Sunday, June 20, 2004

Security Analysis

For those wannabe Warren Buffetts who aren't deterred by my previous post, I'd recommend reading one other book if before all others: Benjamin Graham and David Dodd's Security Analysis: (1940 Edition). Although the most current version of the book is actually the 5th Edition which was published in 1988, I'd still recommend this one before it, especially to those without a strong background in finance.

The names of the companies analyzed may sound quaint and old-fashioned to modern ears, the analytic techniques employed in the book remain at the core of financial practice today, and this older edition is refreshingly free of the modern jargon that tends to obscure the basic concepts at issue in more recent treatments. Does a business earn sufficient income to cover its interest payments several times over? What are the maturities of its outstanding debts? Does the cash flow of the firm support or undermine the assertions of robust growth seen on the income statement? Are there promises of equity grants hidden deep within the financial statements that threaten to dilute the earnings of common stockholders to meaninglessness? Is the company paying dividends, and if not, why not? These sorts of questions have no time limit on their relevance or importance, and here is a book that teaches one how to go about answering them oneself.

I still say stock-picking is a bad idea for most people, but if one is determined to do so, there are better and worse ways of going about it; learning from the mentor of Warren Buffett is far from being the worst road to follow.