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A Modern Approach to Graham & Dodd Investing

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A Modern Approach to Graham & Dodd Investing


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Benjamin Graham and David Dodd wrote the classic book on value investing more than 60 years ago - here's the update.

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Benjamin Graham and David Dodd literally wrote the book (the classic Security Analysis, 1940) on value investing. Warren Buffett followed their advice, which helped make him a household name. But Graham and Dodd devised their investing approach in the 1930s and, obviously, the markets have changed. Investors face different accounting requirements, international investments and non-equity alternatives to traditional corporate stocks. Author Thomas P. Au has undertaken to update the vintage Graham and Dodd approach and, by using numerous examples and explanations, to make it relevant to today’s markets. The basic emphasis on value remains, but he has adapted it to suit a faster, more complex investment world than the old masters ever imagined. thinks that they would have approved of Au’s clear, lucid, well-organized book, which is highly recommended for investors.


The Birth of Graham and Dodd Investing

The crash of 1929 and the ensuing Depression took the Dow Industrial Average from a high of 381.17 to a low of 41.22 in 1932. The so-called "recovery" brought the market to around 200, where it leveled off for some time. In 1934, David Dodd and Benjamin Graham turned their considerable analytical powers to the situation. They concluded that the runaway bull market of the 1920s had taken stocks far beyond any reasonable approximation of value. They began to develop an approach to investing that looked at a stock as a share in a business, not as a speculative instrument. They aimed to answer such questions as:

• What stock price would make this company a bargain? • What buying price would make capital safe and an eventual profit likely? • What constitutes a safe buffer in a stock?

An estimate of a stock’s value might be off by a few dollars either way, but a 50% discount to estimated value provides a good, wide margin of error for the investor. Stock prices involve two kinds of risk:

  1. Quality Risk - The risk that a company may decline or go bankrupt.
  2. Price Risk - The risk that the price...

About the Author

Thomas P. Au is a vice president and portfolio manager for the investment arm of a large insurance and healthcare provider. He worked previously for an emerging markets firm based in Geneva, Switzerland, and for a New York City investment information firm.

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