Security Analysis: Chapter 3 Summary
Security Analysis is a "must have" book for any serious investor written by Benjamin Graham, David Dodd and recommended by Warren Buffett
Welcome back to the Security Analysis series. In the chapter 3 of “Security Analysis”, Graham and David present a list of sources of information in which analyst may find useful when analyzing securities. Well, some of the sources are outdated and not available, I focused on summarizing the parts that are relevant and available to us today. Check out the preceding chapters if you’d like to get caught up:
Chapter 1 Summary: The scope and Limitations of Security Analysis. The Concept of Intrinsic Value
Chapter 3: Sources of Information
In the typical case, an analyst seeks three type of date: 1) the terms of the issue; 2) the company; 3) the industry.
Data on the terms of the issue: for stocks, the terms of the issues of a company are set forth in the charter (or articles of incorporation), together with the by-laws. If the company is listed on the stock exchange, these documents are filed with the U.S. Securities and Exchange Commission (SEC) and with the stock exchange. In terms of bond issues, the analyst should contact the indenture and the bond contracts may be obtained or inspected at the office of the trustee.
Data on the company: the authors emphasized on the reports to shareholders including quarterly statements, semiannual reports, and annual reports. If the stock is listed, all these reports are available on the SEC site. The standard of reasonable completeness for annual reports should include the following:
Sales and production in units
Division of sales between domestic and foreign, intercompany and outsiders
Details of operating expenses: wages, number of employees, taxes paid, selling and general expenses, maintenance expenditures
Details of capital expenditures during the year
Net earnings
Depreciation
Dividends paid
Details of surplus adjustments
Interest charges
Details of inventories
Details of properties owned
Number of stockholders
Information regarding registration statement of new securities must be included in the prospectus supplied by underwriters and filed with the SEC. Other financial information of a company are available via statistical services such as manuals published by Poor’s, Moody’s. The analyst may also request information directly from the company (e.g. during earnings calls).
Data regarding the industry: Statistical data regarding industries as a whole are available in abundance. For example, the Survey of Current Business, published by the United States Department of Commerce, provides figures on output, consumption, stocks, unfilled orders, etc.. More detailed figures can be found in the Biennial Census of Manufactures. For information regarding oil and gas, The Oil and Gas Journal often publishes data about production.