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

Swensen, and Andy Golden didn’t follow that advice. And because of it, those institutions have far more resources at their disposal today than they would have otherwise. Thanks to the insight and independentthinking of these individuals, their respective institutions all have endowments measured in the tens of billions that give them a huge and perhaps permanent competitive advantage over many of their less wealthy peers. Beyond any specific advice that Graham and Dodd offered, the most important point investors should take away from
Security Analysis
is this: look at the numbers and think for yourself. All the great investors do, and that’s what makes them great.
    Interestingly enough, one group of investors was left out when Graham and Dodd were dispensing advice in the last chapter of
Security Analysis
. They had nary a word for all the young people starting out in financial careers that they undoubtedly hoped would bring them fortune and happiness, if not fame. To rectify that oversight, I offer a few last words of advice to this group. Many of my collaborators on this project are, like me, investment professionals who were once in your shoes—young, new to Wall Street, with little if any money in our bank accounts, but armed with energy, hope, and a good work ethic. We feel a particularly strong kinship with you. I think all of us would agree that we made a great career choice. And although we may initially have been motivated by the money, it’s been a long time since the accumulation of wealth was the force that sends us into the office each day. We do what we do because we enjoy it. We relish the challenge, the stimulation, and the satisfaction that comes with finding the next bargain the market has to offer.
    A number of years ago some professors at the University of Chicago concluded that Graham and Dodd had it all wrong. The market, they said,
was
efficient. In effect, they told aspiring analysts such as you: “Don’t bother. Don’t waste your time. The market is too efficient for you to be rewarded by your effort. Find something else to do with your life.” For a long time, it was fashionable for people in financial circles to debate this topic, with the professors marshaling arguments in favor oftheir position and the practitioners insisting they were wrong, often pointing to the many aberrations that could not be explained by the academic theories.
    Recently, the debate has died down, or perhaps it’s just that the practitioners are too busy making money, too busy unearthing the next mis-priced security, to find the time to argue anymore. As rewarding as our careers have been, I think all of us would tell you that it’s been a constant intellectual challenge to understand an ever-changing and increasingly global financial world in a competition that draws many exceptionally talented, bright, and hardworking entrants. But it is just such rigorous competition among colleagues and friends that brings out the best in us. I, for one, feel fortunate to have met so many intellectually curious, hardworking, and motivated people during my time on Wall Street.
    And so, to the aspiring young analyst, I can tell you that the answer to the question of the market’s efficiency or lack thereof is clear: The market is inefficient enough. “Enough for what?” you ask. Inefficient enough for me—and you—to find some great opportunities from time to time. Not every day or every week, but often enough. The Great Illusion persists, leaving plenty of opportunities for those who wish to do the hard, sometimes boring, and often tedious work of value investing. Happy hunting!

Chapter 47

C OST OF F INANCING
AND M ANAGEMENT
    L ET US CONSIDER IN MORE DETAIL the organization and financing of Petroleum Corporation of America, mentioned in the last chapter. This was a large investment company formed for the purpose of specializing in securities of enterprises in the oil industry. The public was offered 3,250,000 shares of capital stock at $34 per share. The company received therefore a net amount of $31 per share, or $100,750,000 in cash. It issued to unnamed recipients—presumably promoters, investment bankers and the management—warrants, good for five years, to buy 1,625,000 shares of additional stock, also at $34 per share.
    This example is representative of the investment trust financing of the period. Moreover, as we shall see, the technique on this score that developed in boom years was carried over