Tuesday, September 19, 2006

Graham and Dodd 2nd Ed. Part III

The following ideas were converted by Graham into analytical method for defensive investors in his book 'Intelligent Investor.' I modified some of the criteria by introducing explicit growth criterion and integrating a current analytical idea of accepting PEG ratio of one as attactive for investment. That's how Graham-Rao method of Analysis for Buy and Hold Investment took shape.

Page 348

… the prewar relationship between analysis and investment on the one hand and price changes and speculation on the other may be set forth as follows: Investment in common stocks was confined to those showing stable dividends and fairly stable earnings; and such issues in turn were expected to maintain a fairly stable market level.

Page 349

The function of analysis was primarily to search for elements of weakness in the picture. If the earnings were not properly stated; if the balance sheet revealed a poor current position, or the funded debt was growing too rapidly; if the physical plant was not properly maintained; if dangerous new competition was threatening, of it the company was losing ground in the industry; if the management was deteriorating or was likely to change for the worse; if there was reason to fear for the future of the industry as a whole-any of these defects or some other one might be sufficient to condemn the issue form the standpoint of the cautious investor.

On the positive side, analysis was concerned with finding those issues which met all the requirements of investment and in addition offered the best chance of future enhancement.

To a lesser extent, the analyst sought to look into the future and to select the industries or the individual companies that were likely to show the most rapid growth.

Narayana Rao

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