Security Analysis

Security Analysis is a working manual for valuing bonds, preferred stocks and common stocks. Its core ideas are a definition and a discipline: an investment is an operation that, on thorough analysis, promises safety of principal and an adequate return, and everything else is speculation; intrinsic value is distinct from market price; and the gap between them, the margin of safety, is what protects an investor. Graham and Dodd also urged analysts to look past reported earnings per share to the balance sheet and the underlying business.

Both authors taught at Columbia Business School, and Graham also ran money. Buffett studied under Graham, and his 1984 talk The Superinvestors of Graham-and-Doddsville cited nine of their followers who beat the market. This sixth edition restores the 1940 text, regarded as the definitive version, and adds about 200 pages of commentary from Klarman, James Grant, Roger Lowenstein, Marks and others.

The caveats are obvious: it runs over 700 dense pages, and many examples are 1930s railroads, utilities and industrials. The Intelligent Investor is the friendlier introduction; this is the professional version. A seventh edition, edited by Klarman, appeared in 2023.

Equity and credit analysts, value investors and MBA students who want the original source should own it.

1. Define investment before you make one. Graham and Dodd's test is thorough analysis, safety of principal and an adequate return; anything else is speculation and should be labeled as such.
2. Value is a range, not a point. You don't need a precise intrinsic value, only enough evidence that it is comfortably above the price you pay.
3. Adjust the earnings. Reported income is a starting point; strip out one-time items, test depreciation and reserves, and look at results over a full cycle.
4. Bond safety comes from coverage. An issuer's ability to cover its fixed charges through a downturn matters more than covenants or collateral.
5. The balance sheet checks the story. Current-asset and liquidation values give a floor, and stocks trading below them were a recurring source of opportunity.

The sixth edition keeps the seven parts of the 1940 text, each introduced by a modern practitioner.

1. Survey and approach. With new introductions by Klarman, Grant and Lowenstein, Graham and Dodd define the scope of analysis, intrinsic value and the line between investment and speculation.
2. Fixed-value investments. Introduced by Howard Marks, this part sets out how to choose bonds and preferred stocks: on the issuer's ability to pay through bad years rather than on legal promises or collateral.
3. Senior securities with speculative features. Introduced by Ezra Merkin, it covers convertible and participating issues, warrants and senior securities trading at distressed prices.
4. Common stocks. Introduced by Bruce Berkowitz, it develops the theory of common-stock investment and the role of dividends.
5. Analysis of the income account. Introduced by Glenn Greenberg, it shows how to adjust reported earnings for nonrecurring items, depreciation, reserves and subsidiaries, and why average earnings matter.
6. Balance sheet and further aspects. Part 6, introduced by Bruce Greenwald, covers book, current-asset and liquidation values; Part 7, introduced by David Abrams, covers discrepancies between price and value and the limits of market analysis.

Buying a dollar's worth of assets for 50 cents isn't the only way to succeed on Wall Street. But it is how Warren Buffett got rich. Just as value investing never goes out of style, neither does the value investor's bible, Security Analysis, by Benjamin Graham and David L. Dodd, which has withstood the test of time as well or better than any investment book ever published. Now the Sixth Edition updates the masters' ideas and adapts them for the 21st century's markets.