Reading Graham's 'Security Analysis': First and Second Preface

by: Geoff Gannon

This book is intended for all those who have a serious interest in security values. It is not addressed to the complete novice, however, for it presupposes some acquaintance with the terminology and the simpler concepts of finance. The scope of the work is wider than its title may suggest. It deals not only with the methods of analyzing individual issues, but also with the establishment of general principles of selection and protection of security holdings. Hence much emphasis has been laid upon distinguishing the investment from the speculative approach, upon setting up sound and workable tests of safety, and upon an understanding of the rights and true interests of investors in senior securities and owners of common stocks.

(Preface to the First Edition)

And so Graham begins his magnum opus – or at least the preface to its first edition. Here we have a full introduction to the entire work – much fuller than a first-time reader might suspect. First, we are introduced to Graham’s ideal reader (“…have a serious interest in security values…not…a complete novice…some acquaintance with the terminology and the simpler concepts of finance.”) Next, the scope of the work is delimited. We are told that it shall encompass not only analysis proper, but the related issues of “selection” and “protection”. Finally, Graham informs us of his own special concerns: the distinction between investment and speculation, practical methods, and shareholder rights.

This last – and in 1940, most peculiar – concern of Graham’s will be explored in two ways: 1) through an exhaustive – and for some readers exhausting – discussion of senior securities (e.g., corporate debt) and 2) through glimpses of shareholder activism.

Graham was an early pioneer of shareholder activism. For more information, see On the Northern Pipeline Contest.

The two prefaces also introduce us to Graham’s idiosyncratic – and to some readers intimidating – writing style. I’ll take up this subject in my next commentary post. For now, just read over the two prefaces (or the passage above) and note how the writing is neither confused nor convoluted. It may be stylistically unfamiliar, but it is very easy to follow. Graham’s sentences are not especially long and they are syntactically streamlined for the modern American reader. Words and clauses appear exactly where you would expect them to appear to perform their standard functions.

Therefore, you’re unlikely to get lost in one of Graham’s sentences. However, you may get lost in one of his paragraphs.

As a general rule, you should not back-track when reading Graham, because his prose is strung together more logically than most people’s. If you don’t think you understand something perfectly, just keep reading. However, if you find you’re truly lost, go back to the first sentence in the paragraph. Even back up another entire paragraph if you must, but don’t try to back-track within a paragraph, because Graham’s paragraphs are threaded together with a logical strand that’s hard to pick up without a good reference point.

Again, my best advice is to keep reading without ever stopping, back-tracking, etc. The best way to read Graham (and probably the best way to read anyone) is to read entire sections straight through and then re-read them if necessary, but never stop and hack them up just to make yourself more confident in your comprehension.

The next commentary post will discuss Graham’s writing style in greater depth. Next Monday’s post will cover the Introduction (pp. 1 – 17). So, please read that for Monday.

Now, who has questions or comments about this first commentary post or either preface?