Saturday, August 16, 2008

Security Analysis: Chapter 49

Security Analysis by Ben Graham and David Dodd is a must read for anyone serious about value investing.

Investors are offered methods of comparing companies for investment when they are in the same industry. Various capitalization, income, and fixed-charge coverage calculations are discussed along with the relative merits of each as a useful tool for the security analyst.

Investors are warned to be wary of comparing companies even within the same industry if they should have capital structures that are very different. If external factors change the industry from one of prosperity to one of depression (or vice versa), the relative positioning of the two companies under comparison will reverse, rendering the initial comparison moot.

The authors also warn the reader to consider the homogeneity of the companies being compared. The question is, will industry factors affect each company equally? For companies selling commodity products, the answer is yes. However, care must taken for companies which sell goods under advertised trade names, for often one concern will prosper at the expense of its competitors, such that companies within the industry do not rise and fall together. In these cases the investor is advised to pay more attention to qualitative factors in comparing the companies rather than relying on straight statistical comparisons.

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