Security Analysis

Security Analysis is a method of performing fundamental research of individual tradeable financial instruments, namely stocks and bonds, in order to determine their intrinsic value. The process follows a bottom-up approach, by assessing the qualitative and quantitative factors that determine the underlying value of individual securities.


The Fundamental Finance Playbook is a publication dedicated to the Fundamental Research of Stocks and Security Analysis. We publish thoughts and opinions on individual publicly traded stocks as well as our thinking on methodologies for finance and investing practices in general.

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All publications on the Fundament Finance Playbook are provided for informational and entertainment purposes only and do not constitute a recommendation to any particular security, a portfolio of securities, or an investing strategy. All views expressed are our own and we receive no compensation from any of the stocks we write about. 


Ben Graham and Value Investing

Ben Graham is considered the founding father of Value Investing. Graham and Dodd pioneered a method of analysing the financial statements in order to measure the underlying value of a security. This value could then be compared with the market price, which would determine the “cheapness” of the stock.

Security Analysis, the book

Along with David Dodd, Ben Graham laid out his method in a 725-page book named Security Analysis, which was published in 1934. Security analysis was relatively technical for its time and targeted audience that was financially literate. Graham later followed up with his book The Intelligent Investor, which was published in 1949. The book, which counted 640 pages, effectively lays out the same principles put forth in Security Analysis but is aimed at a more general audience.



What is a Security?

Securities are tradable financial instruments that derive their value from underlying business operations. Common and preferred stock, debt and other forms of corporate credit are considered to be securities. Financial instruments linked to commodities, such as commodity futures and forward contracts, are not considered to be securities.

What is Fundamental Analysis?

Fundamental Analysis is an accounting and finance term, that refers to the process of analysing a business’s financial statements in order to determine its Intrinsic Value. Although Fundamental Analysis is predominantly a bottom-up approach, other quantifiable factors can be of health, to determine a company’s financial strength.

The primary objective of the fundamental analysis is to establish a quantitative value that can be used for comparison of securities. Additionally, fundamental analysis can be used to forecast a security’s price evolution and make projections on a company’s expected performance. Fundamental analysis is also used to evaluate a business’ management.

Modern Security Analysis

Fundamental research and security analysis has developed over time and there is a healthy debate within the field of active investing on methods and approaches to analysis businesses and valuing securities.

In the book Modern Security Analysis: Understanding Wall Street Fundamentals,  Martin J. Whitman and Fernando Diz outline an approach to business and security analysis that departs from most conventional security analysts.

Modern Security Analysis has more in common with Corporate Finance than it does with the conventional approach. The key factors in appraising a company and its securities are

  1. Creditworthiness
  2. Flows―both cash and earnings
  3. Long-term outlook
  4. Salable assets which can be disposed of without compromising the going concern, dynamics
  5. Resource conversions such as changes in control, mergers and acquisitions, going private, and major changes in assets or in liabilities, and
  6. Access to capital.

Valuation Methods

The value of securities should reflect the present value of their future cash flows to the owners of the security. Therefore, the most common method of valuation is the Discounted Cash Flow Analysis (DCF). The DCF analysis is very suitable for calculating the intrinsic value of bonds and other fixed-income securities. With a bond, all future cash-flows are known but the intrinsic value of the bond is affected by the inflation rate and the risk of default.

Discounted Cash Flow

Equities have an unknown future cash flows, that can be affected by a multitude of factors, ranging from the competitive landscape to corporate governance. Therefore, other valuation methods are often used to complement any analysis of future cash flows.

Relative Value

Comparable Companies Analysis (CCA) and the analysis of Precedent Transaction (PT) are two different ways of performing a comparison of valuation multiples. The aim is to compare the company that is being valued with other companies within the same industry or sector, in order to determine its relative value.

Cost Approach

Cost-to-Build (CtB) and Replacement Cost Analysis (RCA) are two different ways of determining the value of an asset based on costs. Using cost-based approaches is more relevant when there is an uncertainty of industry multiples or if the asset is not a Going Concern.


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The Fundamental Finance Playbook is a publication dedicated to the Fundamental Research of Stocks and Security Analysis. We publish thoughts and opinions on individual publicly traded stocks as well as our thinking on methodologies for finance and investing practices in general.

All publications on the Fundament Finance Playbook are provided for informational and entertainment purposes only and do not constitute a recommendation to any particular security, a portfolio of securities, or an investing strategy. All views expressed are our own and we receive no compensation from any of the stocks we write about.