David LeFevre Dodd (23 August 1895 – 18 September 1988) was an American educator, financial analyst, writer, economist, and investor. During his student years, Dodd was a protégé and colleague at Columbia Business School Benjamin Graham.
The Wall Street crash of 1929 (Black Tuesday) nearly destroyed Graham, who had begun teaching at his alma mater, Columbia University, the previous year. The crash inspired Graham to look for a more conservative and safer way to invest. Graham agreed to teach and stipulated that someone take notes. Dodd, then a young coach at Columbia University, volunteered to participate in these transcriptions, building on the foundations of the 1934 book Analysis of Securities, which inspired the concept of value investing. This is the longest-running investment text ever published.
From 1922 to 1925, Dodd was a lecturer in economics at Columbia University. From 1925 to 1930, he became a lecturer in finance. From 1926 to 1945, he was responsible for business and economics courses. In 1930, he received his Ph.D. from Columbia University. From 1930 to 1938, Dodd was an assistant professor there, associate professor from 1938 to 1947, and full professor from 1947 to 1961. From 1948 to 1952, he was associate dean of Columbia Business School. In 1961, he retired as Professor Emeritus of Finance at Columbia University.
In addition to his co-authorship with Graham, he also had a monograph: David Lefebvre Dodd, "Stock Pouring: A Judicial Valuation of Property Used for Stock Offerings" (January 1, 1930), Columbia University Press, OCLC 2087269.
"Graham and Dodd's" "value investing" views "margin of safety" and "intrinsic value" as biblical value two phrases often used by investors referring to investment methods.
Margin of safety
Using the margin of safety, stocks should be bought when their value exceeds their price in the market. This is the central argument of the philosophy of value investing, which supports the protection of capital as the primary rule for their investments. Benjamin Graham recommends looking at unpopular or neglected companies with p/E ratios and low P/E ratios. One should also analyze financial statements and footnotes to see if a company is likely to be overlooked by the market for hidden assets (e.g., investments in other companies).
The margin of safety protects investors from bad decisions and market downturns. Since fair value is difficult to calculate accurately, the margin of safety provides investors with investment space. Warren Buffett likens the margin of safety to a famous example of crossing a bridge:
You must have the knowledge to make a very general estimate of the value of the underlying business. But you're not going to cut it very close. That's what Ben Graham means by having a margin of safety. You're not going to try to buy a $83 million business for $80 million. You leave yourself with huge profits. When you build a bridge, you insist that it can carry 30,000 pounds, but you can only drive a 10,000 pound truck across it. The same principle applies to investment.
A common explanation for the margin of safety is that the intrinsic value of a person's payment for stocks is much lower. For high-quality issues, value investors typically want to pay 90 cents for a dollar (90 percent of intrinsic value), while more speculative stocks should be bought at up to 50 percent intrinsic value discounts (50 cents for a dollar).
Intrinsic value
In finance, the intrinsic value of an asset usually refers to the value calculated based on simplified assumptions. For example, the intrinsic value of an option is based on the current market value of the underlying instrument, ignoring the possibility of future volatility and the time value of the currency.
If the option is an in-the-money option, the option is said to have intrinsic value. When outside the price, its intrinsic value is zero.
The intrinsic value of an in-the-money option is calculated as the absolute value of the difference between the current price (S) of the underlying and the strike price (K) of the option.
For example, if a call option has an strike price of $1.00 and the underlying price is $1.20, the intrinsic value of the option is $0.20.
The value of an option is the sum of its intrinsic value and time value.