Benjamin Graham, Building a Profession: The Early Writings of the Father of Security Analysis: Classic Writings of the Father of Security Analysis (PROFESSIONAL FINANCE & INVESTM) - Hardcover

ZWEIG

Hardcover

ISBN 10: 007163326X ISBN 13: 9780071633260

Verlag: McGraw Hill, 2010

Inhaltsangabe

How One Man Created a Profession―and Entirely Transformed the World of Investing

“The small list of investment books that must grace the library of any serious investor―not to gather dust, but to be opened over and over again―just grew by one. This wonderful compilation of the wit and wisdom of Benjamin Graham is the new addition. Savor it. Learn from it. Treasure it.”
John C. Bogle, founder and former Chief Executive, The Vanguard Group

“If youth is measured by creativity and excitement about new ideas and a thirst for learning, then Ben Graham-in his early 80s-was the youngest guy in the room when two-dozen stellar investment managers met for three days to explain the inner workings of investment management.”
Charles D. Ellis, CFA, Bestselling Author of Winning the Loser's Game

“These writings, spanning over 30 years, help us understand even better the remarkable achievement of this visionary man and his lasting influence on the finance profession.”
Burton Malkiel, Princeton University, Bestselling Author of A Random Walk Down Wall Street

“Investing involves the intelligent triangulation between fundamentals, psychology, and prices. Benjamin Graham, Building a Profession . . . illustrates how this investment legend never stopped thinking about this multi-dimensional challenge.”
Seth Klarman, The Baupost Group

“Serious professionals in the investment business will delight in pouring over this and checking their own thoughts against those of the master.”
Jeffrey J. Diermeier, CFA, Diermeier Family Foundation, and former CFA Institute president and CEO

“This is a must-read for anyone interested in the history and development of our profession and the importance of critical investment thinking.”
Gary P. Brinson, CFA, GP Brinson Investments

“Some investors ('the happy few') know that Ben Graham's writings on financial analysis give them a leg up. So they will want to read this book, and other investors should.”
Jean-Marie Eveillard, First Eagle Funds

“The CFA Institute and Jason Zweig have performed an invaluable service to our profession in collecting these [writings] in one volume.”
William H. Miller, CFA, Legg Mason Funds Management

About the Book:

When Benjamin Graham began workingon Wall Street in 1914, the centerof American finance resembled a lawless frontier.The concept of regulatory laws was in itsinfancy, the SEC wouldn’t see the light of dayfor 20 years, and many firms hid assets andearnings from nosy outsiders.

And security analysts didn’t exist as weknow them. They were called “diagnosticians,”and they didn’t do much analyzing. These investorsprided themselves on going with the“feel” of the market, and most of them rarelylooked at a financial statement.

Appalled by the lack of research and quantification,Benjamin Graham set out to changeall this―and ended up creating the disciplineof modern security analysis.

A collection of rare writings by and interviewswith one of financial history’s most brilliantvisionaries, Benjamin Graham, Building aProfession presents Graham’s evolution of ideason security analysis spanning five decades.Articles include:

• “Should Security Analysts Have aProfessional Rating? The Affirmative Case”
  Financial Analysts Journal (1945)
• “Toward a Science of Security Analysis”
  Financial Analysts Journal (1952)
• “Inflated Treasuries and DeflatedStockholders: Are CorporationsMilking Their Owners?”
  Forbes (1932)
• “The Future of Financial Analysis”
  Financial Analysts Journal (1963)
• “Controlling versus OutsideStockholders”
  Virginia Law Weekly (1953)

These pages reveal the revolutionary ideas of aman who didn’t so much find his calling as hecreated it from scratch―and opened the doorfor entire generations of investors.

Über diesen Titel

Über die Autorin bzw. den Autor

Jason Zweig writes the “Intelligent Investor” column for The Wall Street Journal. He has been a senior writer at Money, mutual funds editor at Forbes, and guest columnist at Time and CNN.com. Zweig is the editor of the 2003 revised edition of Benjamin Graham’s book The Intelligent Investor and the author of Your Money and Your Brain (2007).
Rodney N. Sullivan , CFA, head of publications for CFA Institute, serves as editor of the Financial Analysts Journal and several other leading publications. He was director of research for Trigon Healthcare, Inc. (now Anthem Healthcare, Inc.) and a senior portfolio analyst for Aris Corporation.

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BENJAMIN GRAHAM BUILDING A PROFESSION

CLASSIC WRITINGS OF THE FATHER OF SECURITY ANALYSIS

The McGraw-Hill Companies, Inc.

Copyright © 2010 CFA Institute
All right reserved.
ISBN: 978-0-07-163326-0

Contents

Chapter One

Should Security Analysts Have a Professional Rating?

The Affirmative Case

INTRODUCTORY STATEMENT

In 1942, the Committee on Standards of the New York Society of Security Analysts proposed to the membership that a rating or professional title be established for security analysts. This rating was designated tentatively as "Qualified Security Analyst" or "Q.S.A." The proposed machinery included the following: A Board of Qualifiers was to be set up by the Society and cooperating agencies—e.g., the Association of Stock Exchange Firms, insurance companies, investment counsel, etc. The Board would confer the rating upon applicants who met designated standards, including those relating to:

a—Character

b—Education and experience

c—Passing of an examination

The latter test might be waived for suitable reasons. Application for the rating would be on a voluntary basis and would be motivated by the desire for prestige and practical advantage. Eventually, however, it might be expected that the Q.S.A. rating would become necessary for those doing the work of a senior security analyst having direct or indirect contact with the public.

No final action has been taken on the Committee's findings. The following articles analyze the arguments for and against the proposal. The Editors will welcome expressions of opinion from the members.

Editors' Note: In part two of this article, Lucien O. Hooper made the case against a professional designation, "The Negative Case."

Reprinted from The Analysts Journal, vol. 1, no. 1 (1945): 37–41 with permission.

The issues involved in this rating proposal are comparatively simple and may be argued largely by analogy. Some fifty years ago, trained accountants were wrestling with a similar idea, and at that time the difficulties and drawbacks of the proposed C.P.A. designation no doubt appeared quite serious to many of them. Today the need for a professional rating in that field and in many others is taken for granted. It takes no prophet to predict that once we surmount the initial hurdles involved in a rating for security analysts, the procedure will establish itself firmly and will come to be considered as indispensable to the public interest.

For purposes of this discussion, a security analyst is defined as one whose function it is to advise others respecting the purchase and sale of specific securities. This definition would exclude the following:

1. Junior statisticians or analysts who merely assemble data

2. Business or financial analysts and economists who do not deal with specific security values

3. Teachers and students of theory as such

Strictly considered, this definition would also exclude stock market analysts since they ordinarily do not advise about specific securities. The writer believes, however, that ultimately, if not now, market analysis will be regarded as a special department of security analysis and that every competent market analyst will be grounded in security analysis.

In any event, by security analysts in this context are meant those giving advice or suggestions on security transactions to customers (and partners) of brokerage houses, investment bankers, banks, and trust companies; those engaged in investment counsel; and those having similar functions on the staff of investment companies, insurance companies, other corporations, philanthropic organizations, and the like. The field is wide and undoubtedly includes several thousand practitioners in this country.

Advantages of a Rating System

The advantages of a rating system may be summarized thus: Those dealing with a Q.S.A. will know he has met certain minimum requirements in regard to knowledge of his field and has professional competence. They will know also that to retain his designation of Q.S.A., the analyst will have to observe rules of ethical conduct which no doubt will become increasingly definite and stringent as time unfolds. These benefits will apply both to the direct employers of security analysts and to the clients of such employers.

The analyst who qualifies for the rating will have the obvious advantages of prestige, improved ability to get a job, and the chance for higher pay. In addition, he is likely to develop a more professional attitude towards his work and a keener interest in maintaining and advancing the standards of his calling.

Answers to Some Possible Objections

It would seem advisable to list the various objections advanced against the proposed rating and to comment briefly on them. These objections apply both to the underlying soundness of the idea and to its practical application.

OBJECTION 1. It is basically impossible to distinguish between qualified and nonqualified analysts, since skill in this field rests largely on judgment rather than on specific knowledge or technique. Good judgment cannot be tested by ordinary examinations.

ANSWER. While judgment plays an important role in security analysis, it requires the aid of well-established methods and of specialized knowledge and experience. More and more emphasis is being laid on sound techniques in analysis—by employers, by teachers, by those entering the field, and by the work of this Society.

Technical ability and adequate information may, of course, be determined by suitable tests, and this applies also to some of the more obvious judgment factors entering into security analysis.

OBJECTION 2. The Q.S.A. rating may mislead the public, because it indicates but cannot guarantee that its holder is a capable analyst.

ANSWER. This objection has a certain validity, but no more than the observation that an M.D. may be a poor doctor. As in similar fields, the Q.S.A. rating will purport to guarantee only that the holder has met certain minimum tests—not that he possesses maximum abilities. The chance of misconception is smaller here than in other fields because the typical analyst is employed by an executive with considerable practical knowledge of his own, and not by unsophisticated members of the general public.

OBJECTION 3. The Q.S.A. rating is a step in the direction of privilege for some and limited opportunity for others. It is a closed shop or cartel development.

ANSWER. There is no reason why the Q.S.A. rating should be denied to anyone who deserves it and wants it. It might result in the exclusion of unqualified practitioners from the field, but this would not be unfair or unsound. The right of every individual to practice his chosen trade is subject to the higher right of society to impose standards of fitness where these are advisable.

OBJECTION 4. The plan has administrative difficulties. Who would judge the competence of others and by what right? Who would give the necessary time to the task?

ANSWER. This rating proposal involves no more difficulties than are found in similar requirements imposed in other fields. Suitable people will be found to act as Qualifiers, as they are found for the Character Committees of the Bar Associations, for the Board of Psychiatric Examiners, etc. Public-spirited analysts of reputation will devote time to this task as to other nonprofit work.

The initiation of the program presents certain special problems. It might appear presumptuous for some analysts to pass on the qualifications of others of similar experience and standing. This hurdle might be overcome, if advisable, by waiving the examination at the outset for those with practical experience of not less than ten or fifteen years. With the passage of time, a constantly larger percentage of analysts will have been subject to the test.

The level of competence necessary to qualify for the rating will have to be determined by the Board of Qualifiers. If precedent in other fields is followed, it will probably be set rather on the low side at first and gradually raised thereafter. It is the writer's personal view that the test may be equivalent to that given for students completing a full year's college or graduate school course in Security Analysis. Character and experience requirements would be set up separately, but some interchange of credit for academic work as against business experience would be advisable.

CONCLUSION. There is in this discussion no desire to minimize the practical difficulties faced by the rating proposal. However, it does not seem that these problems are essentially different from those met in the fields of accounting, law, medicine, and other professions. If these analogies appear too elevated, we can point to the licenses or Certificates of Fitness required, in various areas, for real estate brokers, insurance salesmen, and customers' brokers employed by Stock Exchange houses. It is hard to see why it is sound procedure to examine and register customers' brokers but not sound to apply corresponding standards to security analysts. The crux of the question is whether security analysis as a calling has enough of the professional attribute to justify the requirement that its practitioners present to the public evidence of fitness for their work. The publication of this Journal is in itself an assertion of professional status for security analysts. It would seem to follow, almost as an axiom, that security analysts would welcome a rating of quasi-professional character, and will work hard to develop this rating into a universally accepted warranty of good character and sound competence.

Chapter Two

On Being Right in Security Analysis

The most interesting and important work of the senior analyst leads up to and includes the recommendation that one or more common stocks be purchased. How can we tell whether such a recommendation has been right or wrong? This seems like a simple question, but a really satisfactory answer is not so easy to find. When a department store buyer recommends the purchase of certain merchandise, he implies that all—or nearly all—of it can be sold at the standard mark-up during the current season. In most cases the soundness of such recommendations can be readily checked by the sequel. When a stock market analyst recommends the purchase of stock at 80, on the grounds that its technical action indicates an upward move is imminent, it should not be too difficult to check the "rightness" of such a proposal. Most of us would agree that for the market analyst to be proved right the stock must advance, say, not less than four points in not more than, say, sixty days.

But if a security analyst should recommend the purchase of United States Steel at 80, as "a good buy," what criteria of corresponding definiteness can we apply to test his wisdom? Obviously we cannot ask that the stock go up four points in sixty days. Shall we require that it advance 10% in a year? Or that it do 10% better than "the general market"? Or that, regardless of market action, the stock should meet certain requirements with respect to dividends and earnings, over, say, a five-year period?

Reprinted from The Analysts Journal, vol. 2, no. 1 (First Quarter 1946): 18–21 with permission.

We have no scoring system for security analysts, and hence no batting averages. Perhaps that is just as well. Yet it would be anomalous indeed if we were to devote our lives to making concrete recommendations to clients without being able to prove, either to them or to ourselves, whether we were right in any given case. The worth of a good analyst undoubtedly shows itself decisively over the years in the sum total results of his recommendations, even though precise criteria for evaluating them be lacking. But it is unlikely that security analysis could develop professional stature in the absence of reasonably definite and plausible tests of the soundness of individual or group recommendations. Let us try, tentatively, to formulate such tests.

We return to our assumption that a security analyst is now recommending that United States Steel common be bought at 80. If this is a sound recommendation, not only must it work out well in the market, but it must be based on sound reasoning also. For without such reasoning we may have a good market tip but we cannot have a good security analysis. The reasoning, however, may take various forms, and the meaning of the recommendation itself will vary with the reasoning behind it. Let us illustrate by four alternatives:

1. Steel should be bought because its future earning power is likely to average about $13 per share.

2. Steel should be bought because it is fundamentally cheaper at 80 than is the Dow Jones Industrial Average at 190.

3. Steel should be bought at 80 because next year's earnings will show a substantial increase.

4. Steel should be bought at 80 because that price is far below the top figure reached in the last two bull markets.

Reason 1 implies that Steel will prove a satisfactory long pull investment. That does not mean necessarily that it will average earnings of $13 over the next twenty-five years, but certainly over the next five years. If this analysis proves correct, the purchaser will have both satisfactory earnings and dividends and an undoubted opportunity to sell out at a good advance. The correctness of the analysis and the consequent recommendation can be proved only over a five-year period or longer.

Suppose that the same suggestion, with similar reasoning, had been made in January 1937, when Steel was also selling at 80? Would that analysis have been right? No; even though the stock promptly advanced 57% to 126. For in no five-year period since 1936 have the earnings averaged $7 per share. And the 1937–44 average was about $5 per share. The rise to 126 within sixty days did not establish the rightness of this analysis, any more than the decline to 38 in the following twelve months would necessarily have proved it to be wrong.

The recommendation to buy United States Steel because it is cheaper than the Dow Jones Industrial Average (reason 2) would represent a valid and standard form of analytical argument. It may or may not be coupled with the statement that Steel is attractive in its own right. In the former case, it would be equal to recommendation 1, plus the assertion that Steel is cheaper than other standard issues. But the analyst properly may recommend Steel common on a comparative basis only, without claiming that it is intrinsically cheap. In that case he will be proved right if Steel performs better than the average, even though it may not do well by itself. For example, if Steel declines to 70 within a year from now, while the Dow Jones Industrials decline to 140, the comparative recommendation should be called right—provided (a) it was originally couched in comparative terms, and (b) it was backed by plausible analytical reasoning. Proviso (b) would seem necessary in every case where a single recommendation is tested, in order to make sure that the rightness is not due obviously to mere luck.

Recommendations to buy a stock for the main reason that next year's earnings are going to be higher (reason 3) are among the most common in Wall Street. They have the advantage of being subject to rather simple tests. Such a recommendation will be right if both (a) the earnings increase and (b) the price advances—say, at least 10%—within the next twelve months.

The objection to this type of recommendation is a practical one. It is naive to believe that in the typical case the market is unaware of the prospects for improved earnings next year. If this is so, the favorable factor is likely to be discounted, and the batting average of recommendations based on this simple approach can scarcely be very impressive.

Steel should be bought at 80 because it sold considerably higher in the last two bull markets (reason 4). Is this a valid type of reasoning for security analysis? Opinions may differ on this point, but in any case we can readily tell if such a recommendation proves right. The stock must advance substantially—say, 20% at least—in the current bull market.

Conclusions

The preceding discussion leads to some general conclusions, which are put forward on a tentative basis and as a starting point for controversy:

1. In most cases the rightness of an analyst's recommendation can be tested by the sequel, provided he indicates the type and basis of his recommendation.

2. Different types of recommendation—even though they all may call for the same action, for example, to buy Steel at 80—will be tested for rightness in different ways.

3. Where a recommendation is made on a group basis, only the group result should be tested. Individual issues may be expected to go counter to the group trend.

4. Professional standards for security analysis require that all recommendations indicate clearly both the type of recommendation made and the kind of analytical reasoning on which it is based.

Analysts recommend bonds and preferred issues as well as common stocks. The warranty behind each such suggestion is that the issue has quality at least commensurate to the yield. Such recommendations may be tested two ways: either by the review of the analysis of quality or by the subsequent market action of the issues approved, preferably as compared with a suitable group index. This field of activity does not raise serious problems of testing, except where very refined results are required.

Assuming we can test the analyst's performance on individual recommendations, we can develop a crude batting average for his work, based solely on the percentage of times he is right out of total number of recommendations made. How high should this average be for a good analyst? And is it necessary to refine this test by distinguishing between "very right" or "very wrong" and just "rightish" or "wrongish"?

These are questions for others to answer.

(Continues...)

Excerpted from BENJAMIN GRAHAM BUILDING A PROFESSION Copyright © 2010 by CFA Institute. Excerpted by permission of The McGraw-Hill Companies, Inc.. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Details zur Ausgabe

• Verlag: McGraw Hill
• Erscheinungsdatum: 2010
• Sprache: Englisch
• ISBN 10: 007163326X
• ISBN 13: 9780071633260
• Einband: Tapa dura
• Auflage: 1
• Anzahl der Seiten: 335
• Kontakt zum Hersteller: Nicht verfügbar
• Verantwortliche Person: Nicht verfügbar