Principal Obstacles to Success of the Analysis

Graham談quality approach的例子

SA, page 68

Needless to say, the analyst cannot be right all the time. Furthermore, a conclusion may be logically right but work out badly in practice. The main obstacles to the success of the analyst's work are threefold, viz.,

1) the inadequacy or incorrectness of the data
2) the uncertainties of the future
3) the irrational behavior of the market


1) Inadequate or incorrect data
.....although serious, is the least important of the three
.....Concealment is more common than misstatement
.....the analyst's experience and skill should lead him to note this defect and make allowance therefore

2) Uncertainties of the futures
A conclusion by the facts and by the apparent prospects may be vitiated by new developments. This raise the question of how far it is the function of security analysis to anticipate changed conditions.......It is manifest, however, that future changes are largely unpredictable, and that security analysis must ordinarily proceed on the assumption that the past record afford at least a rough guide to the future.

The more questionable this assumption, the less valuable is the analysis. Hence this technique is more useful when applied to senior securities (which are protected against change) than to common stock; more useful when applied to a business of inherently stable character than to one subject to wide variations; and, finally, more useful when carried on under fairly normal general conditions than in times of great uncertainty and radical change.


3) the irrational behavior of the market
In the sense the market and the future present the same kind of difficulties. Neither can be predicted or controlled by the analyst, yet his success is largely dependent upon them both.

The major activities of the investment analyst may be thought to have little or no concern with market price. His typical function is the selection of high-grade, fixed-income-bearing bonds, which upon investigation he judges to be secure as to interest and principal. The purchaser is supposed to pay no attention to their subsequent market fluctuations, but to be interested solely in the question whether the bonds will continue to be sound investments. In our opinion this traditional view of the investor's attitude is inaccurate and somewhat hypocritical. Owners of securities, whatever their character, are interested in their market quotations. This fact recognized by the emphasis always laid in investment upon marketability. If it is important that an issues be readily salable, it is still more important that it command a satisfactory price. While for obvious reasons the investor in high-grade bonds has a lesser concern with market fluctuations than has the speculator, they still have a strong psychological, if not financial, effect upon him. Even in this field, therefore, the analyst must take into account whatever influences may adversely govern the market price, as well as those which bear upon the basic safety of the issues.

In that portion of the analyst's activities which relates to the discovery of undervalued, and possibly overvalued securities, he is more directly concerned with market prices. For here the vindication of his judgment must be found largely in the ultimate market action of the issues. This field of analytical work may be said to rest upon a twofold assumption : first, that the market price is frequently out of the line with the true value; and, second, that there is an inherent tendency for these disparities to correct themselves. As to the truth of the former statement, there can be very little doubt.

(for interested reader, please continue read Intelligent Investor's The investor and market fluctuations, chapter 8, page 116)