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Security Analysis (7th Edition) Breathes New Life Into Investment Classic
Editor Seth Klarman has thoughtfully complemented the Buffett-approved 1940 text with contemporary commentaries from the likes of Howard Marks and Todd Combs
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It sometimes feels like we’re all trapped inside a Chinese curse. In particular, the one that ominously wishes, “May you live in interesting times…”
The last few years have, indeed, been interesting. We’ve been bombarded with a global pandemic that brought worldwide commerce to a screeching (and devastating) halt, the puzzling rise of speculative ventures like SPACs and meme stocks, and not-so-transitory inflation. Oh, and there’s that much-anticipated recession that might yet lurk around the corner.
In the face of this ever-shifting financial landscape, anyone could be forgiven for doubting that a book originally written in 1934 has much relevant advice to offer. But, actually, the timeless lessons of Benjamin Graham and David Dodd are needed now more than ever.
The all-new seventh edition of Security Analysis, released earlier this month, more than upholds its legacy as the bible of value investing.
The Grahamian philosophy of carefully studying all available information before making an investment — and, even then, only parting with your cold, hard cash if a stock can be purchased at a price below intrinsic value — will never go out of style.
There may not be as many “net-nets” as in Graham’s heyday, but his exhortations for analysis, calculation, and rationality are welcome tools in any financial season.
“While many of Graham’s examples … have been eclipsed by the passage of time,” editor Seth Klarman writes in his preface, “the general principles of Graham and Dodd still hold true because the investor behaviors that drive markets are fixed in human nature — and market inefficiencies can always be found.”
Let’s take a closer look at the seventh edition of Security Analysis…
(Spoiler: Berkshire Hathaway fans, in particular, are in for a treat.)
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Let’s get real for a minute: Security Analysis is a big book. Some might even call it intimidating. This is not a light read and, in many ways, should be treated like a graduate-level text book. Proceed slowly, take notes, break out that highlighter, and let Graham and Dodd’s knowledge and insight sink in at its own pace.
Security Analysis should be savored over many months, not rushed through in a few weeks. (That’s just my opinion, of course.)
That being said, I do believe that this is a book that every investor should read (at least) once in his or her life. It might not be the easiest read, but it’s worth it.
TRIED AND TRUE: The seventh edition of Security Analysis clocks in at nearly 800 pages, with modern commentaries from noted value investors interspersed with the classic Graham and Dodd text. (In this case, the second edition of G&D originally released in 1940.)
Choosing the second edition is a smart move, as no less an authority than Warren Buffett considers it to be the definitive version of Graham and Dodd’s teachings. It is, after all, the one that he used while taking Graham’s class at Columbia Business School in 1950/51. He still keeps a copy of it in his personal library.
“I just think that the reasoning is better and more consistent throughout the second edition, which is really the last one that Ben was 100% … responsible for writing,” Buffett once said.
“What I learned [from it] became the bedrock upon which all of my investment and business decisions have been built.”
I can’t think of any better endorsement for Security Analysis than that.
A MIX OF OLD AND NEW: Seth Klarman, billionaire manager of the Baupost Group, has thoughtfully complemented the unaltered G&D text (the aforementioned, Buffett-approved second edition) with contemporary commentaries written by such investing luminaries as Howard Marks, James Grant, Todd Combs, and more.
Honestly, it’s more like Klarman curated an entire book-within-a-book of new ideas and concepts — at once honoring and modernizing the original teachings of Graham and Dodd.
By my count, there are nearly 250 pages worth of these additional commentaries in the seventh edition. But, through it all, Graham and Dodd remain the stars of the show.
Here is a rundown of the included bonus material:
Foreword by Warren Buffett
The Timeless Wisdom of Graham & Dodd by Seth Klarman
Benjamin Graham and Security Analysis: The Historical Backdrop by James Grant
Benjamin Graham — in His Time and Ours by Roger Lowenstein
Unshackling Bonds by Howard Marks
Investing in Distressed Credit by Dominique Mielle
Finding Value in Common Stocks by Todd Combs
The Evolution of a Value Investor by Steven Romick
Investing with Owner-Operators by Benjamin Stein and Zachary Sternberg
The Evolving Utility of Balance Sheet Analysis by Seth Klarman
The Market Is Still Not Efficient by Nancy Zimmerman
International Investing by Bill Duhamel, Ashish Pant, and Jason Moment
At the Intersection of Public and Private Investing by David Abrams
Endowment Management Principles and Practice by Seth Alexander
(Note: Buffett’s foreword is exactly the same as the previous edition’s. The James Grant and Howard Marks contributions are also largely unchanged with just a few updates here and there. Everything else is brand new to the seventh edition.)
For those who already read the sixth edition (2008), the biggest difference between that and the new seventh edition are the above commentaries. In my rather Berkshire-centric opinion, the Todd Combs chapter alone decisively tilts the scales in favor of #7.
SPEAKING OF TODD COMBS: On Twitter, Michael Mauboussin declared Combs’s contribution as his favorite. I fully agree.
In Security Analysis (7th Edition), Combs writes the introduction to Part IV and sheds some much-appreciated light on his own investing approach in the process. For anyone eager to learn more about the media-shy Combs, this is practically worth the price of admission all on its own.
Combs has certainly stepped into the spotlight a bit more over the past year — headlining the latest G&D annual breakfast and hopping on the NFM podcast last month — but his seventeen-page commentary in Security Analysis is probably the best, most concise summary of his investing philosophy to date.
Here’s just one example:
I start [the research process] with the company’s annual letters, annual reports, 10-Ks and 10-Qs, and other SEC filings, as well as trade magazine articles and press releases for the last ten years. Has the company underpromised and overdelivered or vice versa? Then I work my way to earnings calls, again painting a picture of whether the company does what they say they are going to do. Once I have this picture based on facts instead of a story, then like an investigative reporter, I start to develop a picture of reality.
Combs goes on to lay out his three “Keep It Simple” investing principles, how he first decided to invest in Mastercard, and why serving as chief executive of GEICO has made him a better investor.
A worthy addition to any Berkshire Hathaway fan’s bookshelf.