Below are my reflections and answers to the discussion questions posted at Modern Graham for chapter 11 – Security Analysis for the Lay Investor: General Approach – of the Intelligent Investor written by Benjamin Graham.
1. What quote from this chapter do you think best summarizes the point Graham is making?
“The security analyst deals with the past, the present, and the future of any given security issue. He describes the business; he summarizes its operating results and financial position; he sets forth its strong and weak points, its possibilities and risks; he estimates its future earning power under various assumptions, or as a “best guess.” He makes elaborate comparisons of various companies, or of the same company at various times. Finally, he expresses an opinion as to the safety of the issue, if it is a bond or investment grade preferred stock, or as to its attractiveness as a purchase, if it is a common stock.”
2. If you invest directly in bonds, which factors provided by Graham in this chapter do you currently use?
Do not currently invest in bonds.
3. Graham provides some commentary on analyzing management performance (though he puts more depth into the topic in a later chapter). How do you think this compares to how investors view management today?
I think Graham’s analysis of management still holds up as pretty reasonable and today there still seems like “…a great deal is constantly said on this subject, but little that is really helpful.”
4. What did you think of the chapter overall?
I enjoyed the chapter, especially the part about factors affecting the capitalization rate:
- General long-term prospects
- Financial strength and capital structure
- Dividend record
- Current dividend rate
Also, the part about capitalization rates for growth stocks and the formula for valuing growth stocks, is as Graham writes “… a foreshortened and quite simple formula for the valuation of growth stocks.”
Value = Current (Normal) Earnings × (8.5 plus twice the expected annual growth rate)
“The growth figure should be that expected over the next seven to ten years.”