Thursday, July 3, 2008

* Who is David Dodd and Why Should We Listen to Him

Smith & Wesson immediately means something to a person familiar with firearms. In much the same way, the phrase Graham and Dodd carries a lot of weight with value investors. David LeFevre Dodd, the lessor known of the two, was born in 1895. He was an educator and close colleague of Benjamin Graham at the Columbia Business School.


The 1929 stock market crash almost wiped out Graham. The crash inspired Graham to search for a more conservative, safer way to invest. Graham agreed to teach with the stipulation that someone take notes. David Dodd a young instructor at Columbia volunteered to be that someone. Those notes served as the basis for the 1934 book Security Analysis, which is considered the first book on value investing and is the longest running investment text ever published.

In the late 1950's value investing was pushed aside for modern portfolio theory (MPT) championed by academics at The University of Chicago. MPT makes use of quantitative analysis. Where value investing sees securities as priced correctly, under-priced, or over-priced, MPT proponents insist that under the efficient market hypothesis a stock price is always correctly priced. This teaching was so prevalent between 1965-1990 that Warren Buffett quipped, "You couldn't advance in a finance department in this country unless you taught that the world was flat."

Shortly after Dodd's death in 1988, Bruce Greenwald, a professor at Columbia took up the Value Investing banner. He found the overwhelming success of Value investors nearly impossible to dismiss. Just as reliable data was solidifying the arguments for Value Investing, MPT was showing some flaws. In 1994, Greenwald overhauled and relaunched the Value Investing curriculum at Columbia. Today, Value Investing enjoys broad appeal among academicians and investors around the world.

At the age of 93, David Dodd died on September 18, 1988 of respiratory failure. At the time of his death, Security Analysis, the book he coauthored with Graham had sold over 250,000 copies.


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