Graham gave up on security analysis at the end of his life

As likely many of you know, Benjamin Graham, shortly before his death, stated: “I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when [the bible of fundamental stock analysis, Graham and Dodd’s Security Analysis] was first published; but the situation has changed. I doubt whether such extensive efforts will generate sufficiently superior selections to justify their cost.” Many of us here on the board (including me) want to go into security analysis and portfolio management, and many within that group believe in analyzing specific companies and finding a handful that represent great opportunities. We lionize Warren Buffett and Bruce Berkowitz for their abilities, but we did the same for Bill Miller not so long ago too. If Graham himself saw little opportunity left in the stock market game (and this was back in the 60s, the field is only more crowded now), what makes others (and us) think that we can still beat the average? Has any famous investor ever addressed Graham’s quote?

as more people understand how the valuation works,the theory itself beomes an obstacle for success. This is why I see finance more of an innovative process. I think the adverse selection and moral hazard could work here too - if corporate finance function from industry understands how external analyst views valuation,the intention is to work out the financials somwhow to meet external analyst’s view or contemporary theory.

thats what happens when ur entire strategy is to only buy when price is below net asset value. and this dude grew up in an era where the top companies to value were like US steel and railroads. that value was 10x easier to figure out then a trial phase pharmaceutical who invests earnings into creating the ultimate boner pill. Companies were not as complex. and fundamental analysis sucks not because its harder but because most equity companies are like 90% crap. And the 10% good companies are either properly/over valued or undervalued for a long time. I’ve wasted to much time investing in strong companies that don’t advance because price has been trading between $16-11 for the last 5 years. Also most fundamentalists are big on the concept of averaging down which is just retarded these days.

dollar averaging seems pretty ridiculous to me.

nocareer Wrote: ------------------------------------------------------- > dollar averaging seems pretty ridiculous to me. this comment seems pretty ridiculous to me. dollar cost averaging makes sense if a security’s value is below your conception of IV and your base is above

Just a few years earlier, Buffett had shut down his partnerships b/c he didn’t see opportunities. Of course, right around this period is when Buffett said that he was like a kid in a candy store.

Yeah, but doesn’t Buffett do something a little different than “securities analysis”? I mean, he analyzes companies, their operations, buys them and reorganizes management and strategy. It’s not like Joe Schmo can see opportunity in a company and change management or add an advertising campaign.

From all that I’ve read, Buffett does very little to interfere in the companies that he purchases. He’s the opposite of private equity investors in that sense.

Yeah, but he purchases the company and manages them. I’d say that is far from traditional securities analysis.

kkent Wrote: ------------------------------------------------------- > Yeah, but he purchases the company and manages > them. I’d say that is far from traditional > securities analysis. Yeah, it seems to be a finely tuned blend of successful executive management style. If he wasn’t an investor at all and only was an executive pumping up companies and jumping to the next, he would still be doing pretty well. As he knows the financials of the companies he purchases in addition to giving them some direction, it gives him a very nice seat in negotiations for getting a piece of the pie that is worth his time.

In the simplest form - the capital markets are a form of educated gambling where you take “educated guesses” and gamble money. Fundamental analysis is merely a tool in your educated guess.

…which is why the truly informed analyst will want to be a knowledgable technician as well. You can only juggle knives for so long.

I think you have to understand Graham’s style to understand what he meant. He isn’t saying securities analysis is dead, just that his particular style of buying net nets problably won’t work. Buffet doesn’t do the cigar butt method nor do i.

A descent portion of Berkshire Hathaway’s portfolio are Company’s in which they do not own 100% of the Company. An example would be Coca Cola. That said, a large portion of their portflio derives from Geico’s investment portfolio, which gets wrapped up to Berkshire.

Dollar Averaging is basically rebalancing. I wouldn’t do this for anything that isn’t mean reverting- i.e. It’s be OK for asset classes but not something wise to do for Citi or AIG. See how many active manages has consistently beat their appropiate benchmarks for 10 years- and the std error or 10 years of performance for US Large cap stocks is about 5%, even if you can beat your benchmark for 10 yrs that isn’t a long enough time period to be consider significant. Security analysis is dead, it adds no value. What sucess stock pickers do have is noise. Look at the new inflows Vanguard and DFA have had.

It’s not news that something that worked 40 years ago doesn’t work anymore. The market’s not perfectly efficient, but it’s not this inefficient either.

Re passive management: Typical reaction at this point in a market cycle. Active management will recover. Why? Because there will be success stories that get press and investors respond to anecdotes. Once the greed god is reawakened, active managers will be getting inflows.

That is why Mr. Buffet quotes chapter 8 th of intelligent investor book . Investment market may evolve but many fundamentals may not change; Graham discussed emotional market swings in chapter 8. Market is there to serve you not dictate you. Media creates fear and greed; part of it is media contributors or commentators have vested interest on what they say. If they are long they speak bullish on their positions or vice versa. Buyer beware.

darkxfriend Wrote: ------------------------------------------------------- > From all that I’ve read, Buffett does very little > to interfere in the companies that he purchases. > He’s the opposite of private equity investors in > that sense. In his partnerships he was involved in take-overs and control situations.