Risk Latte - Why Are Equity Analysts Still Around?

Why Are Equity Analysts Still Around?

Rahul Bhattacharya
Apr 19, 2005

In 1934, a book titled Security Analysis was published which soon became the cornerstone of fundamental analysis on Wall Street. Several generations of brokers and equity analysts eventually came to make a career out of this book. The authors of the book were Benjamin Graham and David L. Dodd.

This book, amongst other things, argued that the future earnings power of the firm was the most important determinant of a stock's value. The authors also argued in the book that each dollar of dividends is worth four times as much as each dollar of retained earnings. (Subsequent examination of market data has indicated that this argument has no support.)

However, and ironically, in 1974 Graham himself repudiated the book and the principles contained in it. Instead of following his old approach, he developed a new approach with James Rea to identify under-priced common stocks. The reason for his change in attitude was his belief that the stock market was becoming more and more efficient and that only smaller pockets of inefficiencies were in existence.

Makes us wonder: why are equity analysts still around?

(Reference: Investments by William Sharpe and Gordon J. Alexander).

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