This is the second article in a series of tutorials about post-modern security analysis.

Classic “Intrinsic Value”

The central concept of classical security analysis is “intrinsic value”.

This term is defined as follows in the first chapter of “Security Analysis (1940 Edition)” by Benjamin Graham and David Dodd:

	"Intrinsic Value" is a fuzzy concept

… intrinsic value is an elusive concept. In general terms, it is understood to be that value which is justified by the facts, e.g., the assets, earnings, dividends, definite prospects, as distinct, let us say, from market quotations established by artificial manipulation or distorted by psychological excesses. But it is a mistake to imagine that intrinsic value is a definite and as determinable as is the market price.

Our notion of intrinsic value may be more or less distinct, depending on the particular case. The degree of indistinctness may be expressed by a very hypothetical “range of approximate value”, which would grow wider as the uncertainty of the picture increased … It would follow that even a very indefinite idea of the intrinsic value may still justify a conclusion if the current price falls far outside the maximum or minimum appraisal.

The “facts” on which “intrinsic value” was to be based were considered to be relatively simple and easily acquired at the time Graham & Dodd published the first edition of “Security Analysis”, which stated:

	1910 ad for "Standard" stock index cards

Descriptive analysis consists of marshalling the important facts related to an issue and presenting them in a coherent, readily intelligible manner. This function is adequately performed for the entire range of marketable corporate securities by the various manuals, the Standard Statistics and Fitch services, and others.

Because of this assumption (reasonable at the time), almost the entire volume of “Security Analysis” (often considered to be the Bible of “fundamental analysis”) was devoted to the analysis of data from these standard, easily obtained secondary sources. Little attention was devoted to the job of collating and researching data from original sources (OSINT). More »

This article is the first in a series of tutorials about the techniques of post-modern securities analysis. Click the RSS button in the sidebar to get a free subscription to the whole set.

Definition of “Security Analysis”

Security Analysis is the study of facts about negotiable instruments for the purpose of determining whether a particular instrument is appropriate for a specific investor at a particular time and the intrinsic value of the security compared to its market price, if any.

	Observe closely and get the facts ...

This analysis is usually conducted by gathering facts about the legal jurisdiction governing the security, the terms and conditions of the issue, data on the organization issuing the security, and information on operations, laws, rules, and other factors related to the instrument or the issuer.

The determination of the appropriateness of a security is made by a critical evaluation of a wide range of facts about the instrument in terms of the current price and the needs of a specific investor. More »