I have dedicated myself to a year-long study of Benjamin Graham's book Security Analysis.  Currently, I'm studying:

Part I: Survey and Approach
Chapter 2: The Scope and Limitations of Security Analysis

(page 13) "Analysis" connotes the careful study of available facts with the attempt to draw conclusions therefrom based on established principles and sound logic.  It is part of the scientific method.  But in applying analysis to the field of securities we encounter the serious obstacles that investment by nature is not an exact science.

My Thoughts: Analysis is useful, but with an understanding that a certain level of "individual art (skill)" is involved.  This links back to Graham's comment on page 1, "He must be able to resist human nature itself sufficiently to mistrust his own feelings when they are part of mass psychology."

Graham has also been quoted saying, "You're neither right nor wrong because other people agree with you.  You're right because your facts are right and your reasoning is right -- and that's the only thing that makes you right.  And if your facts and reasoning are right, you don't have to worry about anybody else."

(page 13) The functions of analysis may be described under three headings: descriptive, selective, and critical.

(page 13) Descriptive analysis limits itself to marshaling the important facts relating to an issue and presenting them in a coherent, readily intelligible manner.

My Thoughts: There are three areas to get descriptive information for analysis.  They are: 1) company figures, 2) my own adjustments to put different (page 14) "companies on a fairly comparable plane" and, 3) the company's present situation within the economic environment.

(page 14) Selective function.  The senior analyst must be ready to pass judgment on the merits of securities.  He is expected to advise others on their purchase, sale, retention, or exchange.

(page 21) The critical function of security analysis.  Analytical judgments are reached by applying standards to facts.  It is a matter of great moment to the analyst that the facts be fairly presented, and this means that he must be highly critical of accounting methods.  Finally, he must concern himself with all corporate policies affecting the security owner, for the value of the issue which he analyzes may be largely dependent upon the acts of the management.

My Thoughts: Do not assume that management knows what the analyst's best needs are when presenting financials.  Dig through and get the numbers yourself.  Validate and use common sense tests to see if the information presented is fair and representative of actual (or expected) results.
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