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Friday, June 22, 2018

Friday Feature Book Review: Security Analysis: The Classic 1934 Edition by Benjamin Graham 証券分析 【1934年版第1版】 (ウィザードブックシリーズ ) ベンジャミン・グレアム

What tools are needed in order to become a billionaire? At least 3 billionaires I admire used this book. They are Warren Buffett, Mario Gabelli, and John Bogle. If these 3 titans of finance used it, I am sure it could be worth a read. It is not light reading. At 700+ pages, it is literally heavy lifting (or reading), but still very much worthwhile. I was most attracted to the table of contents in how it laid out financial security analysis. 

I was also attracted to the timeline of expectations. It basically explains that markets rise and fall, and the 1929 crash was a product of a perfect storm of events, a true outlier. Financial markets went through the same storm of events in 2008. The most interesting observation though was the "canary in the coal mine" of a preceding financial event. The more you study history, the more unlikely you are of repeating the mistakes you observe. Those who do not study history are doomed to repeat those very same mistakes.  


Back in 1928, there was a huge credit event, and a year later, we had the great crash. This should have been remembered, but was not. Back in August of 2007, there was a similar credit event in mid August, many wondered what happened at the time, then just forgot. It was a clear precursor to what was to follow. The markets did not forget and the Lehman crisis began in September of the following year in 2008.

There are many solid explanations that are perfectly relevant for markets today. The most interesting subject for me was around the difference between speculation and investment. In these days of cryptocurrency now, a review of this point again seems very timely. Ultimately, you have to start with facts. This is an excellent source of facts to build a solid foundation of any financial understanding.

The Top 3 Takeaways from this book that impact any reader are:

1) You need to identify your investment goals, and know the clear difference between investment and speculation. In this current age of crypto, this classic lesson needs a full review and reinterpretation. Different skills are needed for different parts of any portfolio.

2) You need to fully understand what fixed income securities bring to any portfolio over time. True solid investment is often the goal, and is based on long term incentives. The skills needed for fixed income are one particular set, another different set is needed for equities. Many confuse the two as being the same.

3) You need to value speculative instruments like equities or digital assets like Bitcoin. They have short term benefits to many portfolios. The question is often can you exit these instruments after any price peak. Market timing is often the most important decision to be made.

Even under classic rules for securities within financial markets, core basics still ring true. The products may change, but the core values stay the same. After the 1929 market crash, all equities were questioned for their speculative value. The banking system and the regulations around them had to change and adapt to protect the retail investors. Today, cryptocurrencies like Bitcoin are seen in a very similar way. A pure speculative instrument that need more government regulation in order to protect the retail investor. 

The more things change, the more they stay the same. Financial markets often follow a rising and falling pattern and markets after the Great Financial Crisis of 2008 closely reflect 1929. We can learn from our financial history and adapt. For anybody wondering what the future of crypto will be like and how our financial system may change, this book can explain the base principles you need for any future changes. It is the bible of finance in many ways. Why not consider the tools that the most successful investor of our time, Warren Buffett, learned from? Maybe you too can be a billionaire!


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