[2026–2027] Week 2: Benjamin Graham’s Security Analysis: Bonds (+friends)
I was happy to see how many of you engaged with the reading and the questions in a thorough, high-quality way. Keep it up – while this is not easy reading, it will form the foundation of your investment process. To give you a little encouragement: if you make it past this week’s reading assignment, it gets easier from there. Note : Given the length of this assignment and out of consideration that you all have work, lives, school, etc this assignment is for 2 weeks from now. There will be no post next Friday. Next post is on Friday October 23rd. I wrote an article answering question 0 from last week’s assignment about the dimensions of an investing style where I list 21 important dimensions. Please take a look at the article and compare it with your answer. Switching over to Security Analysis , Part 1 and Benjamin Graham, many of you correctly noted that the first edition was written during the Great Depression and not long after the stock market crash of 1929. That had a big impact on both Graham (whose partnership declined a meaningful amount in part due to use of margin debt) and on overall investor psychology. Join thousands of long-term investors for free to receive valuable insights. Graham was not writing to today’s audience of investors who have been conditioned that stocks only go up over the long-term. He was writing to people who had just seen an unprecedented collapse in stock prices and many of whom think that purchasing any stock is a speculation. That is why he felt the need to work so hard to convince his readers that stocks can be an investment and why he laid out such a careful, risk-averse approach to investing. Before we move on to Parts 2 + 3 and this week’s assignment, here are some excerpts from some of your answers to last week’s questions that I thought are worth sharing with the community. There were far more insightful answers than I can fit in here, and over time I will try to highlight as many folks’ contributions as possible: In response to Question 1 Chris Carothers wrote : The first edition was written in 1934. This was an environment of profound loss, not only in a financial sense, but emotionally and spiritually too. My previous boss Walter Pearson lived during that time and had to drop out of school during the ninth grade and work at a diner to feed his family. I learned through second hand stories about those tough times. So it does not surprise me he wanted to take a conservative approach. In response to Question 2 Tibor wrote : Quoting from Graham-Newman Corporation letters to stockholders, Benjamin Graham’s corporation general investment policy (and a proxy for his also) was defined as: ⁃ “To purchase securities at price less than intrinsic value as determined by careful analysis with particular emphasis on the purchase of securities at less than their liquidation value. ⁃ To engage in arbitrage and hedging operations in the securities field.” Unless we are in a situation where we bought a value trap, a business in a declining or though industry with difficult future perspectives (the relevant examples to add here can be Hathaway Manufacturing Company and Berkshire Fine Spinning Associates in the 1950s), the first point mentioned above can ensure that there is a very high probability that there won’t be a loss of capital and what we own is worth more, at the point of given time, compared what we have paid for. The second point mentioned above if I am not mistaken required more unconventional approach at that time compared to the “mainstream” investment approach and philosophy, but at the end of the day the key elements should have been the intrinsic value (and the opportunity explained by the difference in prices), the probability of the success of the given operations and the time frame necessary that the operation folds out. By talking about Graham’s investment philosophy, it is important to highlight the concepts or taking into consideration also the elements below: ⁃ Intrinsic value; ⁃ Basic concept of margin of safety; ⁃ Uncertainness of the future; ⁃ The irrational behavior of the market; ⁃ The importance of analytical judgment; ⁃ Fundamental analysis including qualitative and quantitative analysis of the company and the management. In response to Question 3 Tony wrote: I would like to imitate his emphasis on risk aversion, margin of safety, and to some degree limited reliance on future expectations. Truly successful investors rarely act, waiting for great opportunities. I sometimes have a tendency to find a reasonably good company at a decent price and act, when I would be much better served waiting for an opportunity that is glaringly undervalued. While calculating a precise intrinsic value can be difficult, a true bargain should be obvious. I want to build the discipline to act only on these obvious mispricings. Graham’s avoidance of future earnings growth is a double-edged sword that I would like to modify. Many of the best investments in recent history have been of high growth companies, growth can be a very powerful thing. In modern times we might not have many opportunities trading for less than liquidation value. However, I think Graham’s caution is still very relevant. Graham lived through a time of economic depression and war. It is possible an unexpected economic disturbance could happen again, just as it has in the past, whether due to a recession, AI changes, or something else. I found Graham’s reference to the war in Europe especially interesting and foreboding. Could the current war in Europe, the Middle East, or some other conflict grow and have an unexpectedly significant impact on the economy and business? I would like to give serious thought to what the valuation of a company looks like without expected growth, or no growth in cash flow or earnings at all. I don’t want to invest based on “this time is different” or with rosy expectations without solid value based on current facts. In response to Question 4 Andrei Tonkikh wrote : Graham defines an investment as an operation that, upon thorough analysis, promises safety of principal and a satisfactory return. Operations that do not meet these requirements are speculative. His choice of words is important: - “thorough analysis” — an investment decision should be based on facts and analysis rather than expectations or market sentiment; - “promises” — does not mean guarantees; investing always involves uncertainty; - “safety of principal” — protection of capital is a necessary condition of an investment; - “satisfactory return” — the objective is not to maximize return, but to obtain a return that the investor considers satisfactory. The implication is that investment and speculation are distinguished not by the security itself, but by the basis on which the operation is undertaken. The same security can therefore be an investment under one set of conditions and a speculation under another. Regarding last week’s Question 4, I am going to add a thought question: What did Graham mean by “an investment operation” in his definition above? As a corollary, can a purchase of a single security in and of itself be classified as either an investment or a speculation according to Graham? According to you? Week 2 assignment is to read the following and answer the questions below: Security Analysis chapters 6, 7, 8 , 22, 23, 26 attached Credit Metrics/Ratings handout (I built it with the help of AI to save you time, it should have links to source material for those who want more depth) Modern Corporate Credit Safety Handout 2pg Sourced (1) 66.2KB ∙ PDF file Download Download Question 1: Why does Graham believe that investing in High Grade fixed income securities to be a 'negative art', in contrast to investing in common stocks? What does he mean by that? Do you agree? Question 2: What is Graham's main idea about what provides safety in a high-grade bond? Do you agree? Question 3: Based on modern standards summarized in the PDF, what credit metrics are important to measure ability to pay? What are the cutoffs for each between what is considered 'investment grade/high-grade' and 'junk/high-yield'? Question 4: How should qualitative factors combine with credit metrics to inform your answer to question 3? Question 5: Find and analyze two high-grade bonds using both Graham's process and any of your own modifications that you think are reasonable. Bring your analysis: a. A bond rated BBB by S&P with a maturity at least 5 years away b. A bond rated A or higher by S&P with a maturity at least 5 years away Is either of those two bonds a good investment in a) Graham's view b) your opinion? Why? Question 6: Why does Graham believe that Senior Securities with Speculative Features are typically attractive in form? Do you agree? Question 7: What are Graham's views on the importance of the terms of the speculative features in such securities vs. the prospects of the underlying enterprise? What do you think about this balance? Question 8: Where does Graham place speculative fixed income securities (high-yield bonds/junk bonds) on the continuum between stocks and high-grade bonds? Would his classification be the same in the current market, and if not how would it differ? How does Graham suggest approaching investing in such securities? Question 9: Find a high-yield bond and analyze it using Graham's approach. Would he consider it attractive? Do you? Question 10: Create an AI prompt based on the material covered by Graham in Parts 2 and/or 3 that would aid you in your investing. Now it’s your turn: Submit your answers in the comments below this article with all your answers in a single comment . I will engage with some of the answers each week and highlight some of the ones I find most insightful in next week’s seminar assignment article. This is a 2-week assignment so please submit your answers by the evening of Thursday, October 22nd. Engage with the answers of some of your fellow seminar members in the comments below. Remember – the goal is to learn together. Be kind, be respectful and try to add to our learning as a community. Feel free to ask any questions about the reading in your comment. Until two weeks from now, Gary Share About the author Gary Mishuris, CFA is the Managing Partner and Chief Investment Officer of Silver Ring Value Partners , an investment firm that seeks to apply its intrinsic value approach to safely compound capital over the long-term. He also teaches the Value Investing Seminar at the F.W. Olin Graduate School of Business.