Security Analysis - The Classic 1934 Edition (Hard Cover) by Benjamin Graham and David Dodd

At first glance, Security Analysis - one shy of 700 single spaced pages without a single picture other than a smiling Mr. Graham on the cover - appears not for the faint of heart. Inside, however, lies the single greatest book on investing ever written, which remains remarkably readable, insightful and timely nearly seven decades after its first edition. Graham, a successful investor in his own right, was also a highly effective and influential teacher (one of his students named Warren Buffett has done quite well), and his methods and language are refreshingly clear and (believe it or not) concise. The length of the book is due to the breadth of its content, not to any wordiness or unnecessary diversions.

Graham (and his collaborator Dodd) meticulously and methodically builds a framework for the analysis and decision-making necessary for truly good investment decisions. Step-by-step, they lay out a general approach and philosophy for investment (as quite distinct from mere speculation) followed by the systematic analysis of fixed income, convertible and equity securities (i.e., bonds, converts/preferreds, stocks); a detailed discussion of financial statements; and a description of certain underlying differences between the intrinsic value of a business and its fluctuating stock price. As a result, the reader emerges with a solid philosophy and approach for his or her own investments and the analytical tools to make actual buying and selling decisions.

This book is neither a get-rich-quick scheme nor an empty academic exercise. Graham does not set out to justify or theorize about the market. Instead, he sets out to counsel the student on the profitable investment in individual securities. Security Analysis contains dozens of case studies and lessons that are just as relevant today as in the post-1929 aftermath, including particularly misleading technical analyses, dangerous justifications for the valuations placed on hot new companies and the dilutive effects of stock options. As other reviewers have noted, Graham has been a towering figure in Finance, influencing Warren Buffett and countless other successful investors, and yet the lessons contained in this book are repeatedly ignored by far greater numbers of individuals and professional investors. The methodologies and rationale for justifying dot-com and telecom valuations in recent years, for example, are strikingly similar to the new stock issues Wall Street marketed (and people bought) just as eagerly in the late 1920's.

The book does show its age in some respects. While the principles underlying Security Analysis are completely sound today, there have been important changes in the market as well, such as the pervasive use of stock options as compensation, the unprecedented access to information (useful or otherwise) enabled by the Web, the heightened awareness around corporate governance issues (and the resulting influence of large institutional shareholders, such as pension funds) and the spectacular growth in mergers and acquisitions, which has at the very least added layers of accounting complexity. In addition, Graham relies perhaps too heavily on seeking out unpopular bargain issues based on asset value. In today's environment, and partly as a result of accounting limitations, companies are driven as much by knowledge intensity as by asset intensity. A strict Graham approach may preclude considering promising companies whose value lies primarily in intangibles not captured on the balance sheet, such as in the form of brands (Coca Cola), distribution process (Dell) or market position (Microsoft).