Security Analysis : Sixth Edition, Foreword by Warren Buffett: Additional Aspects of Security Analysis. Discrepencies Between Price and Value

shortcomings of relative value analysis; and the greed of investment bankers. In the 75 years since the original edition was published, both the world at large and the financial markets have undergone cataclysmic change. Yet, as Graham and Dodd understood, how markets work, how companies are run, and how people—both investors and corporate managers—tend to act in certain situations never change.
    The world likes to categorize things, including investing styles, in neat little boxes. So it is that the financial media frequently label market participants as “value,” “growth,” or “momentum” investors. That’s all fine, but I can tell you that I’ve observed a great many investors over the years, and I’ve never seen a consistently successful one whose strategy was
not
based on a value approach—paying less for something than it is worth, either today or in the future. True, some people like to buy things that will grow and others are drawn to assets that beckon from the bargain counter, while still others like to engage in arbitrage activities, buying one thing and selling another to profit on the price differential, or spread. But every successful investor I’ve ever known makes a calculation that compares an asset’s purchase price to its present or future value.
    Whatever their approach, countless investors have used the principles laid out in
Security Analysis
to uncover bargains. Scads of people have become wealthy doing so, including many of the contributors to this revised edition, not to mention all the people who were smart enough to buy Berkshire Hathaway years ago. Their success is a testament to value investing’s glorious past. But what about its future? Is the road ahead bright and prosperous? Or is it bleak and beggarly? Are there more people practicing Ben Graham’s underlying principles than there are bargains for them to find? Is there just too much money chasing a finite supply of bargains? Or might a serious security analyst still be able to prosper over time?
    I am optimistic about the future of value investing. To be sure, there are many bright and savvy people in the financial markets employing Graham and Dodd’s techniques, but the markets themselves have grown exponentially. The chunk of capital being invested by the value-investing crowd is a small percentage of the overall capitalization of global financial markets. Having observed the markets for more than two decades, my sense is that, rather than a glut of Graham and Dodd acolytes picking through scarce opportunities to find a place for their cash, money is evermore prone to sloshing around in giant waves, flowing from one fad to the next. If anything, it seems that the people controlling these mega-sums have become less intelligent and less sophisticated over time. The last decade alone has brought incredible extremes in valuation, starting in 1999 and 2000 with the high-altitude Internet bubble that was followed in short order by the utter collapse of the tech market. In the summer of 2002, we witnessed a tremendous corporate debt meltdown. But soon, these excessively low valuations were pushed off the front pages by the most generous and lax lending standards of all time. Now, as I write this introduction, the mortgage market is imploding, creating perhaps yet another new set of opportunities. That we’ve seen the last of these extreme swings seems doubtful.
    What is driving this manic phenomenon? The explanation is something I call the “Great Illusion of the Stock Market.” Investing looks easy, particularly in a world of inexpensive software and online trading. Buying a stock is no more difficult than buying a book on Amazon.com. And because a great many people
have
gotten wealthy in the stock market, lots of others have come to believe that anyone can get rich with very little effort. They are wrong. All the people I know who’ve built wealth in the stock market have worked very hard at it. Graham and Dodd understood the effort it took to be successful in the market. They wrote:
    Since we have emphasized that analysis will lead to a positive conclusion only in the exceptional case, it follows that many securities must be examined before one is found that has real possibilities for the analyst. By what practical means does he proceed to make his discoveries? Mainly by hard and systematic work. (p. 669)
    So, yes, you can get rich buying and selling stocks, but, as the authors well knew, it takes hard work