[2025–2026] Week 7: Benjamin Graham’s Security Analysis, Part 7

Reading assignment and questions for week 7 of the Value Investing Seminar

(Note: If you are just joining the seminar, please start by reading the Introduction)

When I was just starting out as an investor, 25 years ago, I used to think that if a stock traded below book value it was probably a bargain. How things have changed.

The reality is that even back in Benjamin Graham’s days, a stock trading below book value was an invitation to do further work, not a sure-fire sign of an undervalued security. After all, remember that book value is just the historical amount of equity capital that went into the business. It tells you little about what that business is now worth under its current competitive reality.

Investors who have only come across Graham’s work superficially typically know him for his “net-nets.” Hopefully if you have read Parts 1 through 5 and answered the questions in this seminar, you know by now that there is a lot more to Graham than that.

However, even Graham’s “net-nets” are frequently misunderstood. People want to make them into a mechanical, formulaic calculation that is black and white. That is not the case. Reality is more complicated than that.

When you look at Graham’s suggested table for calculating liquidation value below, did you understand a) why these balance sheet items need a discount b) why the discount is increasing as you go down the table and c) why the range is getting wider?

Source: Security Analysis, Benjamin Graham, 6^th Ed, Pg. 560

Pause for a minute and try to answer those questions.

If you had trouble, consider different business types that might be undergoing a liquidation. For example, what would demand a bigger haircut: the inventory of a teenage apparel retailer that ran into trouble, or a seller of gold coins?

Or if you are considering the discount applicable to Property, Plant & Equipment, think about whether a greater discount would need to be applied to PP&E that has many alternative uses as opposed to highly specialized equipment?

Even though this is what Graham is most known for, and most investors treat this as a purely quantitative calculation, I hope that by now you appreciate how much qualitative judgement is still involved. Never let formulas replace a fundamental understanding of the business, whether you are following Graham’s approach or a completely different one.

Regarding Question 1 John wrote: “Ideally, book value anchors valuation in fact, not forecast. It measures the tangible capital behind a share and (should) offer a margin of safety when prices fall below that base. However, by the time you see a book value, it’s already old and dated - it captures the past, not earning power. A business is worth what its assets can produce in the future, not just what they cost in the past. At best, book value protects the investor by giving them a valuation floor, but it rarely tells the whole story”

Regarding Question 2 Navin wrote “Graham emphasizes that even if book value is often not a determining factor, it deserves “at least a fleeting glance” before buying or selling. This aligns with the margin of safety principle: assets provide a cushion against downside risk.

Today, it’s appearing less central but still valuable as a reality check in asset-heavy or distressed contexts.”

Regarding Question 3 PatrickL wrote: “Graham’s liquidation process is basically a very conservative mark-to-reality exercise. He takes the balance sheet and applies heavy haircuts to most asset categories. Cash stays at full value. Receivables get discounted. Inventory is marked down a lot. Other current assets get cut in half. Fixed assets are marked way down because they usually don’t sell anywhere close to book value in a forced situation. Intangibles are left out. Then he subtracts all liabilities. The goal is simply to make sure the investor is protected even if things go badly.”

Regarding Question 5 James wrote: “Many, many, many:

1) liquidation estimate of value too high: sometimes things are sold for a song, far lower than expected, or seems reasonable: even assets that are very tangible, like property, can realise far less than expected.

2) It can take a very long time to liquidate a complex company. LCTM which went bust in 1998 took decades to liquidate, and I once received a check from a supplier who had gone bust nearly 30 years previously, and had a land asset that was eventually sold.

3) Dilution, capital raises, or sale of the whole for very little.

4) Expenses of liquidation can eat up the margin of safety. Legal fees, liquidators fees, surveyors fees, banking fees, and the listing fees, are all substantial, and accumulate over the often protracted process.”

Regarding Question 6 J. Rupert wrote: “Alignment of interest is uber important because their actions and recommendations directly influence the chance of recovery. Will management address inefficient or overly aggressive use of assets that may have increased earnings? Will they consider new ownership or mergers to optimize asset utilization? If all else fails, would they accept reality and liquidate, prioritizing the financial well-being of debt and equity holders, even at the loss of their own jobs? If there is trust in the management to make these potentially unpopular decisions, they may not be depended on to assist in the turnaround.”

Week 7 assignment is to read Part 7 of Security Analysis and answer the following questions:

Question 1: How does Graham suggest we approach comparing companies in the same field?

Question 2: What are some limitations/pitfalls of such comparisons?

Question 3: How does Graham suggest we go about uncovering investment opportunities? How would you adapt his approach to the current environment?

Question 4: Where is Graham’s approach located on the different “dimensions” of an investment style? Try to find as many dimensions as you can and think about where Graham is on each. Use a scale of 1 to 10 and indicate what each extreme means for each dimension. Then think about where you would like to be on each (and why). If you need inspiration for dimensions, read this article.

Question 5: What is your overall assessment of Graham’s investment approach? Which aspects of it would you like to incorporate into your own? What changes do you want to make? Why?

Question 6: Find one security of any kind that you think that Graham would conclude currently has a large margin of safety based on his approach outlined in Security Analysis. Please provide a brief qualitative and quantitative analysis supporting your view that Graham would be proud of.

Note: Our next reading will be Philip Fisher’s Common Stocks and Uncommon Profits.

Now it’s your turn:

1. Submit your answers in the comments below this article with all your answers in a single comment. I will engage with some of the answers each week and highlight some of the ones I find most insightful in next week’s seminar assignment article.

2. Engage with the answers of some of your fellow seminar members in the comments below. Remember – the goal is to learn together. Be kind, be respectful and try to add to our learning as a community.

3. Feel free to ask any questions about the reading in your comment.

Until next week,

Gary

About the author

Gary Mishuris, CFA is the Managing Partner and Chief Investment Officer of Silver Ring Value Partners, an investment firm that seeks to apply its intrinsic value approach to safely compound capital over the long-term. He also teaches the Value Investing Seminar at the F.W. Olin Graduate School of Business.