Security analysis

Security analysis is the analysis of tradeable financial instruments called securities. These can be classified into debt securities, equities, or some hybrid of the two. More broadly, futures contracts and tradeable credit derivatives are sometimes included. Security analysis is typically divided into fundamental analysis, which relies upon the examination of fundamental business factors such as financial statements, and technical analysis, which focuses upon price trends and momentum. Quantitative analysis may use indicators from both areas.

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References

Security Analysis (book)

Security Analysis is a book written by professors Benjamin Graham and David Dodd of Columbia Business School, which laid the intellectual foundation for what would later be called value investing.

Overview

The work was first published in 1934, following unprecedented losses on Wall Street. In summing up lessons learned, Graham and Dodd scolded Wall Street for its focus on a company's reported earnings per share, and were particularly harsh on the favored "earnings trends." They encouraged investors to take an entirely different approach by gauging the rough value of the operating business that lay behind the security. Graham and Dodd enumerated multiple actual examples of the market's tendency to irrationally under-value certain out-of-favor securities. They saw this tendency as an opportunity for the savvy.

Current Use

The book represents the genesis of financial analysis and corporate finance. However, by the 1970s, Graham stopped advocating a careful use of the techniques described in his text for security analysts in selecting individual stock investments, citing that "in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost. To that very limited extent I'm on the side of the "efficient market" school of thought now generally accepted by the professors." Graham stated that the average manager of institutional funds could not obtain better results than stock market indexes, since "that would mean that the stock market experts as a whole could beat themselves — a logical contradiction". Regarding portfolio formation, Graham suggested that investors use "a highly simplified" approach that applies one or two criteria to security prices "to assure that full value is present", relying on the portfolio as a whole rather than on individual securities.