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Excerpted from "A Modern Approach to Graham and Dodd Investing," John Wiley & Sons, copyright 2004. All rights reserved.

Passage 1  (From the Preface)"

"As a child growing up in the 1960s, I always wondered what the celebrated 'Roaring' 1920s were like. This was said to be a wild and crazy time that most adults remembered fondly, like a favorite uncle, yet the end of the decade had left a bad taste in everyone's mouth, as if that uncle had died a violent death before his time. How could such good times end so badly?

The 'bad' 1930s immediately following were a distant time in the past to me, yet well within the memory of many adults I knew (other than my parents, who as late 1940s immigrants, did not have the American experience of the 1930s). In contrast to the 1920s, the 1930s were a time of economic hardship, a step backward in the unfolding of the American dream, This was probably  the least favorite decade for most people old enough to remember it. Could such times happen again despite the increasing sophistication of government policy?...

These stresses, in turn, followed logically from the 1920s like 1990s [and early 2000s]. 'Signs of the times' included social phenomena such as 'instant' young adult multimillionaires, and fantasy 'reality' programs on national TV. More substantively, these times were marked by a blind and naive public faith in the financial markets, an orgy of industrial and economic speculation, greedy CEOs, and a Wall St. that abandoned its fiduciary responsibilities in favor of its commercial interests. Two investors, Benjamim Graham and David Dod yanked the investment world back to reality with their 1934 book Security Analysis."

Passage 2 (From the end of Chapter 2):

"So what is the difference between a value investor and a growth investor? A growth investor wants the stocks of companies with the highest growth rates, at least 15 per cent, and hopefully more than 20 per cent, and is willing to pay large premiums of price-to-book values (or high P/E ratios) in order to obtain such growth. Such a stock is characterized by a high, or fast-growing ROE (return on equity). This investor has a high degree of confidence in one's ability to identify such growth stocks, and avoid the issues of those companies whose earnings will be disappointing...

A value investor, conversely, distrusts too much growth on the theory that all companies cannot be above average. Instead, the value investor looks for companies with characteristics of broadly average profitability, and then attempts to capitalize on them by buying some of their issues at a bargain price...

The debate between value and growth is largely a debate between views of the world. The growth investor believes, implicitly if not explicitly, that earnings will go up in a smooth pattern, and that likewise, stock prices will fluctuate in a relatively narrow range around a perceived central value. Under such assumptions,  the best thing to do is to jump on the bandwagon and ride it to riches...

The value investor believes that earnings progress will take place in a disorderly, not smooth fashion, and that this will  be fully reflected in stock price volatility. The value investor is comfortable waiting for the right (low) stock price, based on a belief about price volatility, which can be observed, rather than future earnings growth, which can only be guessed at."

Passage 3 (From Chapter 8):

"It is probable that a dividend stream lends value to the stock independently of assets and earnings. In fact, dividends are so important that some of our earlier evaluation rules can be expanded to incorporate the effects of the annual disbursement of dividends. Thus:

Expanding the PEG ratio, which is the P/E ratio divided by the growth rate, some investors and others derived the PEGY ratiop, which is the P/E ratio divided by the sum of the P/E ratio and dividend yield, Y. That is PEGY= (P/E)/(G+Y).

We consider this a reasonable growth formula for earnings valuation because the addition of the dividend term in the denominator reduces the fraction, thereby making the stock cheaper at any given price. We justify this by rationalizing that it is only retained earnings, not those paid out in the form of dividends, that support growth. In the case of no dividend, the PEGY ratio simply reduces to the PEG ratio.

For asset value, a stock is considered to be of investment value if it could be obtained for book value plus 10 times the annual dividend or less. Thus,

Investment value (price)=Book value +10*dividends."

Passage 4 (From Chapter 18 and 19):

"A stock can be analyzed as being composed of a fixed income vehicle and a call option. When [Pimco's Bill] Gross estimated the "bond value of the Dow as 5000 [in 2002], he was saying that there was a "call option" (based on a Dow of just under 10,000). Our 'investment value' calculations are even more conservative than Gross' because they assume a risk premium for corporate bonds over Treasuries...

A Graham and Dodd investor would not believe that the world is in anything like a new era, except for a few minor details. Instead, the world is probably following a pattern that has been displayed many times before. It is manifested in a willingness to ignore time-tested principles in the name of 'progress.' This pattern has always led to massive misery in the past, and can hardly avoid doing so this time around. A French proverb sums it up best, 'Plus ca change, plus c'est la meme chose.' Or in Ben Graham's English version, 'The more things change, the more it's the same thing.'

The fundamental issue of our time is world credit creation, or more exactly, the problems that are likely to accompany the collapse of the credit pyramid at home and abroad...Most of the world, the United States not excepted, after having ingested economic steroids, is about to feel its aftereffects...

[As a result] The world is headed for a situation similar to the last time that the Graham and Dodd methodology was most effective, a period characterized by a series of stock market crashes, followed by a global depression."

Disclosure: Long authorship of "A Modern Approach to Graham and Dodd Investing"