputs from a more psychological nature and emotion leads to greater variability in performance and risk of permanent capital loss.
Thank you for the kind words. Here is a thought question: can a group of "intelligent speculations" as Graham defines them, taken together constitute and "investment operation"?
“Intelligent speculation”
Going back to Graham's definition, "an investment operation is on which, upon thorough analysis, promises safety of principal and a satisfactory return". Graham added another criterion in his definition; "an investment operation is one that can be justified on both qualitative and quantitative grounds."
He then defined "intelligent speculation" as the taking of risk that appears justified after careful weighing of the pros and cons.
The above definitions seem to align, as a group of intelligent speculations involve careful analysis and their diversification offers safety. The intelligence aspect promises the return. What troubles me with speculation of any form, intelligent or not, is whether it can consistently outperform the market by at least 5% (Buffett in his Partnership years had a yardstick of outperforming the Dow by at least 10% over the long run). Another point, when intelligent speculation beats the market, can one measure the source of the performance. Was it skill or luck?
Howard Marks points out that the future is not knowable. He also maintains that if riskier investments reliably produced higher returns, they wouldn't be riskier. A group of investment speculations might look like an investment operation that promises safety of principal, but there is no guarantee that higher prospective returns will materialize. The probability distribution of returns becomes wider. Along with the promise of higher potential rewards increases the risk of permanent loss of capital due to the wider probability distribution.
The primary aim of speculation is higher returns (aggressiveness). The priority of long-term investing is capital preservation and satisfactory returns (defensiveness). To conclude, a group of intelligent speculations does not constitute an intelligent operation as it increases the risk of permanent capital loss due to the wider probability distribution of returns.
I may have interpreted wrong but towards the end of Part 1, I was a bit surprised to see that Graham accepted some forms of intelligent speculation page 110-111, if done with reasonable care, and seems to also acknowledge that the market can at times determine the best available fair intrinsic value of speculative issues
Thanks for running this course. Sorry my responses are quite late, it was not an easy read. I'll put my responses here in the event that you might see them.
0. I don’t know many dimensions, but I think of these different styles in relation to time. For example:
At one extreme if we are adopting a short term strategy with quick realization of profits – trading based on sentiment or other peoples’ trades like momentum trading or strategies at funds where the returns are measured monthly, I would think the diversification would be large, and research not as deep.
Comparatively, if we are adopting a longer term strategy, the research has to be deeper, as the opportunity cost grows – deciding to hold a position, is forfeiting your right to another assuming capital is limited.
1. The first edition was published in 1934, when he was around 40. His work was influenced by his family’s fall into poverty in 1907 and the subsequent years – war collapse, hectic prosperity, postwar hesitation, inflation, deep depression. He understood price and intrinsic value are different, and given the circumstance – booms or busts, prices can fluctuate greatly based on sentiment, but this had little to do with the value of an investment which is based on its fundamentals.
2. He looks to buy securities which are priced at a discount to their intrinsic value which is determined through thorough analysis. That is best because it offers safety of principal and some return over time.
3. I think I would keep most of his approaches, because principal protection is one of the tenents of investing. I would probably be mindful that the majority of companies operating in his period are more capex heavy –eg, industrials, railroads where most of the cash generated by the business is going towards the maintenance of these assets or purchasing other hard assets. The values of these assets could likely hold because the rate of change and progress in technology and thus obsolescence is much slower compared to now. Thus his thinking on placing trust in asset values holds.
As most of the cash in asset heavy businesses was going towards maintenance of the business with leftovers paying down debt and giving shareholders some returns, I think managements would be more occupied thinking about how to manage costs or capital structures more efficiently. Compared to now, where there are more businesses which are more asset light, with less reinvestment requirements, managements need to think about how to allocate excess cash and think in terms of its returns to maximise shareholder value. Perhaps more emphasis needs to be placed on managements compared to Graham’s time.
4. “ An investment operation is one which upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”
He chose the words as they were clear enough to prevent serious misunderstanding and yet were broadly applicable to different asset classes or situations.
Hi Gary, All. I've got the book and finished section 1. A bit late, but I wanted to start at the beginning. I've not yet read Gary's answers, he provided in his newsletter, so I could do this assignment.
Question 0: Rather than list investing styles (as Gary has done a comprehensive email on this), I thought a focus on the retail additional considerations.
1. certainty of return of both capital and interest. And the level of return. For example, putting the money in a bank, would enable this. However, Investing means less certainty, but potentially greater returns.
2. Level of consumer protection against the latest technological developments. For example, in the UK if a bank goes under, your money is protected up to £85K. However, if I invest in Crypto, I could lose all my money through theft, and it wouldn't be protected. This recognises that regulation usually takes money and time to put in place.
3. Cost v level of access. For example, online brokers are cheap, but may only offer a limited selection of stocks. While other brokers will cost more, but able to buy any shares in the market. This of course, influences your investing style...you may have to go for large stocks and only in certain countries.
4. tax saving V flexibility general trading account. Trade-off between saving on tax (potentially keeping capital growth) versus more flexibility a general account may offer both in terms of accessing cash, probably also what money can be invested in.
4. Position size, versus cost. If trading fees are expensive, I may want to have a larger position size to spread the cost.
5. Cost v frequency of trading. A similar one to the one above is the cost of trading, which also influences how frequently to trade. The cost of trading is high, I may choose to reduce the frequency.
6. trade (£) size v frequency of trading. Assuming investing in one stock, there is also a trade-off between position size, and frequency of trading. Therefore wish to have a smaller position size for each trade, but buy more frequently to take advantage in price changes.
7. Time-frame V speed of profits. There is a trade-off between time of money in the market, and having access to the profits/capital.
8. capital appreciation v dividends. How do you know if you're winning? Via a change in price of the stock or versus the income/dividends received.
Question 1:When did Graham write the first edition of Security Analysis and how did the environment during which he was operating and writing influence his work?
I thought I knew alot about the context, including depression, Graham losing his money during it, and looking to find ways to stop it happening again. What I hadn't realised was the infrastructure of finance as we know it was also being created. The set-up of the SEC and, requirements to publish data. The quality of data was improving. Government intervention and policies also influence companies and the stock market. So he was also responding to the challenge, with new data and standards coming into force, should I use this quantitative data? If so how, what weight should I give the past versus the future.
Question 2: What’s Graham’s investment philosophy? Why does he think that’s best?
-He wanted to focus on the data, and the realisation that price mattered. Yes, the company might be good, but that might be too high a price. Graham liked using data and analysis to identify hidden gems, where the odds of making a return were in his favour and very unlikely to loss money, even if the company went bankrupt. He wasn't a fan of speculation. Speculation also included future aspects, what the future could be like. He wanted an analyst to ideally go I value the company share a £X. I've added on £Y for growth prospects.
Question 3: Which parts of his approach do you think you want to imitate? Which ones do you think you would rather not? Why?
-I would like to emulate, using data to inform investment decisions. As Buffet says, learn how to look under rocks to find gems. I also like his systematic approach to breaking down a company, and being clear what is evidence, and it unknown/speculative factors.
I don't think I would emulate trying to price speculation/future prospects. But I might try to put it in a bucket (little, medium, alot, massive) to give me a feel of what I think it could be. I should also consider the risks.
-I disagree with Graham's definition of speculation....seems a bit too conservative. I'm investing as I want more money to grow more than is possible in a bank. (As I'm choosing one stock over another. As I'm not doing an index fund...could argue I'm speculating. I would simply say, I'm taking the road less travelled, and applying more effort for potential for greater return.
Question 4: What’s the difference between an investment and a speculation? Why did Graham choose the words that he did to define it, and what are the implications of his choices for investing?
For Graham, speculation is a lot about placing too much emphasis on the future, and essentially not enough emphasis on the data and evidence. He also wants to emphasise dividends rather than capital growth (again what is certain v uncertain.)
Due to the emphasis on data, Graham would only invest in companies and industries with a known track record. And be unlikely to chase the new/big thing. By default his investing could be seen as conservative. However, as he liked complex deals, I'm not sure it could be seen as conservative..more that, he wanted rich data to inform his decisions. (he would have loved google! for their emphasis on data to make decisions.)
I think your point on Graham's definition of speculation being too conservative is one worth thinking about over time. Especially as we study other investors, since you will see that one's "speculation" is another's "investment." The most important thing is that you are clear about where the line is for you.
Question 1
Graham wrote the first edition of Security Analysis in 1934, in the depths of the Great Depression. The Dow Jones Industrial Average lost about ninety percent of its value from the peak in 1929. Graham’s approach was in question. He described a “double discrediting.” So, his approach prevented its followers from the upside during the euphoria and did not protect them from ruin. This did not stop with the followers of his approach; Graham himself was wounded by the crash. He was writing with a fresh personal wound, since his joint account lost about seventy percent of its value after he reduced hedges and maintained margin exposure on the mistaken belief that conditions were improving.
The influence of these events is clear in his writing. He described the future as something to be guarded against, not profited from. This paints a very dark picture of the environment at the time. However, if I was in his shoes, I would not look for the future or growth when many common stock issues were trading as net-nets or for less than cash. I would be worried about realizing the value available now, not tomorrow—especially since tomorrow was not promised during the Great Depression. Also, Graham had seen a forty-seven percent decline in the Dow Jones in 1921. So, if I had experienced a recession and a depression in less than ten years, I would not have been very optimistic about the future or its growth prospects either. I would focus my efforts on protecting against the highly uncertain future.
Question 2
I think the cynical definition of an investment that Graham quotes in the book is a good way to understand his philosophy—namely, that an investment is just a successful speculation, and a speculation is an unsuccessful investment. Graham’s philosophy is a way to defeat that cynic’s definition. He draws a hard line: an investment operation is one which, after thorough analysis, promises safety of principal and a satisfactory return. There is a difference between market price and intrinsic value, and value can be ascertained before capital is committed by analyzing present, verifiable facts—critical examination of accounts, comparison of related issues, and close reading of covenants—then buying only with a margin of safety between price and value.
He thinks this is best because the method is testable and repeatable: you can evaluate the process (facts → conservative value → margin of safety) regardless of the outcome of any single position. That keeps you out of the cynic’s trap where results alone rewrite definitions after the fact.
Question 3
I think the most important part of his approach to imitate is the use of clearly defined standards for selecting investments before committing capital, because this guards against behavioral biases. I also want to imitate his flexibility in comparison. Graham compares similar and related securities: stocks against stocks, stocks against bonds, and different securities within the same issuer. To me, this is his way of practicing a kind of variant perception for his time.
I will partially disagree with the idea that the future is only something to be guarded against. That is probably influenced by the fact that I did not live through the Depression, and because today a significant portion of value comes from intangibles. I still want to protect against uncertainty, but I also want to weigh how present facts connect to durable, forward drivers of value in modern businesses.
Question 4
An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.
We should note that Graham uses “speculative” as an adjective to describe the process, not to re-label any single holding after the fact. He does not draw a hard boundary between “an investment” and “a speculation” as static categories, because the same issue can be investment-grade in one set of conditions and speculative in another. Instead, he gives standards by which a decision is judged.
His choice of the word “operation” is intentional. He wants a comprehensive process that covers more than just bonds and common stocks. This lets the framework include hedging, liquidations, and arbitrage. It also scales to the portfolio level. Two issues, separately, might promise safety of principal and a satisfactory return, but taken together they could offset each other if they are negatively correlated. Looking at the operation allows for approaches like baskets of net-nets, where a single name may fail yet the basket makes sense at the portfolio level.
“Safety of principal” mattered especially in his time, when many assumed only bonds were investments. Graham insists that if a bond lacks adequate collateral or protection, it should not be called an investment. He uses “satisfactory return” to include all forms of return—interest, dividends, and especially capital gains—so that gains are not dismissed as mere speculation when they arise from sound analysis and a margin of safety.
The degree to which "the future is something to be guarded against" vs. "profited from" is a key dimension of an investment style. Keep on eye on that distinction as we study the different investors. There are successful masters at each end of the spectrum (and many failed attempts as well), so I would suggest that a big part of success lies in knowing yourself well and mastering the implementation of an approach that is within your own circle of competence.
Questions 0: Investment Dimensions
-Market Cap [Small → Mid → Large → Mega]
-Cyclical sensitivity [Defensive → Neutral → Cyclical → Deep Cyclical]
-Value/Growth [Deep Value → Value → Growth → Hyper-Growth]
-Business mode integration [Asset-Light / Outsourced / Platform → Partially Integrated → Fully Vertically Integrated]
-Business Sales Strategy [Discount → Value → Premium → Luxury/Prestige]
-Asset orientation [Asset-Light (software, IP, platforms) → Asset-Moderate (brands, distribution) → Asset-Heavy]
-Geography [Regional → National → Global]
-Business diversification [Single business line → Broadly diversified conglomerate]
-Income [No Yield → Moderate Yield → High Yield]
-Active/Passive [Fully Passive → Quantitative/Factor → Active]
-Liquidity [Private → Illiquid Small Cap → Liquid Mid Cap → Highly Liquid Large Cap]
-Industry/Company Ownership structure [Founder-Controlled → Family-Controlled → Institutional Majority → Widely Held / Dispersed → State-Controlled]
-Risk tolerance [Capital Preservation → Speculative]
-Momentum [Contrarian (buy weakness) → Neutral → Trend-Following (buy strength)]
-Willingness to pay a premium [Retail → Institutional → Private equity → Strategic buyer]
-Analyst coverage [No Coverage → High Coverage]
-Industry consolidation [Fragmented → Concentrated]
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Question 1: When did Graham write the first edition of Security Analysis and how did the environment during which he was operating and writing influence his work?
Graham wrote the first edition of Security Analysis in 1934, right after the 1929 crash and the Great Depression, one of the worst economic downturns ever. That backdrop shaped his conservatism, focus on margin of safety, and temperament with forecasting. Investors at the time had just seen what overconfidence and speculation could do, so his writing was really about bringing discipline and realism back into investing.
I think it’s worth remembering that context, but also asking what stops us from repeating the same mistakes today. I can’t say when/whether another major crash will happen, but Murphy’s Law still applies: anything that can go wrong will go wrong. Graham’s environment may have been unique, but his mindset still feels relevant now.
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Question 2: What’s Graham’s investment philosophy? Why does he think that’s best?
I think Graham’s investment philosophy can be captured in the saying “a bird in the hand is worth two in the bush.” He’s intellectually honest about what can be reasonably known and trusted, and adjusts his framework accordingly. He’s also critical of both quantitative and qualitative analysis, recognizing the limits of each. Ultimately, his philosophy is about building a reasonable margin of safety and protecting against an uncertain world.
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Question 3: Which parts of his approach do you think you want to imitate? Which ones do you think you would rather not? Why? (we will revisit this at the end of the book)
When I first tried reading The Intelligent Investor a few years ago, I couldn’t make it through because it felt dated. Looking back, that probably reflected my own bias. I’ve only really experienced markets shaped by 2008, 2020, and 2022 and I didn’t pay close attention at the time.
I’ve learned a lot from Graham’s focus on the margin of safety and the discipline of thinking through downside. That framework has helped me size positions more thoughtfully and avoid getting swept up in optimism. I’ll be honest — I’m still growing into a genuine love for value investing, as I’ve leaned more toward growth-oriented ideas lately. I was a bit surprised to read Graham’s acceptance of certain forms of intelligent speculation as part of intrinsic value (p.111), but I actually find that useful. The rest of his teaching (that he’s more commonly known for) helps me consider “the other side of the bet” and understand risk.
I used to view valuation as a hard science, and I’d get frustrated feeling like I needed to perfect every model. Graham helped me realize how imperfect valuation truly is, and that realization has grounded my expectations. That said, since much of the market still uses tools like DCFs, I think it’s important to understand how others are pricing risk and opportunity — just with the perspective that precision in modeling alone isn’t edge. As Graham wrote, “a satisfactory statistical exhibit is a necessary though by no means a sufficient condition for a favorable decision by the analyst” (p. 88). This reminds me of investors I follow who’ve said that, over time, a majority of their effort has shifted toward qualitative work rather than modeling.
I also appreciate Graham’s point that the level of analysis should match the scale and purpose of the investment: “A buyer of a $1,000 bond would not deem it worth his while to make as thorough an analysis of an issue as would a large insurance company considering the purchase of a $500,000 block” (p. 81). That perspective helps me focus my effort. I know I can always go deeper into research — and that’s valuable — but it’s equally important to accept uncertainty and recognize when additional analysis has diminishing returns (no pun intended).
Finally, I like Graham’s view that “trend,” while often expressed quantitatively, is ultimately a qualitative factor: “we consider the trend as a qualitative factor in its practical implications, even though it may be stated in quantitative terms” (p. 86). That idea resonates with how I think about forecasts — something I try to keep in mind and balance against conviction.
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Question 4: What’s the difference between an investment and a speculation? Why did Graham choose the words that he did to define it, and what are the implications of his choices for investing?
An investment is based on study and standards while speculation is driven more by psychology. In Graham’s words, “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative” (p.106).
I find Graham’s word choice deliberate and layered. He uses “investment operation” rather than “asset,” which I initially would have chosen, because his definition is meant to apply broadly: to a single stock, a basket of securities, or even strategies like arbitrage or hedging.
What stands out to me is how Graham acknowledges the “indefiniteness” of terms like thorough analysis, safety of principal, and satisfactory return. On the surface, these words seem to provide clarity, but in reality they raise additional questions given how subjective they are and vary by the investor’s judgment, skill, and objectives. For example, one investor’s “thorough analysis” might not meet accepted professional standards; similarly, “satisfactory return” depends on what the investor finds acceptable, given their risk tolerance.
It pushes me to think about my own process: what counts as “thorough,” how I assess the likelihood of permanent capital loss, and what a “satisfactory” return means to me. His definition, while seemingly straightforward, actually raises more questions than it answers. And that’s the point—it forces investors to think critically about their assumptions, standards, and the tradeoffs between risk and reward.