Security Analysis读书笔记

Portfolio Theory and Value Investment

The core difference is the definition of "Risk". Portfolio theory takes "Risk" as the price volatility of securities. In contrast, value investment treats "Risk" as the inappropriate valuation of securities.

The underlying logic for defining "Risk" as volatility is the need of frequent measurement of asset portfolio in market value. The emphasis on the liqudity of security.

Value investor does not focus on market value of their holdings but rely on long-term value realization instead.

About The Timing of Selling

It is questionable that a value investor should sell a security when it reaches full value. As good asset provides long-term cash flows that are difficult to completely converted into current value based on available information. A value investor may rely on such assets to survive different economic conditions, especially downturns.

Invest for Certainty

A good value investment should involve certain judgement for key elements.

Uncertainty of future falls into several categories, internal uncertainty and external uncertainty.

Principal Obstacles to Success of the Analyst

  1. The inadequacy or incorrectness of the data
  2. The uncertainty of the future
  3. The irrational behavior of the market

Two Assumptions of Analytical Work

  1. The market price is frequently out of line with the true value
  2. There is an inherent tendency for these disparities to correct themselves

Market Modelling: Voting Machine instead of Weighing Machine.

The market price will not reflect the value of each securities in an exact and impersonal mechanism. Rather, it reflects the choices of countless individuals partly of reason and partly of emotion

Trend Essentially a Qualitative Factor

No limit may be fixed on how far ahead the trend should be projected; and therefore the process of valuation, while seemingly mathematical, is in reality psychological and quite arbitrary. For this reason we consider trend analysis as a qualitative factor in its practical implications, even though it may be stated in quantitative terms.

A Test of Distinction Between Investment v.s. Speculation

Safety: An asset is only safe only if it is assured, or at least strongly indicated, by the application of definite and well-estabilished standards.

Definition of Investment

An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.

Past Performance V.S. Future Assessment

The traditional view was that prudent bond investing must be based on solid inference from past data as opposed to speculation regarding future events. However, the motivation of inferencing from past data was exactly trying to has know about the possibility of future.
Thus the real difference is really about whether we should judging a firm's future perspective based exclusively on historical data (concervative); or we can forward-looking at the quality and possibility of business.


Forward-looking analysis can be profitably applied to instruments of all sorts.

About Investment Risk

The supposed acturial computation of investment risk is hardly practical. Investment losses are not distributed fairly evenly in point of time, but tend to be concentrated at intervals, which is incalculable.

Four Principles for the Selection of Issues of the Fixed-value Type

  1. Safty is measured not by specific lien or other contractual rights, but by the ability of the issuer to meet all of its obligations.
  2. This ability should be measured under conditions of depression rather than prosperity
  3. Deficient safety cannot be compensated for by an abnormally high coupon rate
  4. The selection of all bonds for investment should be subject to rules of exclusion and to specific quantitative tests corresponding to those prescribed by statute to govern investments of saving banks.

Old Equity Investment (Common Stock) Theory - Threefold Principle

  1. A suitable and established dividend return
  2. A stable and adequate earnings record
  3. A satisfactory backing of tangible assets

P/E Ratio and Bond Interest Return

A PE ratio of 25 is equivilent to a 4% coupon ratio corporate bond. Both pay 4% on yield plus face value of the security when held to maturity/sold.

U.S. Economy Cycle

1929 - 1933, down
1934 - 1937, up
1937 - 1938, down
1939 - 1943, up
1944 - 1947, down

Dividend Policy

Liberal Dividend: A policy to distribute a major part of earnings as dividend to shareholders

Conservative Dividend Policy

Conservativem means following the current tradition.

Three Traits of Human Nature:

  1. aversion to boredom
  2. a tendency for emotions to overwhelm reason
  3. greed

Three Approach for Value Investment

  1. Secular Expansion as Basis
  2. Individual Growth as Basis of Selection
  3. Selection Based on Margin-of-safety Principle

Intransic Value

Intransic value only concerns about the earning power of the business, not including the growth potential. Value investing is about buying at a bargin price (compared to intransic value) with enough margin of safety. Invest in certainty.

Investing in growth potential is speculation and add more factors on top of the intransic value and current price level (bargin or not). More factors, higher uncertainties.

Current Earnings Should Not Be the Primary Basis of Appraisal

The market level of common stocks is governed more by their current earnings than by their long-term average. This fact accounts for the tremendous fluctuations in common stock prices. The mistake of the market lies in its assumption that in every case changes of this sort are likely to go farther, or at least to persist, which is doubtful.

Earning Power and Losses

Net losses should not be included in the average profit to represent a company's earning power.

Losses represents only the loss potential. Earning power and loss potential should be split apart.

Capital Structure

A speculative capitalization structure may give the common stock a definite speculative advantage even though it will turn the common stock unsuitable for investment.

PE ratio and Earning Basis

A PE ratio of 20 means the stock is expected to generate earnings of 5% per year of the investment for the time forward.

The relationship between Profit per Value and Output per dollar of stock value

Profit per value is inversely related to output per dollar of stock value

Valution of a Company by Summing Up The Valution of Parts With Different Ratio

Discrepancies between price and value

  1. Causes of Price Discrepancies
    A. Exaggeration
    B. Oversimplication
    C. Neglect

Factors for the Market Valuation of Secondary Issues

  1. If professional market operators are interested in the issue
  2. If professional investor are interested in the issue
  3. The interests of genneral public torwards the issue
  4. If there are sponsors of the issue

Market Behavior of Top Issues and Secondary Issues

  1. Standard of leading issues almost always respond rapidly to changes in their reported profits, so much so that they tend regularly to exaggerate marketwise the significance of year-to-year fluctuations in earnings
  2. The actions of the less familiar issues depends largely upon what attitude is taken towards them by professional market operators. If interest is lacking, the price may lag far behind the statistical showing. If interest is attracted to the issue, either manipulatively or more legitimately, the opposite result can readily be attained, and the price will respond in extreme fashion to changes in the company's exhibit.

The composition of the market-leader group has varied greatly from year to year, especially in view of the recent shift of attention from past performance to future prospects

The paradigm shift of stock valuation was primarily driven by the growing impact of business renovation, especially its destructive power against existing market participants.

Bargin Purchase of Common Stock

  1. The bargin rate needs to be increased when the general market is statistically at a high level

The definition of Market Analysis

  1. Predicting future prices based on market price movement and signals, including macroeconomic and microeconomic factors without reference to the company fundementals.

The Constrain of Growth Projection Valuation

  1. The Law of Diminishing Return
  2. The Law of Increasing Competition


Operating Leverage

OL = %Change in EBITA / %Change in Sales

PPE investments will result in fixed assets. An expansion of PPE investments will increase the per year depreciation expense together with production capacity. However, the bottom line will be hurt if the production capacity is not reached due to lack of sales. In this case, the depreciation expense become the fixed cost in production.

Analysis Framework

  1. Industry Life Cycle
  2. Sector Rotation
  3. Business Cycle

JF读书笔记 – 2018年8月

Unscheduled News and Market Dynamics

In a limit order market, the price information (limit orders) are the only information that market participant can be efficiently used to communicate with others.

Optimal Order Submission

  1. Order Price
  2. Execution Probability
  3. Pick-off Risk

The optimal order submission is a trade-off between these three factors.






查理芒格: 反过来想,问题会变得更容易

Money Supply and Interest Rate

Federal Funds Effective Rate

The weighted average of the negotiated federal fund lending rate among banks.

Federal Funds Target Rate

The target federal funds effective rate set by the Federal Open Market Committee.