Benjamin Graham: No longer dependable measurement

Unfortunately in this kind of work, where you are trying to determine relationships based upon past behavior, the almost invariable experience is that by the time you have had a long enough period to give you sufficient confidence in your form of measurement, just then new conditions supersede and the measurement is no longer dependable for the future.”

–Benjamin Graham.

Graham & Dodd: Standards of safety

“In 1928 and 1929 there occurred a wholesale and disastrous relaxation of the standards of safety previously observed by the reputable houses of issue. This was shown in the sale of many new offerings of inferior grade, aided in part by questionable methods of presenting the facts to the public. The general collapse in values affected these unsound and unseasoned issues with particular severity, so that the losses suffered by investors in many of these flotations have been little short of appalling.” –Benjamin Graham and David Dodd.

Graham & Dodd: Indicated earning power

“For what the investor chiefly wants to learn from an annual report is the indicated earning power under the given set of conditions, i.e., what the company might be expected to earn year after year if the business conditions prevailing during the period were to continue unchanged.”

—Benjamin Graham and David Dodd (Security Analysis: Sixth Edition). 

Graham and Dodd: Not the immutable truth

“It is necessary to caution the analyst against overconfidence in the practical utility of his findings. It is always good to know the truth, but it may not always be wise to act upon it, particularly in Wall Street. And it must always be remembered that the truth that the analyst uncovers is first of all not the whole truth and, secondly, not the immutable truth. The result of his study is only a more nearly correct version of the past. His information may have lost its relevance by the time he acquires it, or in any event by the time the market place is finally ready to respond to it.”

—Benjamin Graham and David Dodd (Security Analysis: Sixth Edition). 

Benjamin Graham: Pursue without any reference 

“Study the past record of the stock market, study your own capabilities, and find out whether you can identify an approach to investment you feel would be satisfactory in your own case. And if you have done that, pursue that without any reference to what other people do or think or say.”

—Benjamin Graham. 

Graham & Dodd: Two dangers

“The cardinal defect of instability may not be regarded, therefore, as menacing the long-range development of common stocks as a whole. It does indeed exert a powerful temporary effect upon all business through the variations of the economic cycle, and it has permanently adverse effects upon individual enterprises and single industries. But of these two dangers, the latter may be offset in part by careful selection and chiefly by wide diversification; the former may be guarded against by unvarying insistence upon the reasonableness of the price paid for each purchase.”

—Benjamin Graham & David Dodd, Security Analysis. 

Graham and Dodd: Desirability of common stock

“The notion that the desirability of a common stock was entirely independent of its price seems incredibly absurd. Yet the new-era theory [of 1927-1929] led directly to this thesis. If a public-utility stock was selling at 35 times its maximum recorded earnings, instead of 10 times its average earnings, which was the preboom standard, the conclusion to be drawn was not that the stock was now too high but merely that the standard of value had been raised. Instead of judging the market price by established standards of value, the new era based its standards of value upon the market price. Hence all upper limits disappeared, not only upon the price at which a stock could sell but even upon the price at which it would deserve to sell. This fantastic reasoning actually led to the purchase at $100 per share of common stocks earning $2.50 per share. The identical reasoning would support the purchase of these same shares at $200, at $1,000, or at any conceivable price.
An alluring corollary of this principle was that making money in the stock market was now the easiest thing in the world. It was only necessary to buy ‘good’ stocks, regardless of price, and then to let nature take her upward course. The results of such a doctrine could not fail to be tragic.”
–Benjamin Graham & David Dodd, Security Analysis. 

Benjamin Graham: Measurement no longer dependable 

“Unfortunately in this kind of work, where you are trying to determine relationships based upon past behavior, the almost invariable experience is that by the time you have had a long enough period to give you sufficient confidence in your form of measurement, just then new conditions supersede and the measurement is no longer dependable for the future.”

—Benjamin Graham. 

Graham & Dodd: Not an easy matter

“It may seem a comparatively easy matter to determine that one enterprise is more promising than another. But it is by no means so easy to establish that one common stock at a given price is clearly preferable to another stock at its current price.” – Benjamin Graham and David Dodd (Security Analysis: Sixth Edition).

Benjamin Graham: Prosperity and safety

“Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of good business conditions. The purchasers view the good current earnings as equivalent to ‘earning power’ and assume that prosperity is equivalent to safety.” —Benjamin Graham.

Benjamin Graham: Past behaviour

“Unfortunately in this kind of work, where you are trying to determine relationships based upon past behavior, the almost invariable experience is that by the time you have had a long enough period to give you sufficient confidence in your form of measurement, just then new conditions supersede and the measurement is no longer dependable for the future.”

—Benjamin Graham. 

Benjamin Graham: Good hard look from time to time

“Most businesses change in character and quality over the years, sometimes for the better, perhaps more often for the worse. The investor need not watch his companies’ performance like a hawk; but he should give it a good, hard look from time to time.” – Benjamin Graham.

Benjamin Graham: Mathematics

Benjamin Graham

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“In the stock market the more elaborate and abstruse the mathematics the more uncertain and speculative are the conclusions we draw there from.” Benjamin Graham

Benjamin Graham: Prejudices

Benjamin Graham

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“With every new wave of optimism or pessimism, we are ready to abandon history and time-tested principles, but we cling tenaciously and unquestioningly to our prejudices.” Benjamin Graham.

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