Security Analysis Pt.

1 Presentation

Notes

Scope & Limitations of Security Analysis

Analysis is the study of available facts to draw conclusions based on established principles & sound
logic

• Established facts to draw from include previous 10-20 year earnings & consistent organic
growth both in the top and bottom line.

• Established principles and standards should include at a minimum 10 years of growth in terms
of return on equity (various accounting tricks such as taking on more debt to improve return on
equity)

Intrinsic Value is value which is justified by the facts

• Notice the recurring theme (we only want to deal with the facts) not estimates, projections or
opinions. If you objectively analyze a business and block out all outside noise and personal
preference then you much more likely to reach concrete conclusions as to its true value and
future prospects.
Quantitative & Qualitative Factors of Analysis

• Firstly, there are 4 basic factors to consider in selecting a security for investment purposes:

– Security: Analyze the character of the enterprise both from a quantitative & qualitative
perspective.

– Price: Every security is a speculation at one price and an investment at another.

– Time: Again, a security may be more or less attractive at two different points in time.

– Person: An investment may be more or less attractive based on one's personal circumstances
(Although some factors apply to everyone, such as purchasing securities that are intrinsicly
undervalued in strong, stable enterprises)

• Both Quantitative & Qualitative analysis must be applied to a security before it can be
considered for investment purposes.

Distinctions Between Investment & Speculation

• The forthcoming slide will debunk this very early premonition of what constitutes an
investment operation

• "Returns are not inherent to any asset class; they result from the fundamentals of the
underlying businesses and the price paid by investors for the related securities" - Benjamin
Graham

• In this respect modern portfolio management comes up short (as it does in many other ways)
The average actively managed portfolio looks to produce immediate gains to keep investors
happy, in this regard they buy and sell securities merely based on stock price fluctuations rather
than the true underlying value of the enterprise they are flipping.
 • As you can see in this chart (not as clear as it could be) over the long term (5-10 years) a buy
and hold (value based strategy) would have returned over 100% more than a buy and sell
(growth based strategy) Immediate gratification (frequent buying and selling) equates to
perilous long term results.

Proposed Distinctions Between Investment & Speculation

• To sum up what you see I will say that:

“An investment operation is one that can be justified on both qualitative and quantitative
grounds.”

• One cannot reasonable expect to receive an adequate return on their invested capital if they
have not objectively concluded that the enterprise is stable and is expected to stay so for the
foreseeable future, and if management does not have a high degree of integrity and character.

Conclusion

• Key word in that quote is promise as in finance, like in life there are no guarantees.

• Any thoughts, comments, what do and what don't you agree with, what has been your
experiences?