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Rupert Hargreaves
Rupert Hargreaves
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Some of the Best Lessons From Graham's Lectures

Lecture notes from the godfather of value investing

August 11, 2017

Notes of Benjamin Graham’s lectures between September 1946 and February 1947 at the New York Institute of Finance.

The series of lectures was titled "Current Problems in Security Analysis," and it gives a great insight into Graham’s process and investing mentality.

On the influence of the market on analysts:

“Such sticking to the facts alone might be very salutary; for the judgment of security analysts on securities is so much influenced by market conditions down here that most of us are not able, I fear, to express valuation judgments as good analysts. We find ourselves almost always acting as a mixture of market experts and security experts. I had hoped that there would be some improvement in that situation over the years, but I must confess that I haven't seen a great deal of it.”

On trying to be different from the rest of the crowd:

“You are not going to get good results in security analysis by doing the simple, obvious thing of picking out the companies that apparently have good prospects whether it be the automobile industry or the building industry or any such combination of companies which almost everybody can tell you are going to enjoy good business for a number of years to come. That method is just too simple and too obvious and the main fact about it is that it does not work well. The method of selectivity which I believe does work well is one that is based on demonstrated value differentials representing the application of security analysis techniques which have been well established and well tested. These techniques frequently yield indications that a security is undervalued, or at least that it is definitely more attractive than other securities may be, with which it is compared.”

On the madness of IPOs:

“I want to pass on finally to the most vulnerable position of the securities market in the recent rise, and that is the area of new common stock offerings. The aggregate amount of these offerings has not been very large in hundreds of millions of dollars because the typical company involved was comparatively small. But I think the effect of these offerings upon the position of people in Wall Street was quite significant because all of these offerings were bought by people who, I am quite sure, didn't know what they were doing and were thus subject to very sudden changes of heart and attitude with regard to their investments.”

On comparing the prospects of railroads in different states:

“The question that was asked about the general future prospects of one territory as compared with another is certainly very relevant to analysis of railroad securities. Yet I must say that I have found in my own work that you can count very much more dependably upon differences of value which can be established from the earnings and expense picture than you can on those which seem to be inherent in the possibilities of the different territories.”

On why it's important to calculate future long-term earnings power, not just earnings for the next year:

“When you are talking about future earning power, you should mean the average expectable earnings over some period in the future. I think most of us ought to think pretty much alike as to the period that we would talk about. My suggestion is that it would be a five-year period, and that when we speak of future earning power of a company, we should have in mind ordinarily the average earnings over the next five years. As far as the use of earning power or earning prospects in Wall Street is concerned, let me point out that in most of the current thinking earning power is not considered along the lines of an average over a period of time of medium duration. It is either considered as the earnings that are being realized just now, or those right around the corner, such as the next 12 months.”

“For if you are going to project Dow's earnings practically to the year 2000 and determine values that way, then of course you can justify any price that you wish to. In fact, what actually happens is that you take the price first, which happens to be not only the present market but some higher price if you are bullish on the stock, and then you determine a multiplier which will justify that price. That procedure is the exact opposite of what a good security analyst should do.”

About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. Prior to his investing and writing career, Rupert was as a proprietary currency trader. Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

Visit Rupert Hargreaves's Website


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