I wanted to share a quote from an important book, but first I need to explain about the book. Benjamin Graham is the father of all modern securities analysis. His 1934 book ‘Security Analysis’ is the standard for valuing stocks to this day (the book has been updated many times since 1934). Despite the fact that Mr. Graham passed away about 30 years ago, his methodologies still live on in his pupils, most famously Warren Buffett.
Ok, now to the quote. This is from the Preface of ‘Security Analysis’:
“In dividing our space between topics the primary but not the exclusive criterion has been that of relative importance. Some matters of vital significance, e.g., the determination of the future prospects of an enterprise, have received little space, because little of definite value can be said on the subject”.
In other words, the 700 page book has almost nothing about trying to predict the future of a company, mostly because it can’t be done. Yet this is exactly what most people on Wall Street and Main Street try to do. They try to guess the future and invest based on that guess. It’s silly that highly paid investment analysts will say “Company XYZ will earn $1.34 a share in 2008”. The future is just not that exactly knowable.
What Mr. Graham did and Mr. Buffett still does is try to determine the value of a company today, based on assets they own and current earning power, then only buy if the stock is far below that value.
This one simple concept evades 90% of the investors, amateur and professional alike. So put away the crystal ball, stop trying to guess the future and look really hard at right now. And you’ll be ahead of most other investors out there.