Reviewing Graham and Dodd

As Benjamin Graham and David Dodd wrote following the Great Depression (Security Analysis, 1934),

“The‘new-era’ doctrine – that ‘good’ stocks (or ‘blue chips’) were sound investments regardless of how high the price paid for them — was at bottom only a means for rationalizing under the title of ‘investment’ the well-nigh universal capitulation to the gambling fever… Why did the investing public turn its attention from dividends, from asset values, and from earnings, to transfer it almost exclusively to the earnings trend? The answer was, first, that the records of the past were proving an undependable guide to investment; and secondly, that the rewards offered by the future had become irresistibly alluring … The notion that the desirability of a common stock was entirely independent of its prices seems incredibly absurd. Yet the new-era theory led directly to this thesis.”

For all that has been written about bubbles and bad behavior during this recession, it seems like going back to basics always makes sense. This is applicable for any market.