In the introduction, Graham and Dodd stated, “Even though the last bull and bear markets have been unexampled in recent history as regards both magnitude and duration, at bottom the experience of speculator was no different from that in all previous market cycles.” He elaborated, “That enormous profit should have turned into still more colossal losses.”[i]
You need to understand the background of our textbook and perhaps a little about the authors whose work was published in 1934, with fresh memories of the great depression just behind them. Benjamin Graham, at the time was a profession at Columbia University and David Dodd was his assistant. Benjamin Graham was also a practitioner of Wall Street. It has been said that few people were aware, he lost a great deal during the depression and perhaps it was an additional incentive for him to teach at Columbia.
In his twenties after graduating he was offered several opportunities to teach at Columbia but turned it down for Wall Street. This guy was a think tank. His teaching inspires many but the most famous of all is Warren Buffett. Good thing for the great depression which indirectly lead Graham to teach without which there would be no Warren Buffett and without Buffett I would not have had this fascination with investing.
Our topic today is Speculation. So what is speculation? Graham and Dodd felt that it would be easier to ask, what is not considered speculation? For instance what is an investment? Their definition is, “An investment operation is one which, upon thorough analysis promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”[ii] If there is a chance of loss under normal and reasonable assumptions that we have to take into account it is then speculation and not investment.
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[i] Benjamin Graham, David Dodd,1962. Security Analysis, The Classic 1934 ed. United States of America: The McGraw-Hill Companies, Inc. at 1
[ii] Ibid at 54