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Geoff Gannon July 14, 2008

Security Analysis: First and Second Preface

This book is intended for all those who have a serious interest in security values. It is not addressed to the complete novice, however, for it presupposes some acquaintance with the terminology and the simpler concepts of finance. The scope of the work is wider than its title may suggest. It deals not only with the methods of analyzing individual issues, but also with the establishment of general principles of selection and protection of security holdings. Hence much emphasis has been laid upon distinguishing the investment from the speculative approach, upon setting up sound and workable tests of safety, and upon an understanding of the rights and true interests of investors in senior securities and owners of common stocks.

(Preface to the First Edition)

And so Graham begins his magnum opus – or at least the preface to its first edition. Here we have a full introduction to the entire work – much fuller than a first-time reader might suspect. First, we are introduced to Graham’s ideal reader (“…have a serious interest in security values…not…a complete novice…some acquaintance with the terminology and the simpler concepts of finance.”) Next, the scope of the work is delimited. We are told that it shall encompass not only analysis proper, but the related issues of “selection” and “protection”. Finally, Graham informs us of his own special concerns: the distinction between investment and speculation, practical methods, and shareholder rights.

This last – and in 1940, most peculiar – concern of Graham’s will be explored in two ways: 1) through an exhaustive – and for some readers exhausting – discussion of senior securities (e.g., corporate debt) and 2) through glimpses of shareholder activism.

Graham was an early pioneer of shareholder activism. For more information, see On the Northern Pipeline Contest.

The two prefaces also introduce us to Graham’s idiosyncratic – and to some readers intimidating – writing style. I’ll take up this subject in my next commentary post. For now, just read over the two prefaces (or the passage above) and note how the writing is neither confused nor convoluted. It may be stylistically unfamiliar, but it is very easy to follow. Graham’s sentences are not especially long and they are syntactically streamlined for the modern American reader. Words and clauses appear exactly where you would expect them to appear to perform their standard functions.

Therefore, you’re unlikely to get lost in one of Graham’s sentences. However, you may get lost in one of his paragraphs.

As a general rule, you should not back-track when reading Graham, because his prose is strung together more logically than most people’s. If you don’t think you understand something perfectly, just keep reading. However, if you find you’re truly lost, go back to the first sentence in the paragraph. Even back up another entire paragraph if you must, but don’t try to back-track within a paragraph, because Graham’s paragraphs are threaded together with a logical strand that’s hard to pick up without a good reference …

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Geoff Gannon July 11, 2008

Second Largest Bank Failure in U.S. History: Feds Seize IndyMac

It’s no longer a rumor; it’s now news. IndyMac (IMB) has failed.

From Reuters:

The FDIC said the estimated cost of the California-based bank’s failure to its insurance fund is between $4 billion and $8 billion. The regulator said it will operate IndyMac to maximize the value of the firm for future sale.

IndyMac’s primary regulator, the Office of Thrift Supervision, blamed a senior lawmaker’s comments for causing a run on the deposits at the largest independent publicly traded U.S. mortgage lender.

From Bloomberg:

IndyMac came under fire last month from U.S. Senator Charles Schumer, who said lax lending standards and deposits purchased from third parties left it on the brink of failure. In the 11 business days after Schumer explained his concerns in a June 26 letter, depositors withdrew more than $1.3 billion, the OTS said.

“This institution failed due to a liquidity crisis,” OTS Director John Reich said in the statement. “Although this institution was already in distress, I am troubled by any interference in the regulatory process.”

Office of Thrift Supervision Shuts Down IndyMac (AP)

IndyMac Seized (Bloomberg)

IndyMac Taken Over By Regulators (Reuters)

Federal Regulators Take Control of IndyMac (LA Times)

IndyMac Bancorp Is Seized By Federal Regulators (WSJ PREVIEW)…

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Geoff Gannon July 10, 2008

Security Analysis: Homework for Monday, July 14th, 2008


Security Analysis: The Classic 1940 Edition

The Interpretation of Financial Statements

Security Analysis: Preface to the Second Edition, Preface to the First Edition (pg. vii – x)

The Interpretation of Financial Statements: Introduction to Chapter XX (read to pg. 48)


I will post the first commentaries on Monday. The chapter commentary will only cover the two prefaces to give everyone an extra week to acquire a copy of Security Analysis.

There will also be commentaries on general subjects interspersed with the chapter specific commentaries. The entire Security Analysis “course” will be collected together and made available through a Security Analysis link under the CATEGORIES heading on the right sidebar starting Monday.

By the way, if you have any accounting background, you can skip The Interpretation of Financial Statements.…

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Geoff Gannon July 10, 2008

Whitney Tilson is Short Hanesbrands

According to this post at Seeking Alpha, Whitney Tilson is short Hanesbrands (HBI). I mentioned Hanes (which was then my favorite stock) during a “roundtable” discussion on October 20, 2006:


However, there are many situations (and here is usually where you find some bargains) where the EV/EBIT measure is not the most useful. When I can predict a high free cash flow margin with confidence, I use a very long-term discounted cash flows calculation. For instance, this is what I would do with HanesBrands (HBI), which was recently spun-off from Sara Lee (SLE). On an EV/EBIT basis, it may not look cheap. But, looking truly long-term, I’m convinced the intrinsic value of each share is much closer to the $45 – $65 range than the roughly $23.00 a share at which it now trades. But, that’s a special case – Hanes is a special business.


I wrote a post on Hanes back on July 23, 2007. That’s also where I mentioned that Hanes had been the sole idea slated for the October 2006 issue of my newsletter, but I shut down the newsletter because I felt one idea couldn’t justify the $75 price tag.

Three days earlier (July 20th, 2007) I had written:

If you’re looking for a stock where leverage will amplify your returns, I still like Hanes Brands (HBI). It’s not as leveraged as Journal Register (though it has plenty of leverage) and it’s a much better business. Hanes was the most interesting spin-off of last year and the stock did well enough but has since cooled off a bit.

Note that I’ve yet to find someone who agrees with me on Hanes. I’m not sure if that’s a good sign or a bad sign.

I loved Hanes at the spin-off price. I still like it at today’s price. It’s probably not ridiculously undervalued as a business, but the debt will amplify the difference that does exist. Last October, I wrote that Hanes was probably worth more like $45 – $65 a share than $25 a share. I still think that’s true; however, the spin-off, plant closings, and debt might obscure the business value for a time. Be patient.


My only post focused solely on Hanes was written on July 20th, 2007 and is basically a collage made from the much longer newsletter piece I had written for October of 2006.

That issue was never published, so I made a blog post out of the scraps.

Although it’s an old post; you may enjoy reading it.

Regardless, you should definitely read Tilson’s Seeking Alpha post and the accompanying PDF.

They’re both good.…

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Geoff Gannon July 9, 2008

John Templeton Interview

John Bethel of Controlled Greed has a post on John Templeton.

He links to a 1997 interview with Charlie Rose.

This interview reminds me how good Charlie is interviewing an investor. Many financial journalists don’t manage to get as much out of their subjects as Charlie does.

Value Discipline also has a post.…

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Geoff Gannon July 9, 2008

Reading Graham’s Security Analysis: Care to Join Me?

Reading a thread over at GuruFocus reminded me of a common problem people have:

Have you actually read Security Analysis cover-to-cover? Has anyone on here?

I have. Several editions, several times.

A lot of people haven’t. I don’t think it’s a matter of dedication, enthusiasm, intellectual curiosity, etc. I think it’s a matter of being or not being a certain kind of reader.

I’m sure many, many people read a lot more than I do. But, I’m also sure I’m well-suited to reading Security Analysis on my own, because:

1) I never stop reading a book I enjoy

2) I’m a binge reader

3) I routinely read books written by dead guys

If this doesn’t describe you and you’ve never read Security Analysis cover-to-cover and you’d really, really like to – I have an idea.

I’m willing to do a weekly post on Security Analysis, taking anyone who wants to go on the journey through every chapter of the book. I’ll give you my best commentary on the text, and I’ll answer any questions you have. In return, I ask that you get the book and read a chapter a week.

Is anyone up for this?

If you’d like to join me, this is the required text:

Security Analysis: The Classic 1940 Edition

If you’ve neither taken a financial accounting course nor read Graham before, you’ll need this one as well:

The Interpretation of Financial Statements


To whet your appetite, here’s a previous comment I made about a passage in Security Analysis, in a post On Technical Analysis:

“…the influence of what we call analytical factors over the market price is both partial and indirect – partial, because it frequently competes with purely speculative factors which influence the price in the opposite direction; and indirect, because it acts through the intermediary of people’s sentiments and decisions. In other words, the market is not a weighing machine, on which the value of each issue is recorded by an exact and impersonal mechanism, in accordance with its specific qualities. Rather should we say that the market is a voting machine, whereon countless individuals register choices which are the product partly of reason and partly of emotion.”

I’ve seen a lot of people cite this quote, without bothering to notice what’s really being said. Graham had a very broad mind, much broader than say someone like Buffett. That’s both a blessing and a curse. At several points in Security Analysis (and to a lesser extent in his other works), Graham can not help but explore an interesting topic more deeply than is strictly necessary for his primary purpose. In this case, Graham could have said what many have since interpreted him as saying: in the short run, stock prices often get out of whack; in the long run, they are governed by the intrinsic value of the underlying business. Of course, Graham didn’t say that. Instead he chose to describe the stock market in a way that should …

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Geoff Gannon July 8, 2008

Sir John Templeton Dead at 95

One of the world’s greatest investors has died.


“In almost every activity in life people try to go where the outlook is best…However, my contention is that if you are selecting publicly traded investments, you have to do the opposite. You are trying to buy a share at the lowest possible price in relation to what a corporation is worth. There is only one reason a stock is being offered at a bargain price: because other people are selling. There is no other reason.”


(From the Preface to Investing the Templeton Way)

There are already countless articles out there. Here are just a few:

Articles and Obits


New York Times

Daily Telegraph

Washington Post

Globe and Mail


Investing the Templeton Way: The Market-Beating Strategies of Value Investing’s Legendary Bargain Hunter

Templeton Plan: 21 Steps to Personal Success and Real Happiness

Worldwide Laws of Life: 200 Eternal Spiritual Principles

Discovering the Laws of Life

And remarkably, a negative post from a nasty, little blog that uses quotation marks in place of conversation, and preaches to the choir on the evils of preaching and choirs.…

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Geoff Gannon July 7, 2008

Good WSJ Articles – Monday, July 7th, 2008

No links – just headlines. If you subscribe to The Wall Street Journal in print, online, or by Kindle and don’t have time to read the whole paper, here’s a list of some of today’s articles you shouldn’t miss.

GM Weighs Layoffs, Sale of Brands

Merrill May Sell Bloomberg Stake, Some of BlackRock

Glaxo Seeks Guidance from Health Systems

Immelt Defends GE’s Wide Reach

Firms Train for EU Raids Amid Price-Fixing Probes

Pay Your Own Way: Firm Lets Workers Pick Salary

Gas Stations Hit Skids

Retro Ploy on Wall Street

Why Bother?

GM Weighs Layoffs, Sale of Brands

Only if you’re interested in General Motors (GM) or automakers. The branding thing has always baffled me, not just for GM but for carmakers generally. It seems poorly done, confusing, bound to lead to cannibalization, etc. – but I’m not a marketer.

By the way, John Bethel’s Controlled Greed is the best blog for GM shareholders.

Merrill May Sell Bloomberg Stake, Some of BlackRock

Shows the cost of being in a position where you need to make a deal. Who will buy the Bloomberg stake? Don’t know. Probably not Berkshire – it’s likely Bloomberg will be too expensive for Buffett’s taste, though I imagine it’s the kind of company he’d like to own at the right price (it’s also sized right).

Glaxo Seeks Guidance from Health Systems

Read for a sense of the trends in government and medicine.

Immelt Defends GE’s Wide Reach

Combine with 24/7 Wall St’s post and enjoy a GE twofer.

Firms Train for EU Raids Amid Price-Fixing Probes

Funnier than fiction.

Pay Your Own Way: Firm Lets Workers Pick Salary

Neat idea.

Gas Stations Hit Skids

Can you believe it? An article involving gas prices that contains info you probably didn’t know.

Retro Ploy on Wall Street

Because I’ve always thought rights offerings were underutilized and overstigmatized.

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Geoff Gannon July 6, 2008

News Items – Sunday, July 6th, 2008


With $35bn to Spare, Buffett is Poised to Feed Off the Bear


GE’s Earnings, Immelt, And Jack’s Ghost (24/7 Wall St)

Controlled Greed: Life of the Blog (Controlled Greed)

Six Flags Is No Bargain Even at a Buck (Seeking Alpha)…

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Geoff Gannon July 5, 2008


I’ve recently returned to blogging after a more than three month absence with my post “On Blogging”. In that post, I discussed some of the problems that come along with blogging. Having explored the downside of blogging, I’m asking for some help exploring the upside.

What did you like most about this site? The blog? The podcast? Which posts? Which episodes? What kinds of subjects? What would you like me to do that I haven’t yet done?

How can I make this site better for you?


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