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The Road To Mastery: What Is Investment Analysis?

Date: Tuesday, April 3, 2018 7:09 PM EDT

“The public buys issues which are sold to it, and the sales effort is put forward to benefit the seller and not the buyer.”

Benjamin Grahamand David Dodd (Security Analysis 1934)


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If admitting future events to be uncertain, could the favourable and unfavourable developments be counted on to cancel out against each other, more or less, so that the initial advantage afforded by sound analysis will carry through into an eventual average profit?


Article Key Ideas

  • Investment Vs. Speculation aka Technical Analysis
  • Critical Function of Stock Analysis
  • Qualitative and Quantitative Factors involved in Investment Analysis


When Benjamin Graham and David Dodd released the first edition of Security Analysis in 1934, most analysts, working in Wall Street firms, were more interested in the prevailing trend of a stock price (in the form of stock price pattern) to determine whether it’s a good time to buy or sell a stock. (Source: Joe Carlen’s book – The Einstein of Money)

Whereas, Graham and Dodd were more interested in the true underlying value of the stocks and bonds, as determined by their own analysis. Analysis that involves analyzing the underlying business (the assets, liabilities, income, and expenses etc.)

Today, there is almost an endless amount of second-hand investment analysis available across the internet sphere, and as Charles Brandes has written in the 2004 edition of Value Investing Today, “Be wary of adopting others’ optimistic views on particular companies even if they are professional analysts.”

Brandes was originally referring mostly to Wall Street buy-side analysts, but it equally applies to stock promoters, like the Motley Fool, whose income relies upon the public believing they have a crystal ball telling them of the next 10 bagger stock. As Brandes continued, “analysts have, on average, predicted an earnings growth rate nearly three times the actual rate.”

Joe Carlen who is author of book The Einstein of Money, wrote the following, “An extensive Journal of Finance study published in 2003 (in the wake of various dot-com analyst coverage controversies) concluded that the brokerage houses that employ many of these allegedly independent professional analysts tend to prefer “relatively optimistic analysts presumably because they help promote stocks and hence generate investment banking business and trading commissions.” The Motley Fool was apparently caught up in this mess, promoting highly speculative tech stocks.

And Carlen further added, “However even in instances where analysts appear to be completely independent, it is likely that the publication or program that communicates their views relies on advertising dollars from brokerage firms and other entities that, in general terms would prefer that people buy as many securities as possible.”


Investment Vs Speculation

"Stocks are simply the conduit through which we own a company's assets. When we invest our capital into a company's stock, we enter into its particular business. [Hence] Analyzing a stock involves an analysis of the business."

Benjamin Graham and David Dodd


Graham and Dodd taught investors who read their book Security Analysis, that the most fundamental concept of investment in common stocks is to view buying common stocks as taking a share in a business.

Graham and Dodd wrote, “The typical common-stock investor was a businessman [before World War 1], and it seemed sensible to him to value any corporate enterprise in much the same manner as he would value his own business. This meant that he gave at least as much attention to the asset values behind the shares as he did to their earnings records.”

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