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Posted by dapperdobbs on March 5, 2008, 7:57 am
[snip]
> Perhaps it is a mere semantical difference between us.
[snip]
In simplest terms, Graham is predicated on financial analysis.
Portfolio management theory is predicated on the failure of financial
analysis.
The latter's quantitative explorations can be applied to determine the
probability of the presence of a spaceship in your soup, but are not
applied to the financial analysis of a company. The former's
quantitative explorations can be applied to the financial analysis of
a company, and recommend you use a spoon to look for the spaceship.
Graham acknowledges that it is virtually impossible to consider all
factors affecting a company, down to the finger that may make its way
into a bowl of chili, thus the prudence of diversification in the face
of unknowns. That could be viewed as Graham's concession to the
concept of "risk" that cannot be analyzed out of the picture. He makes
it clear that some situations are more certain than others.
So, I think there may be some mixing of definitions of one word. It is
also important to keep in mind the first edition of "Security
Analysis" - 1934. As far as I know, that was decades ahead of any
portfolio management theory - Markowitz hit the scene in the early
1950's..
Financial analysis and portfolio management theory are two fields with
only the thinnest of intersections. Entire portfolio management theory
textbooks have but one purpose - to "define" "risk." As one text put
it, financial analysis is in another building, we don't talk to each
other, don't have lunch together, and though we are required to accept
their universe of admissible companies, we're completely unbiased
towards it. And that's all that text had to say about financial
analysis!
Texts about "Wealth Management" (Evensky, H.R., ISBN 0-7863-0478-2.)
discuss "risk-related" issues very differently. This isn't the place
to write one-paragraph book reviews, but I noticed a quote (op. cit.):
"Security is mostly a superstition, it doesn't exist in
nature." (Hellen Keller.)
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Posted by dapperdobbs on March 4, 2008, 5:11 am
Hi, guys. I picked some well-known names out of the brim of my hat,
and checked charts back to 1982 in sequence: Becton Dickinson, ADP,
McDonalds, Kimberly Clark, General Mills, Exxon, Sigma Aldrich,
Emerson Electric, United Technologies, and Wells Fargo. (Symbols for
BigCharts.com : BDX, ADP, MCD, KMB, GIS, SIAL, EMR, UTX, WFC .. let's
add JNJ to make a round 10.) All are big companies. I did not own
them. Anyone who did probably doesn't care about average annualized
appreciation. "You did good," as Newt Gingrich might say. I have
purchased my indiscernible stake in all but BDX over the past two
years.
When Enron was "hot" I took a look at their 10k to see what all the
surge upwards was about. It took me five minutes to conclude it was
not suitable for Granny's portfolio, but the real kicker was the
phrase "non-cash earnings." All I looked at was in management's
discussion of the business, and I didn't even glance at the numbers.
After the debacle, two separate CPA's were squeezed into two thirty
second spots on CNBC, and both said what I just said (one guy took 15
minutes on Enron's 10k).
One simply must look at the 10k's (press releases often spin things
very badly). What characterized the market from 1982 to 2000 is still
puzzling me. I'm close to settling on "productivity increases" as the
key to the economic expansion. I wonder if the next couple of decades
will not require a bit more selectivity, and perhaps a lowering of
expectations. But if one should stumble upon a first-class company
with beautiful earnings and bright business prospects (a growing
market for its products and services) what is to prevent one from
pulling some cash out of an index fund, and holding one company's
stock? Or two, or three?
My thought is still that Graham emphasized selectivity - even in
diversification.
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Posted by Ron Peterson on March 4, 2008, 5:11 am
> Ron Peterson wrote:
> > He recommends diversifying among different business sectors.
> Graham actually does not recommend this in _The Intelligent Investor_,
> although Jason Zweig discusses diversification across sectors in his
> commentary.
In http://www.wiley.com/legacy/products/subject/finance/bgraham/benlec10.html
he says:
MR. GRAHAM: Yes, the approach is not based on the character of the
operation, but only on the mathematical odds which you have been able
to determine to your own satisfaction. It doesn't make any difference
what you are buying, whether a bond or a stock or in what field, if
you are reasonably well satisfied that the odds are in your favor.
They are all of equal attractiveness, and they all belong equally in
your diversification. You make a further sound point, and that is that
you are not really diversifying if you went into ten Electric Bond and
Share situations -- all substantially the same. You would not really
be diversifying, because that is practically the same thing as buying
ten shares of Electric Bond and Share instead of buying one share of
each; since the same factors would apply to all of them. That point is
well taken. For real diversification; you must be sure that the
factors that make for success or failure differ in one case from
another.
--
Ron
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Posted by Will Trice on March 4, 2008, 6:43 pm
Ron Peterson wrote:
>
>>Ron Peterson wrote:
>
>
>>>He recommends diversifying among different business sectors.
>>
>
>>Graham actually does not recommend this in _The Intelligent Investor_,
>>although Jason Zweig discusses diversification across sectors in his
>>commentary.
>
>
> In http://www.wiley.com/legacy/products/subject/finance/bgraham/benlec10.html
Note that he is saying here to diversify across investment situations,
not sectors. Of course, this advice doesn't come up in the two books
under discussion either.
-Will
william dot trice at ngc dot com
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