Graham and Dodd

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.

Related or Semi-related Video

Finance: What is Graham and Dodd?0 Views

00:00

Finance allah shmoop what is the gram and dod investment

00:06

style Well they're old geezers who literally wrote the book

00:11

on value investing all right value that is companies where

00:15

the dollar invested today can be easily mathematically mapped out

00:19

such that the company returns well more than a dollar

00:22

in a relatively short time period like either in earnings

00:25

or dividends or both All right think generally low p

00:28

e ratios here in value investing high dividends modest growth

00:33

highly predictable A revenue stream and no huge capital expenditures

00:39

needed down the road We'll a key distinction of the

00:41

gram and dod system was to buy low and then

00:45

sell when fairly priced not like buy low sell high

00:48

as the cliche goes and this is the opposite of

00:51

a momenta Mohr go go investor who's kind of like

00:55

buy high sell higher kind of pattern Yeah well the

00:58

core idea that comprises investing logic is that if you

01:01

invest a dollar today you expect to get more than

01:03

a dollar back tomorrow or next year or next decade

01:06

So if a company has no debt in a dollar

01:08

of cash and will earn a dollar this here in

01:10

dollars ten next year in a dollar twenty The next

01:12

they're just plants keep its cash or buy back stock

01:14

with it and that company can be bought for ten

01:17

bucks a share Then it's a value stock in today's

01:20

world in graham and dod would probably be along that

01:23

stock or buy it well The equity value of the

01:25

company in this case is nine bucks a share After

01:28

subtracting that dollars share of cash with earnings growing slowly

01:31

and steadily life is grand with very low downside risk

01:36

and the company should be able to double in value

01:38

all else being equal about every six seven eight years

01:40

or so with very high predictability and well that's Very

01:44

nice investment Turn for value investors So graham is yoda

01:47

dada's obi wan and they note the fine picture of

01:51

their disciple here Luke that's biggest fan Look sharp it 00:01:56.308 --> [endTime] geico

Find other enlightening terms in Shmoop Finance Genius Bar(f)