On Mar 5, 5:04*am, "Elle" <honda.lion...[at]spamnocox.net> wrote:
[snip]
- quote -


In simplest terms, Graham is predicated on financial analysis.
Portfolio management theory is predicated on the failure of financial
analysis.

The latter's quantitative explorations can be applied to determine the
probability of the presence of a spaceship in your soup, but are not
applied to the financial analysis of a company. The former's
quantitative explorations can be applied to the financial analysis of
a company, and recommend you use a spoon to look for the spaceship.

Graham acknowledges that it is virtually impossible to consider all
factors affecting a company, down to the finger that may make its way
into a bowl of chili, thus the prudence of diversification in the face
of unknowns. That could be viewed as Graham's concession to the
concept of "risk" that cannot be analyzed out of the picture. He makes
it clear that some situations are more certain than others.

So, I think there may be some mixing of definitions of one word. It is
also important to keep in mind the first edition of "Security
Analysis" - 1934. As far as I know, that was decades ahead of any
portfolio management theory - Markowitz hit the scene in the early
1950's..

Financial analysis and portfolio management theory are two fields with
only the thinnest of intersections. Entire portfolio management theory
textbooks have but one purpose - to "define" "risk." As one text put
it, financial analysis is in another building, we don't talk to each
other, don't have lunch together, and though we are required to accept
their universe of admissible companies, we're completely unbiased
towards it. And that's all that text had to say about financial
analysis!

Texts about "Wealth Management" (Evensky, H.R., ISBN 0-7863-0478-2.)
discuss "risk-related" issues very differently. This isn't the place
to write one-paragraph book reviews, but I noticed a quote (op. cit.):

"Security is mostly a superstition, it doesn't exist in
nature." (Hellen Keller.)


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"Will Trice" <wtrice[at]notmonitored.com> wrote
snip as usual for conciseness and hopefully not losing
meaning
- quote -

I believe I can appreciate how you do not call P/E a risk
measure. But it seems to me Graham most assuredly does
consider it so. That is, roughly, I think Graham is saying
High P/E = poor bargain = poor chance for increasing
further, relative to lower P/E stocks. Apply a number of
crude gages together (like low P/E; dividends for the last
20 years; current ratio over 2; etc.), and one can lower the
risk further. Or at least backtesting indicates thusly.

Perhaps it is a mere semantical difference between us.

- quote -

imprecise estimating risk is, at least in the context you
suggest here with individual stocks. Graham is circumspect.
He does not speak as though it's all black and white. That's
TV loudmouth stock "analyst" Jim Cramer's job, anyway.

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Elle wrote:
- quote -

I can see your point at least in the sense that Graham might have
considered a high P/E stock to be more risky that a low P/E stock
(although I would not call P/E a risk measure, I would call it a
valuation measure - related, but not the same). But in my reading of
his two most popular books, I have not seen any mention of using P/E (or
some combination of quantitative values) to determine the relative risk
of each holding and thus determine if you need to diversify further as
Ron suggested.

-Will

william dot trice at ngc dot com

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Ron Peterson wrote:
- quote -

Note that he is saying here to diversify across investment situations,
not sectors. Of course, this advice doesn't come up in the two books
under discussion either.

-Will

william dot trice at ngc dot com

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BreadWithSpam[at]fractious.net wrote:
- quote -

Sorry, I didn't mean to imply that Buffett was derisive about
diversification, I was referring to _Security Analysis_. In fact, in
his appendix to _The Intelligent Investor_, Buffett lauds the investment
records of some of those he describes as "diversified enormously."

-Will

william dot trice at ngc dot com

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On Mar 3, 6:55 pm, Will Trice <wtr...[at]notmonitored.com> wrote:
- quote -

In http://www.wiley.com/legacy/products.../benlec10.html
he says:
MR. GRAHAM: Yes, the approach is not based on the character of the
operation, but only on the mathematical odds which you have been able
to determine to your own satisfaction. It doesn't make any difference
what you are buying, whether a bond or a stock or in what field, if
you are reasonably well satisfied that the odds are in your favor.
They are all of equal attractiveness, and they all belong equally in
your diversification. You make a further sound point, and that is that
you are not really diversifying if you went into ten Electric Bond and
Share situations -- all substantially the same. You would not really
be diversifying, because that is practically the same thing as buying
ten shares of Electric Bond and Share instead of buying one share of
each; since the same factors would apply to all of them. That point is
well taken. For real diversification; you must be sure that the
factors that make for success or failure differ in one case from
another.

--
Ron

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Hi, guys. I picked some well-known names out of the brim of my hat,
and checked charts back to 1982 in sequence: Becton Dickinson, ADP,
McDonalds, Kimberly Clark, General Mills, Exxon, Sigma Aldrich,
Emerson Electric, United Technologies, and Wells Fargo. (Symbols for
BigCharts.com : BDX, ADP, MCD, KMB, GIS, SIAL, EMR, UTX, WFC .. let's
add JNJ to make a round 10.) All are big companies. I did not own
them. Anyone who did probably doesn't care about average annualized
appreciation. "You did good," as Newt Gingrich might say. I have
purchased my indiscernible stake in all but BDX over the past two
years.

When Enron was "hot" I took a look at their 10k to see what all the
surge upwards was about. It took me five minutes to conclude it was
not suitable for Granny's portfolio, but the real kicker was the
phrase "non-cash earnings." All I looked at was in management's
discussion of the business, and I didn't even glance at the numbers.
After the debacle, two separate CPA's were squeezed into two thirty
second spots on CNBC, and both said what I just said (one guy took 15
minutes on Enron's 10k).

One simply must look at the 10k's (press releases often spin things
very badly). What characterized the market from 1982 to 2000 is still
puzzling me. I'm close to settling on "productivity increases" as the
key to the economic expansion. I wonder if the next couple of decades
will not require a bit more selectivity, and perhaps a lowering of
expectations. But if one should stumble upon a first-class company
with beautiful earnings and bright business prospects (a growing
market for its products and services) what is to prevent one from
pulling some cash out of an index fund, and holding one company's
stock? Or two, or three?

My thought is still that Graham emphasized selectivity - even in
diversification.

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"Will Trice" <wtrice[at]notmonitored.com> wrote
(Hopefully I did not snip too much.)
- quote -

Not to split hairs over wording, I hope, but I would not say
this. Graham gives several basic, numerical parameters that
he advises an investor (defensive category) to apply to
reduce his/her risk in investing. E.g.

P/E <15
P/B < 1.5
Current Ratio over 2
Earnings growth of 33% over ten years, averaging the first
and last three year periods.
Some positive earnings in each of the last ten years

- quote -

I think maybe a distinction should be made between "does
not really justify" and "is circumspect due to the nature
of the science of economics."

Just the usual one-and-one-half cents.

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Will Trice <wtrice[at]notmonitored.com> writes:

- quote -

Twain apparently said, and Buffett apparently quoted him in saying
it this way:

Behold the fool saith, "Put not all thine eggs in the one
basket"--which is but a manner of saying, "scatter your money and your
attention," but the wise man saith, "Put all your eggs in the one
basket and WATCH THAT BASKET."

Buffett also said "Diversification is protection against ignorance."

I'm not sure it was meant all that derisively, though. He's also
made it clear that those who don't have the time or energy or
ability (and he considers his stock picking/managing ability to
be a gift just like athletic ability) - he's made it clear that
most folks would do a lot better just buying an index than
messing around. (several of his letters to investors, as well
as in a speech he gave last year at the Berky annual meeting -
google for "Buffett Index Funds")




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Ron Peterson wrote:
- quote -

Graham actually does not recommend this in _The Intelligent Investor_,
although Jason Zweig discusses diversification across sectors in his
commentary.

- quote -

I think you're conflating diversification with asset allocation. Graham
does not suggest the need for estimating risk in any sort of
quantitative way in either _Security Analysis_ or _The Intelligent
Investor_. But he does give some explicit numbers of equities that
should be held, although he does not really justify the numbers.


-Will

william dot trice at ngc dot com

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On Mar 1, 2:34 pm, "BGFan" <nos...[at]nospam.com> wrote:
- quote -

He recommends diversifying among different business sectors.

He's not explicit on the number of equities because that entails
estimating the risk for each equity. If one invests in large firms,
the need for diversification is lower, but probably limiting the
investment in each equity to 10% will reduce the effect of an Enron
type of investment.

I have 32 different equities distributed among the tech, energy,
health, industrial goods(primarily residential construction), and
basic materials sectors. My largest investment in a equity is 12% of
my portfolio.

--
Ron

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BGFan wrote:
- quote -

In _Security Analysis_, the textbook that Graham wrote with David Dodd,
diversification is seemingly given somewhat short shrift. The book even
seems to derisively imply that diversification has come to replace
quality as the dominant factor in security selection.

However, Graham's popular investing book, _The Intelligent Investor_,
emphasizes diversification for the individual. Graham explicitly
recommends that the defensive investor hold between 10 and 30 stocks in
the equity portion of the investor's portfolio. However, he later
mentions that an investor should have at least 20 stocks to achieve a
portfolio margin of safety.

Interestingly, Graham implies that the enterprising investor should have
at least 100 stocks to be widely diversified, unless that investor is
the rare bird who can dependably pick winning issues, like Warren
Buffett. However, Buffett describes a 100+ stock portfolio as
"diversified enormously" in his appendix to Jason Zweig's revision of
the Fourth Edition of _The Intelligent Investor_, and eschews
diversification in general.

-Will

william dot trice at ngc dot com

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On Mar 1, 3:34*pm, "BGFan" <nos...[at]nospam.com> wrote:
...> One more thing (other than my earlier Q about selling),
- quote -

Decent question - BG's focus is on analysis of companies. I prefer the
1964 edition "Security Analysis" over the later revision "The
Intelligent Investor." On page 55 of my preferred he points to the
high safety of T-Bills (and consequently little need for
diversification) as opposed to lower safety and thus a "prudent"
requirement consistent with margin of safety. He also makes the point
that highly reliable information reduces the need for diversification,
and that many fortunes have been concentrated in the stock of only one
company. The entire chapter 4 "Investment and Speculation" speaks to
the limitations of analysis, the advisability of analysis, and the
assurances of safety pursuant thereunto. :-)

Your ballpark numbers of 5 to 20 stocks sounds familiar, and generally
practical, since one is subject to work limitations in trying to keep
track of more than 20 or 30 companies with any degree of accuracy.
I'll look through my 1973 4th revised edition of "TII" and see if I
can find anything else. Btw, I didn't see any notes by Jason Zweig - I
thought it was Marty Zweig who is well-known as a writer on Wall
Street in any event. Which edition do you have?

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I have read Intelligent Investor by Benjamin Graham.
One more thing (other than my earlier Q about selling),
I am not so clear about is what kind of diversification in the
equity part of your portfolio does BG recommed?
I got mixed messages.in the book. At one place, I felt
that he didn't recommend too much diversification - i.e
hold a max of 5-6 stocks only in your portfolio. At other
places he seemed to recommend 20 odd stocks. Another
confusing thing is that I seem to lose track of what was
BG's recommendation & what was Jason Zweig's?
(the chap who wrote the notes at the end of each chapter)

Does someone have an answer?

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