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Sunday, February 22, 2009

Security Analysis:Chapter 7

In this chapter we learn about the qualitative and the quantitative factors that make up a company's value. Qualitative includes things such as:

-nature of the business
-relative position in the industry
-physical, geographical, and operating characteristics
-character of the management
-outlook for the unit, industry, and business in general

while quantitative factors include:

-earnings and dividends
-assets and liabilities
-operating statistics

It should be noted that many companies are overvalued because of the character of the management. It is listed separately from high earnings, when, in reality, high earnings means the management was good. This is "counting the same trick twice."

We also learn about trends. While most people think it is quantitative, because it has numbers, it is really qualitative, because it is uncertain. Trends are not useful for qualitative analysis, either, because it defines a definite prediction; as investors, we avoid predicting definitively.

Before, we mentioned that, as investors, we try to guard against the future. Three ways that Graham suggests to offset a hazardous future are:

-to require a large margin of safety
-inherent stability in the company
-future expectations*

*this is not a deciding factor, it is only to be used as a supplementary reason, and only when using sober judgement

In a nutshell, we the quantitative analysis is necessary to arrive at a conclusion whether we should buy a particular stock or not, but qualitative factors must also check out well.

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