Graham and Dodd
Categories: Financial Theory, Education
They’re the old geezers who literally wrote the book on value investing.
Value. That is, companies where the dollar invested today can be easily mathematically mapped out, such that the company returns well more than a dollar in a very short time period. Think generally: low price-to-earnings ratios; high dividends; modest growth; highly predictable growth on investment at current prices.
A key distinction of the Graham and Dodd system was to "buy low and sell when fairly priced." Not when high. And this is the opposite of a momentum or go-go investor, who follows kind of a “buy high, sell higher” pattern.
The core idea that comprises investing logic is that, if you invest a dollar today, you expect to get more than a dollar back tomorrow. Or next year. Or next decade.
So if a company has no debt and a dollar of cash, and will earn a dollar this year, a dollar ten next year, a dollar twenty the next, and just plans to keep its cash, or buy back stock with it…and that company can be bought for 10 bucks a share...then it is a value stock in today’s world.
The equity value of the company is 9 bucks a share after subtracting that dollar of cash, and with earnings growing slowly and steadily, life is grand, with very low downside risk, and the company should double in value (all else being equal) about every 7 years or so.
Very nice investment returns for value investors.
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Finance: What is Graham and Dodd?0 Views
Finance allah shmoop what is the gram and dod investment
style Well they're old geezers who literally wrote the book
on value investing all right value that is companies where
the dollar invested today can be easily mathematically mapped out
such that the company returns well more than a dollar
in a relatively short time period like either in earnings
or dividends or both All right think generally low p
e ratios here in value investing high dividends modest growth
highly predictable A revenue stream and no huge capital expenditures
needed down the road We'll a key distinction of the
gram and dod system was to buy low and then
sell when fairly priced not like buy low sell high
as the cliche goes and this is the opposite of
a momenta Mohr go go investor who's kind of like
buy high sell higher kind of pattern Yeah well the
core idea that comprises investing logic is that if you
invest a dollar today you expect to get more than
a dollar back tomorrow or next year or next decade
So if a company has no debt in a dollar
of cash and will earn a dollar this here in
dollars ten next year in a dollar twenty The next
they're just plants keep its cash or buy back stock
with it and that company can be bought for ten
bucks a share Then it's a value stock in today's
world in graham and dod would probably be along that
stock or buy it well The equity value of the
company in this case is nine bucks a share After
subtracting that dollars share of cash with earnings growing slowly
and steadily life is grand with very low downside risk
and the company should be able to double in value
all else being equal about every six seven eight years
or so with very high predictability and well that's Very
nice investment Turn for value investors So graham is yoda
dada's obi wan and they note the fine picture of
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