If secondary issues tend NORMALLY to be undervalued, what reason has the investor to hope that he can profit by such a situation?
For if this undervaluation persists indefinitely, will he not always be in the same position market wise as when he bought the issue?
The answer here is somewhat complicated.
Substantial profits from the purchase of secondary companies at bargain prices arise in a variety of ways.
- First, the dividend return is high.
- Second, the reinvested earnings are substantial in relation to the price paid and will ultimately affect the price. In a five- to seven-year period these advantages can bulk quite large in a well-selected list.
- Third, when a bull market appears, it is most generous to low-priced issues; thus it tends to raise the typical bargain issue to at least a reasonable level.
- Fourth, even during relatively featureless market periods a continuous process of price adjustment goes on, under which secondary issues that were undervalued may rise at least to the normal level for their type of security.