Security Analysis is the most comprehensive investing book ever written, an all-time bestseller and Warren Buffett has repeatedly praised his investment success and valuation skills he gained through the book. Security Analysis outlines three key concepts:
What is the difference between speculating and investing?
How much money is the company really making?
How can the balance sheet reveal the truth about a company?
Security analysis helps in finding which securities are good
investments. Real investments will keep the principal safe. They’ll also give
good returns. Hence, anything which doesn’t do this is speculation.
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There are three functions of security analysis:
1.
“Descriptive function” – This compares different securities.
Plus, it smartly outlines facts.
2.
“Selective function” – It helps judge if an investor must
sell, buy or hold a security.
3.
“Critical function” – This observes management, company
policies, and structure regularly.
Market analysis is different than securities analysis. It tries
to predict the prices of individual securities. It doesn’t consider the core
facts of different firms. Technical analysis is a form of market analysis.
Under this, future values are predicted by seeing old market values. These
activities influence security prices to some level. None of these market
analyses have proven effective. Both mainly promote speculation.
Internal value is a crucial concept in security analysis. But,
it’s also a vague concept. It’s a value justified by facts. These include
earnings, assets, dividends, etc. Such facts are then manipulated artificially.
Investors can’t measure the exact intrinsic value of a security. This is
because there’re many variables involved. But, careful analysis can help find
if the price quoted by the market is proper. Securities should pass safety
tests to be profitable investments. Also, they must sell below their internal
value.
