David Dodd

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David LeFevre Dodd (1895 - 1988) was an American educator, financial analyst, author, economist, professional investor, and in his student years, a protégé of, and as a postgraduate, close colleague of Benjamin Graham at Columbia University.

The Wall Street Crash of 1929 (Black Thursday) almost wiped out Graham, who had started teaching the year before at his alma mater, Columbia. 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. Dodd, then a young instructor at Columbia, volunteered. Those transcriptions served as the basis for a 1934 book Security Analysis, which galvanized the concept of Value Investing. It is the longest running investment text ever published.[1]

After cooling off from irrational exuberance in the 90s, today, more than ever, Graham and Dodd's approach to Value Investing serves as a compass for legendary investors, one of whom is Warren Buffett, who attended Columbia University (MS Economics '51) specifically to study with the duo.

Contents

[edit] Value investing

It has been suggested that this article or section be merged with Value investing. (Discuss)

The phrases "Graham and Dodd," "value investing", "margin of safety", and "intrinsic value" — all biblical to value investors — are often used interchangeably when referring to an approach to investing. Despite the onset of modern portfolio theory (MPT) in the late 1950s — a theory that peaked throughout the 80s, gaining Nobel recognition in 1990 (co-laureates: Harry Markowitz, Merton Miller, William F. Sharpe) — Value Investing proved to be a formidable style that sharply defied MPT.

The University of Chicago was at the center of MPT (see "quantitative analyst") while Columbia has been the Mecca for Value Investing for 7-1/2 decades. Many cracks in MPT are now well established, whereas the basics behind Graham & Dodd’s approach to Value Investing are as valid today as when they were first introduced.

Value Investors see securities as either priced correctly, under-priced, or over-priced. In contrast, MPT proponents insist that, by definition under the efficient market hypothesis, a realized price of a stock is the correct price. Value investor purists reject the usefulness of Capital Asset Pricing Model (CAPM), in part, because it wrongly extrapolates historical volatility as a proxy for risk. For example, if equity prices of a company fell 75%, assuming the underlying fundamentals of the company were solid, an MPT practitioner would view it as volatile (risky); whereas, a value investor would determine whether it was undervalued, and, if so, buy it reasoning, among other things, that the resulting downward risk is less than before. Ergo, value investors see MPT metrics — such as standard deviation, beta (relative standard deviation), alpha (excess return), and the Sharpe ratio (risk adjusted return) — as inadequate and even misleading.

Columbia resisted de-emphasizing Value Investing during the throes of the MPT renaissance, but the appeal of MPT seemed to be part of a larger movement, thrusting finance aspects of business education into higher echelons of academia.

During about a 25-year period (1965-90), published research and articles in leading journals of the value ilk were few. Warren Buffett once commented, "You couldn't advance in a finance department in this country unless you taught that the world was flat."[2] Shortly after the death of David Dodd in 1988, Professor Bruce Corman Norbert Greenwald, a star professor at CBS, took a keen interest in Value Investing. He found the overwhelming success of Value investors difficult to dismiss. At the same time, reliable data that fortified Value Investing was solidifying, while MPT was showing some flaws. Professor Greenwald invigorated the academic aspects of what many in ivory towers erstwhile treated as a vocational discipline. As if everyone were realizing the success of Value Investing at the same time (a little EMH first-mover humor), wide popularity spread among academicians and MBA students not only at Columbia, but around the globe.

MPT pundits argue that the Warren Buffett's long-term record is a statistical three- to five-sigma event — that is, his success is probable, but not replicable with certainty.[3]

Yet the success of numerous other investment funds and practitioners who applied Value Investing theories weakened assertions attributing success to chance. Because Value Investing rejects MPT and its use of sophisticated statistics, there's irony when MPT theorists attribute its success to tails of standard deviation.

Bruce Greenwald overhauled and relaunched the Value Investing curriculum at Columbia in the spring of 1994. Today, Value Investing enjoys broad appeal among academicians and investors around the world. Professor Greenwald is the Robert Heilbrunn Professor of Finance and Asset Management at Columbia University.

David Dodd died September 18, 1988, aged 93, of respiratory failure at Maine Medical Center, Portland, Maine.[4] At the time of his death, various editions of the book he coauthored, Security Analysis, had sold over 250,000 copies.[5]

His daughter, Barbara Dodd Anderson lives in Northern California and is a benefactor and supporter of the Heilbrunn Center for Graham and Dodd Investing.

[edit] Academic timeline

[edit] Professional timeline

[edit] Memberships

Dodd's residence (1950s - 60s): 39 Claremont Avenue (down the street from Juilliard's former home), Morningside Heights (2006 photo)
Dodd's residence (1950s - 60s): 39 Claremont Avenue (down the street from Juilliard's former home), Morningside Heights (2006 photo)

[edit] Bibliography

Dodd, David LeFevre, "Stock Watering: the judicial valuation of property for stock-issue purposes" (January 1, 1930), Columbia University Press

[edit] Notes

  1. ^ Janet Celesta Lowe, Value Investing Made Easy, McGraw-Hill (1996)
  2. ^ Joseph Nocera, The Heresy That Made Them Rich, The New York Times, October 29, 2005
  3. ^ Buffett Partnership, Ltd., a limited investment partnership Buffett managed from 1957-1969, beat the Dow Jones Industrial Average every year of its existence, achieving a cumulative return of 2,749.9% relative to the DJIA'’s 152.6%. Berkshire Hathaway Inc., a onetime beleaguered textile company that Buffett acquired in 1965 and transformed into an investment vehicle, beat the pre-tax total return of the S&P 500 in 36 of 41 years, achieving an after-tax cumulative return of 305,134% relative to the S&P 500’s pre-tax total return (with reinvested dividends) of 5,583%. Nobel Laureate William F. Sharpe dismissed Buffett's success as a “‘three sigma event — a statistical aberration absurdly out of line.
  4. ^ Obituary, David Dodd, The New York Times, September 20 1988
  5. ^ Obituary, David Dodd, The New York Times, September 20 1988

[edit] See also


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