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Graham & Dodd vs. Edwards & Magee

By Advisor Perspectives
Wealth Management


The development of a personal trading or investing philosophy is usually an evolutionary and highly personal process. Through a combination of experience, trial-and-error, and the attainment of knowledge, successful market participants hone their skills until they find a strategy that works for them and that is consistent with their general mindset. Despite the individualized journey, though, battle lines are generally formed between those who practice more value-based fundamental analysis and those who practice price-based technical analysis. Both disciplines can obviously be used together, but most people in this business probably do lean either more one way or the other, hence the friendly friction between the two schools of thought.

To greatly oversimply things, the “fundamentalists” are commonly followers of Benjamin Graham and David Dodd, the noted Columbia Business School professors who wrote the seminal book Security Analysis back in 1934. Their work treated stocks as the businesses they represented, and they endeavored to uncover situations where the price of shares in a company diverged from the true intrinsic value of its business. “Technicians,” on the other hand, study Technical Analysis of Stock Trends written by Robert D. Edwards and John Magee in 1948 and believe that stocks are just pieces of paper and the prices paid for them at any given time are the true “values” of the companies. Technical analysts argue that the fundamentals don’t make you any money unless the market agrees with your assessment of those fundamentals, and even if one’s fundamental opinion is correct and the price moves to the intrinsic value, it will be reflected in the charts anyway so the technically inclined can take advantage of the move as well. Fundamentalists, of course, retort that the true value of a company can be known in advance of a price move, which potentially allows for getting in or out before the chartists start picking up on any changes in trend. It’s also tough to argue against a strategy that turned Graham & Dodd disciple, Warren Buffett, into the world’s wealthiest person!

Read more at Advisor Perspectives.


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