Graham & Dodd To The Rescue

Like clockwork, post big brokerage houses suggesting 40X multiples were becoming the norm, coupled with the proliferation of “new valuation models” emerging, the financial world was thrown into a tizzy by reality. As witnessed more times than I can recall, the battle cry has once again been made; bring back Graham and Dodd.

Why not, David Dodd and Benjamin Graham; you know him, he taught Warren Buffett a thing or two, the true foundation builders for value investing are back. Just like what happened in the late 1920s – early 1930s Wall Street wore the ill-fated moniker of dismissing its fiduciary duties and we all know what that result was. Over the last several years, especially since October 2021, big brokerage has done it again. How many times does someone need witness these utterly false, almost conjured up, mythical prognostications before they learn; valuation criteria, even those as simple as what Graham and Dodd put forth in 1934, work.

It’s not really all that difficult folks. These guys created a valuation method to uncover equities whose prices were just too low. It was simple; high earnings-to-price ratio, an historically low P/E ratio, a solid, higher than most dividend yield trading below its book value and net current asset value. Yeah, it takes a little work to identify equity investments using Graham and Dodd but with existing filters coupled with a decent computer anyone can do it.

There’s more to what to look for but to keep it simple, “cash is king” and “debt kills”. For us using Graham and Dodd identifies equities that should be shorted. You might remember the days when true “hedge funds” bought “the best of breed” in a specific industry while “shorting the laggard”. That’s before we redefined “hedge funds” as speculative pools of money that mostly made their owners rich.

Hope you enjoyed this post. I’m just a young 68 years old; my Dad became a broker when I was 13. It’s time for me to ‘give back’ to all of you what’s in my head. It’s not always pretty but it’s based on history . . . and history, unchecked, repeats itself.

Everyone learns at their own pace. If you pick everything up the first time through, great but if not email me at dzimmer@substack.com so we can further help.

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