Chapter 1: Introduction

Objectives of security analysis

1. To present important facts regarding a stock or bond in a manner most informing and useful to an actual or potential owner.
2. Seeks to reach dependable conclusions, based upon facts and applicable standards as to safety and attractiveness of a given security at the current or assumed price.

Common Stock Classification

• Primary common stocks are those of large and prominent companies, generally with a good record of earnings and of continued dividends. There may be some 200 issues of this type about which there would be little dispute and perhaps similar amount that may be disputable.
• Secondary common stocks are marginal in the sense that they are regarded as very close to the primary grade and expected to reach that privileged status in due course. Perhaps 80% of listed issues and 90% of unlisted issues belong to the secondary category.
• Market price behavior is influenced in significant ways by the category to which the stock belongs and should be taken into account.

Graham rejects the standard notion of industry lifecycle – expansion, slowing down, decline and complete decay or extinction. He believes the most striking characteristic of large American businesses is their repeated pendulum swings from better to poorer results and back. A remarkably small percentage of these enterprises actually go out of business through voluntary liquidation or sheriff’s auction. Those that have ended their corporate existence have usually effected this via a merger or sale as a going concern which meant continuance of function if not of name. Graham suggests this point to be of greatest importance in the determination of a sophisticated investment policy.

Graham suggests that dividends will be controlled by profits and they will not operate as a separate factor of consequence in investment practice.

Graham notes that it is strange that neither World War I nor World War II had any exceptional impact on the course of stock prices.