Security Analysis by Benjamin Graham and David Dodd was first published in 1934. It is a fundamental book for serious students of value investing.
From this chapter onwards, the authors begin the discussion on common stock investments. The authors contend that even a thorough analysis of a typical stock couldn't make an analyst highly confident about its attractiveness. Only in a few cases, this is possible. This theory led writers to delve into the history of common stock analysis.
Historically (prewar period), enough emphasis was given to asset values and earning records. However, a lot of focus turned to value driven by market price versus the other way around. It was thought that stock value is driven by what is going to happen in the future. One theory was that good stocks will always rise regardless of the price paid. No importance was given to searching for undervalued and underfollowed stocks. Huge attention was paid to earnings trends versus average earnings, which makes more sense given the nonlinearity inherent in business. Such focus defies the basic rules of the economics of the law of diminishing returns and competitive pressures.
Mr. Graham and Mr. Dodd illustrate the contradictory behavior of pitching the stocks as safe heaven at a time when speculation is high.
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