Reading Ben Graham's 'Security Analysis': Care to Join Me?

by: Geoff Gannon

Reading a thread over at GuruFocus reminded me of a common problem people have:

Have you actually read 'Security Analysis' cover-to-cover? Has anyone on here?

I have. Several editions, several times.

A lot of people haven’t. I don’t think it’s a matter of dedication, enthusiasm, intellectual curiosity, etc. I think it’s a matter of being or not being a certain kind of reader.

I’m sure many, many people read a lot more than I do. But, I’m also sure I’m well-suited to reading Security Analysis on my own, because:

1) I never stop reading a book I enjoy

2) I’m a binge reader

3) I routinely read books written by dead guys

If this doesn’t describe you and you’ve never read Security Analysis cover-to-cover and you’d really, really like to – I have an idea.

I’m willing to do a weekly post on Security Analysis, taking anyone who wants to go on the journey through every chapter of the book. I’ll give you my best commentary on the text, and I’ll answer any questions you have. In return, I ask that you get the book and read a chapter a week.

Is anyone up for this?

If you'd like to join me, this is the required text:

Security Analysis: The Classic 1940 Edition

If you've neither taken a financial accounting course nor read Graham before, you'll need this one as well:

The Interpretation of Financial Statements

• • •

To whet your appetite, here’s a previous comment I made about a passage in Security Analysis, in a post On Technical Analysis:

“…the influence of what we call analytical factors over the market price is both partial and indirect – partial, because it frequently competes with purely speculative factors which influence the price in the opposite direction; and indirect, because it acts through the intermediary of people’s sentiments and decisions. In other words, the market is not a weighing machine, on which the value of each issue is recorded by an exact and impersonal mechanism, in accordance with its specific qualities. Rather should we say that the market is a voting machine, whereon countless individuals register choices which are the product partly of reason and partly of emotion.”

I’ve seen a lot of people cite this quote, without bothering to notice what’s really being said. Graham had a very broad mind, much broader than say someone like Buffett. That’s both a blessing and a curse. At several points in Security Analysis (and to a lesser extent in his other works), Graham can not help but explore an interesting topic more deeply than is strictly necessary for his primary purpose. In this case, Graham could have said what many have since interpreted him as saying: in the short run, stock prices often get out of whack; in the long run, they are governed by the intrinsic value of the underlying business. Of course, Graham didn’t say that. Instead he chose to describe the stock market in a way that should have been of great interest to economists as well as investors.

Data affects prices indirectly. The market is a lot like a fun house mirror. The resulting reflection is caused in part by the original data, but that does not mean the reflection is an accurate representation of the original data. To take this metaphor a step further, the Efficient Market Hypothesis is based on the idea that the original image acts on the mirror to create the reflection. It does not recognize the unpleasant truth that one can interpret the same process in a very different way. One could say it is the mirror that acts on the original image to create the reflection. In fact, that is often how we interpret the process.