The stock of a growing company, if purchasable at a suitable price, is obviously preferable to others.
The choice between the attractive issue that turns out well and the one that does poorly is by no means easy to make in the growth-stock field.
However, superior results may be obtained in this field if the choices are competently made.
Even with careful selection, some of the individual issues may fare relatively poorly.
Wednesday 21 January 2015
Tuesday 20 January 2015
Formula Timing - Buying in low markets and selling in high markets. No simple and fool-proof formula. Select a ins and outs formula timing plan that is simple and convenient .
Let's look at the possibilities and limitations of a policy of entering the market when it is depressed and selling out in the advanced stages of a boom.
This bright idea appeared feasible from a first inspection of the market chart covering the gyrations of the past fifty years.
But closer study indicated that no simple and fool-proof formula could be counted upon to work out in the future.
For example, the history of the Dow-Jones Industrial Average suggests that it should be possible to buy at 140 during the next few years and sell out at 280 later.
But this is only an indication and not a true prediction.
Nor can we tell whether the probability of its working out is good enough to justify the basing of an investment policy upon it.
$$$$$
The various formula timing plans, which have come into prominence in recent years, all represent a compromise attempt to deal with this probability.
Instead of planning to do all the buying at 140 - or some similar price - and all the selling at 280, the formula user buys at various stages on the downside and sells in installments on the upside.
By this means he can obtain some benefit from market fluctuations, even if they do not fall precisely within the range suggested by the chart.
Thus his formula assures him at least some profit if the future performance of the market is only reasonably close to that of the past.
$$$$$
A simple application of this idea would be to sell 10 percent of your holdings when the market advances 10 per cent above a chosen base or central level; then to sell 20 per cent of the remainder when it advances another 10 per cent and so on.
Repurchases would be made after the market had declined to the central level, and on some similar schedule.
Following this plan, you would have sold all your stocks if and when the market level reached double the base figure, and you would then have realized a profit of 37 per cent above the base.
You can apply these ins and outs of formula timing plans, using various types of plans, to calculate their possible results, using the record of your own actual operations and also applied to hypothetical or imaginary funds.
$$$$$
There is some danger here for both writers and investors to lose themselves in a maze of alternative procedures.
It is well to bear certain basic facts in mind. No one plan has a priori or guaranteed advantage over any other.
The relative results of various plans will depend on how well each happens to fit the market fluctuations of the future.
$$$$$
1. The more certain the investor is that the range of future fluctuations will duplicate the past, the more justified he is in concentrating his buying close to the bottom line of the Dow-Jones performance chart and his selling not much below the top line.
2. But since we lack any proof that the past range must determine that of the future, most of us will prefer a compromise formula by which buying and selling is done in various stages below and above the indicated median level.
3. So too, there is no assured advantage as between a plan to sell 100 per cent of our stock holdings by the time a designated high point is reached and a plan that assures retention of some stocks under all circumstances. The latter in some measure protects against an inflationary breakout of a permanent character into a much higher band of fluctuation than we have experienced hitherto.
But like all the other choices in formula timing plans the wisdom of this one depends not on reasoning but on results.
$$$$$
The sovereign virtue of all formula plans lies in the compulsion they bring upon the investor to sell when the crowd is buying and to buy when the crowd lacks confidence.
If the reader adopts a formula plan today and it happens to turn out badly - because the market chances to soar upwards to unexpected heights and does not return - it will still prove to have been worth while.
For the principle and the psychology will remain sound and applicable to the markets of the future, however far removed their middle range may be from the line of the past.
$$$$$
Since all the rest is a matter of detail or of guesswork, we strongly advice to "formula investors" that they select a plan that is simple and convenient in their circumstance.
Benjamin Graham
Intelligent Investor
This bright idea appeared feasible from a first inspection of the market chart covering the gyrations of the past fifty years.
But closer study indicated that no simple and fool-proof formula could be counted upon to work out in the future.
For example, the history of the Dow-Jones Industrial Average suggests that it should be possible to buy at 140 during the next few years and sell out at 280 later.
But this is only an indication and not a true prediction.
Nor can we tell whether the probability of its working out is good enough to justify the basing of an investment policy upon it.
$$$$$
The various formula timing plans, which have come into prominence in recent years, all represent a compromise attempt to deal with this probability.
Instead of planning to do all the buying at 140 - or some similar price - and all the selling at 280, the formula user buys at various stages on the downside and sells in installments on the upside.
By this means he can obtain some benefit from market fluctuations, even if they do not fall precisely within the range suggested by the chart.
Thus his formula assures him at least some profit if the future performance of the market is only reasonably close to that of the past.
$$$$$
A simple application of this idea would be to sell 10 percent of your holdings when the market advances 10 per cent above a chosen base or central level; then to sell 20 per cent of the remainder when it advances another 10 per cent and so on.
Repurchases would be made after the market had declined to the central level, and on some similar schedule.
Following this plan, you would have sold all your stocks if and when the market level reached double the base figure, and you would then have realized a profit of 37 per cent above the base.
You can apply these ins and outs of formula timing plans, using various types of plans, to calculate their possible results, using the record of your own actual operations and also applied to hypothetical or imaginary funds.
$$$$$
There is some danger here for both writers and investors to lose themselves in a maze of alternative procedures.
It is well to bear certain basic facts in mind. No one plan has a priori or guaranteed advantage over any other.
The relative results of various plans will depend on how well each happens to fit the market fluctuations of the future.
$$$$$
1. The more certain the investor is that the range of future fluctuations will duplicate the past, the more justified he is in concentrating his buying close to the bottom line of the Dow-Jones performance chart and his selling not much below the top line.
2. But since we lack any proof that the past range must determine that of the future, most of us will prefer a compromise formula by which buying and selling is done in various stages below and above the indicated median level.
3. So too, there is no assured advantage as between a plan to sell 100 per cent of our stock holdings by the time a designated high point is reached and a plan that assures retention of some stocks under all circumstances. The latter in some measure protects against an inflationary breakout of a permanent character into a much higher band of fluctuation than we have experienced hitherto.
But like all the other choices in formula timing plans the wisdom of this one depends not on reasoning but on results.
$$$$$
The sovereign virtue of all formula plans lies in the compulsion they bring upon the investor to sell when the crowd is buying and to buy when the crowd lacks confidence.
If the reader adopts a formula plan today and it happens to turn out badly - because the market chances to soar upwards to unexpected heights and does not return - it will still prove to have been worth while.
For the principle and the psychology will remain sound and applicable to the markets of the future, however far removed their middle range may be from the line of the past.
$$$$$
Since all the rest is a matter of detail or of guesswork, we strongly advice to "formula investors" that they select a plan that is simple and convenient in their circumstance.
Benjamin Graham
Intelligent Investor
Monday 19 January 2015
Timing is of no value, unless it coincides with pricing, enabling repurchase at substantially under previous selling price.
The investor can scarcely take seriously the innumerable predictions which appear almost daily and are his for the asking.
Yet in many cases he pays attention to them and even acts on them. Why?
Because he has been persuaded that it is important for him to form some opinion of the future course of the stock market, and because he feels that the brokerage or service forecast is at least more dependable than his own.
This attitude will bring the typical investor nothing but regrets.
Without realizing it, he is likely to find himself transformed into a market trader.
During a sustained bull movement, when it is easy to make money by simply swimming with the speculative tide, he will gradually lose interest in the quality and the value of the securities he is buying and become more and more engrossed in the fascinating game of beating the market.
But "beating the market" really means beating himself - for he and his fellows constitute the market.
Thus he begins by studying market movements as a "commonsense investment precaution" or a "desirable supplement to his study of security values"; he ends as a stock-market speculator, indistinguishable from all the rest.
A great deal of brain power goes into this field, and undoubtedly, some people can make money by being good stock-market analysts.
But it is absurd to think that the general public can ever make money out of market forecasts.
For who will buy when the general public, at a given signal, rushes to sell out at a profit?
If you, the reader, expect to get rich over the years by following some system or leadership in market forecasting, you must be expecting:
(a) to try to do what countless others are aiming at and
(b) to be able to do it better than your numerous competitors in the market.
There is no basis either in logic or in experience for assuming that any typical or average investor can anticipate market movements more successfully that the general public, of which he is himself a part.
$$$$$$$$$$
Timing is of great psychological importance to the speculator because he wants to make his profit in a hurry.
The idea of waiting a year before his stock moves up is repugnant to him.
But a waiting period, as such, is of no consequence to the investor.
What advantage is there to him in having his money un-invested until he receives some (presumably) trustworthy signal that the time has come to buy?
He enjoys an advantage only if by waiting he succeeds in buying later at a sufficiently lower price to offset his loss of dividend income.
What this means is that timing is of no real value to the investor unless it coincides with pricing - that is, unless it enables him to repurchase his shares at substantially under his previous selling price.
Benjamin Graham
Intelligent Investor
Yet in many cases he pays attention to them and even acts on them. Why?
Because he has been persuaded that it is important for him to form some opinion of the future course of the stock market, and because he feels that the brokerage or service forecast is at least more dependable than his own.
This attitude will bring the typical investor nothing but regrets.
Without realizing it, he is likely to find himself transformed into a market trader.
During a sustained bull movement, when it is easy to make money by simply swimming with the speculative tide, he will gradually lose interest in the quality and the value of the securities he is buying and become more and more engrossed in the fascinating game of beating the market.
But "beating the market" really means beating himself - for he and his fellows constitute the market.
Thus he begins by studying market movements as a "commonsense investment precaution" or a "desirable supplement to his study of security values"; he ends as a stock-market speculator, indistinguishable from all the rest.
A great deal of brain power goes into this field, and undoubtedly, some people can make money by being good stock-market analysts.
But it is absurd to think that the general public can ever make money out of market forecasts.
For who will buy when the general public, at a given signal, rushes to sell out at a profit?
If you, the reader, expect to get rich over the years by following some system or leadership in market forecasting, you must be expecting:
(a) to try to do what countless others are aiming at and
(b) to be able to do it better than your numerous competitors in the market.
There is no basis either in logic or in experience for assuming that any typical or average investor can anticipate market movements more successfully that the general public, of which he is himself a part.
$$$$$$$$$$
Timing is of great psychological importance to the speculator because he wants to make his profit in a hurry.
The idea of waiting a year before his stock moves up is repugnant to him.
But a waiting period, as such, is of no consequence to the investor.
What advantage is there to him in having his money un-invested until he receives some (presumably) trustworthy signal that the time has come to buy?
He enjoys an advantage only if by waiting he succeeds in buying later at a sufficiently lower price to offset his loss of dividend income.
What this means is that timing is of no real value to the investor unless it coincides with pricing - that is, unless it enables him to repurchase his shares at substantially under his previous selling price.
Benjamin Graham
Intelligent Investor
A creditable, if unspectacular, result can be achieved by the lay investor with a minimum of effort and capability.
One thing badly needed by investors - and a quality they rarely seem to have - is a sense of financial history. In nine companies out of ten the factor of fluctuation has been a more dominant and important consideration in the matter of investment than has the factor of long-term growth or decline.
Yet the market tends to greet each upsurge as if it were the beginning of an endless growth and each decline in earnings as if it presaged ultimate extinction.
Investments may be soundly made with either of two alternative intentions:
(a) to carry them determinedly through the fluctuations that are reasonably to be expected in the future, or
(b) to take advantage of such fluctuations by buying when confidence and prices are low and by selling when both are high.
Neither policy can be followed with intelligence unless the investor, or his adviser, has a broad comprehension of the effects of the economic alternations of the past, and unless he takes them fully into account in planning to meet the future.
The art of investment has one characteristic which is not generally appreciated. A creditable, if unspectacular, result can be achieved by the lay investor with a minimum of effort and capability, but to improve this easily attainable standard requires much application and more than a trace of wisdom. If you merely try to bring just a little extra knowledge and cleverness to bear upon your investment program, instead of realizing a little better than normal results, you may well find that you have done worse.
Since anyone - by just buying and holding a representative list - can equal the performance of the market averages, it would seem a comparatively simple matter to "beat the averages"' but as a matter of fact the proportion of smart people who try this and fail is surprisingly large.
Even many of the investment funds, with all their experienced personnel, have not performed as well over the years as has the general market.
Allied to the foregoing is the record of the published stock-market predictions of the brokerage houses, for there is strong evidence that their calculated forecasts have been somewhat less reliable than the simple tossing of a coin.
Benjamin Graham
Intelligent Investor
Yet the market tends to greet each upsurge as if it were the beginning of an endless growth and each decline in earnings as if it presaged ultimate extinction.
Investments may be soundly made with either of two alternative intentions:
(a) to carry them determinedly through the fluctuations that are reasonably to be expected in the future, or
(b) to take advantage of such fluctuations by buying when confidence and prices are low and by selling when both are high.
Neither policy can be followed with intelligence unless the investor, or his adviser, has a broad comprehension of the effects of the economic alternations of the past, and unless he takes them fully into account in planning to meet the future.
The art of investment has one characteristic which is not generally appreciated. A creditable, if unspectacular, result can be achieved by the lay investor with a minimum of effort and capability, but to improve this easily attainable standard requires much application and more than a trace of wisdom. If you merely try to bring just a little extra knowledge and cleverness to bear upon your investment program, instead of realizing a little better than normal results, you may well find that you have done worse.
Since anyone - by just buying and holding a representative list - can equal the performance of the market averages, it would seem a comparatively simple matter to "beat the averages"' but as a matter of fact the proportion of smart people who try this and fail is surprisingly large.
Even many of the investment funds, with all their experienced personnel, have not performed as well over the years as has the general market.
Allied to the foregoing is the record of the published stock-market predictions of the brokerage houses, for there is strong evidence that their calculated forecasts have been somewhat less reliable than the simple tossing of a coin.
Benjamin Graham
Intelligent Investor
Judged by past history, you always had a chance to buy them back at substantially lower levels at some time later.
Another encouraging element for the preceptor is found in the strong warp of continuity that seems to underlie the pattern of financial change.
Important developments affecting broad groups of security values do not come suddenly or in one piece.
An excellent example is found in the long term course of the stock market; this has never moved to permanently higher levels without retreating at least once to former territory.
Hence, investors who sold out representative stocks at what seemed a high price as judged by past history have always had a chance to buy them back at substantially lower levels at some later time.
This proved true in spite of the inflationary effects of the First World War and again of the Second World War, and it also was notoriously true after the extreme market advance of 1928 - 29.
Benjamin Graham
The Intelligent Investor
Comments:
Here are the charts of KLSE and the annual returns of KLSE.
Observe for yourself whether the statement by Benjamin Graham above holds true.
It generally is so but how can you hope to profit from this strategy?
Annual Stock Market Returns in KLSE
2005 -0.84%
2006 21.83%
2007 31.82%
2008 -39.33%
2009 45.17%
2010 19.34%
2011 0.78%
2012 10.34%
2013 10.54%
2014 -5.66%
MSCI Malaysia (price) index
2005 -1.52%
2006 33.11%
2007 41.54%
2008 -43.39%
2009 47.79%
2010 32.51%
2011 -2.92%
2012 10.76%
2013 4.17%
2014 -13.41%
Important developments affecting broad groups of security values do not come suddenly or in one piece.
An excellent example is found in the long term course of the stock market; this has never moved to permanently higher levels without retreating at least once to former territory.
Hence, investors who sold out representative stocks at what seemed a high price as judged by past history have always had a chance to buy them back at substantially lower levels at some later time.
This proved true in spite of the inflationary effects of the First World War and again of the Second World War, and it also was notoriously true after the extreme market advance of 1928 - 29.
Benjamin Graham
The Intelligent Investor
Comments:
Here are the charts of KLSE and the annual returns of KLSE.
Observe for yourself whether the statement by Benjamin Graham above holds true.
It generally is so but how can you hope to profit from this strategy?
Annual Stock Market Returns in KLSE
2005 -0.84%
2006 21.83%
2007 31.82%
2008 -39.33%
2009 45.17%
2010 19.34%
2011 0.78%
2012 10.34%
2013 10.54%
2014 -5.66%
MSCI Malaysia (price) index
2005 -1.52%
2006 33.11%
2007 41.54%
2008 -43.39%
2009 47.79%
2010 32.51%
2011 -2.92%
2012 10.76%
2013 4.17%
2014 -13.41%
Sunday 18 January 2015
### Attractive Buying Opportunities arise through a Variety of Causes
Attractive buying opportunities for the enterprising investor arise through a variety of causes.
The standard or recurrent reasons are
(a) a low level of the general market and
(b) the carrying to an extreme of popular disfavor toward individual issues.
Sometimes, but much more rarely, we have the failure of the market to respond to an important improvement in the company's affairs and in the value of its stock.
Frequently, we find a discrepancy between price and value which arises from the public's failure to realise the true situation of a company - this in turn being due to some complicated aspects of accounting or corporate relationships.
It is the function of competent security analysis to unravel such complexities and to bring the true facts and values to light.
Benjamin Graham
Intelligent Investor
Summary:
Attractive buying opportunities (discrepancy between price and value) due to various causes:
1. low level of the general market
2. extreme of popular disfavour towards individual stocks
3. failure of market to respond to improvement in the company
4. failure to realise hidden value in the company due to some complicated aspects of accounting or corporate relationships
The standard or recurrent reasons are
(a) a low level of the general market and
(b) the carrying to an extreme of popular disfavor toward individual issues.
Sometimes, but much more rarely, we have the failure of the market to respond to an important improvement in the company's affairs and in the value of its stock.
Frequently, we find a discrepancy between price and value which arises from the public's failure to realise the true situation of a company - this in turn being due to some complicated aspects of accounting or corporate relationships.
It is the function of competent security analysis to unravel such complexities and to bring the true facts and values to light.
Benjamin Graham
Intelligent Investor
Summary:
Attractive buying opportunities (discrepancy between price and value) due to various causes:
1. low level of the general market
2. extreme of popular disfavour towards individual stocks
3. failure of market to respond to improvement in the company
4. failure to realise hidden value in the company due to some complicated aspects of accounting or corporate relationships
Special Situation is where a Definite Corporate Event creates undervalued security in which profits is expected to be realised.
A particular kind of undervalued security in which the profit is expected to be realized from a definite corporate event, rather than from a mere change in the market's attitude is known as a "special situation."
Such events include
A great deal of money has been made by shrewd investors in recent years through the purchase of bonds of railroads in bankruptcy - bonds which they knew would be worth much more than their cost when the railroads were finally reorganized.
Similar large profits have been made in the preferred and common stocks of public-utility holding companies which either were being broken up under the so-called death-sentence clause of the 1935 legislation or were subject to recapitalization plans.
The underlying factor here is the tendency of the security markets to undervalue issues which are involved in any sort of complicated legal proceedings.
An old Wall Street motto has been: "Never buy into a lawsuit."
This may be sound advice to the speculator seeking quick action on his holdings.
But the adoption of this attitude by the general public is bound to create bargain opportunities in the securities affected by it, since the prejudice against them holds their price down to unduly low levels.
"In general, the market undervalues a litigated claim as an asset and overvalues it as a liability. Hence students of these situations often have an opportunity to buy into them at less than their true value, and to realize attractive profits - on the average - when the litigation is disposed off."
The exploitation of special situations is a technical branch of investment which requires a somewhat unusual mentality and equipment. Probably only a small percentage of our enterprising investors are likely to engage in it.
Benjamin Graham
The Intelligent Investor
Such events include
- sale of the business,
- merger,
- recapitalization,
- reorganization, and
- liquidation.
A great deal of money has been made by shrewd investors in recent years through the purchase of bonds of railroads in bankruptcy - bonds which they knew would be worth much more than their cost when the railroads were finally reorganized.
Similar large profits have been made in the preferred and common stocks of public-utility holding companies which either were being broken up under the so-called death-sentence clause of the 1935 legislation or were subject to recapitalization plans.
The underlying factor here is the tendency of the security markets to undervalue issues which are involved in any sort of complicated legal proceedings.
An old Wall Street motto has been: "Never buy into a lawsuit."
This may be sound advice to the speculator seeking quick action on his holdings.
But the adoption of this attitude by the general public is bound to create bargain opportunities in the securities affected by it, since the prejudice against them holds their price down to unduly low levels.
"In general, the market undervalues a litigated claim as an asset and overvalues it as a liability. Hence students of these situations often have an opportunity to buy into them at less than their true value, and to realize attractive profits - on the average - when the litigation is disposed off."
The exploitation of special situations is a technical branch of investment which requires a somewhat unusual mentality and equipment. Probably only a small percentage of our enterprising investors are likely to engage in it.
Benjamin Graham
The Intelligent Investor
Saturday 17 January 2015
Concept of "Risk." Market price fluctuation is NOT risk.
It is conventional to speak of good bonds as less risky than good preferred stocks and of the latter as less risky than good common stocks.
From this is derived the popular prejudice against common stocks because they are not "safe."
The words "risk" and "safety" are applied to securities in two different senses, with a resultant confusion in thought.
A bond is clearly proved unsafe when it defaults its interest or principal payments.
Similarly, if a preferred stock or even a common stock is bought with the expectation that a given rate of dividend will be continued, then a reduction or passing of the dividend means that it is unsafe.
It is also true that an investment contains a risk if there is a fair possibility that the holder may have to sell at a time when the price is well below cost.
Nevertheless, the idea of risk is often extended to apply to a possible decline in the price of a security, even though the decline may be of a cyclical and temporary nature and even though the holder is unlikely to be forced to sell at such times.
These chances are present in all securities, other than United States Savings Bonds, and to a greater extent in the general run of common stocks than in senior issues generally.
But we believe that what is here involved is not a true risk in the useful sense of the term.
$$$$
The man who holds a mortgage on a building might have to take a loss if he were forced to sell it at an unfavourable time. That element is not taken into account in judging the safety or risk of ordinary real-estate mortgages, the only criterion being the certainty of punctual payments.
In the same way the risk attached to an ordinary commercial business is measured by the chance of its losing money, not by what would happen if the owner, were forced to sell.
We would emphasize our conviction that the bona fide investor does not lose money merely because the market price of his holdings declines; the fact that a decline may occur does not mean that he is running a true risk of loss.
$$$$$
If a group of well-selected common-stock investments shows a satisfactory over-all return, as measured through a fair number of years, then this group investment has proved to be "safe".
During that period its market value is bound to fluctuate, and as likely as not it will sell for a while under the buyer's cost.
If that fact makes the investment "risky" it would then have to be called both risky and safe at the same time.
$$$$$
This confusion may be avoided if we apply the concept of risk solely to a loss of value which either:
(a) is realized through actual sale or
(b) is ascertained to be caused by a significant deterioration in the company's position.
Many common stocks do involve risks of such deterioration.
But it is our thesis that a properly executed group investment in common stocks does not carry any substantial risk of this sort and that therefore it should not be termed "risk" merely because of the element of price fluctuation.
Benjamin Graham
The Intelligent Investor
From this is derived the popular prejudice against common stocks because they are not "safe."
The words "risk" and "safety" are applied to securities in two different senses, with a resultant confusion in thought.
A bond is clearly proved unsafe when it defaults its interest or principal payments.
Similarly, if a preferred stock or even a common stock is bought with the expectation that a given rate of dividend will be continued, then a reduction or passing of the dividend means that it is unsafe.
It is also true that an investment contains a risk if there is a fair possibility that the holder may have to sell at a time when the price is well below cost.
Nevertheless, the idea of risk is often extended to apply to a possible decline in the price of a security, even though the decline may be of a cyclical and temporary nature and even though the holder is unlikely to be forced to sell at such times.
These chances are present in all securities, other than United States Savings Bonds, and to a greater extent in the general run of common stocks than in senior issues generally.
But we believe that what is here involved is not a true risk in the useful sense of the term.
$$$$
The man who holds a mortgage on a building might have to take a loss if he were forced to sell it at an unfavourable time. That element is not taken into account in judging the safety or risk of ordinary real-estate mortgages, the only criterion being the certainty of punctual payments.
In the same way the risk attached to an ordinary commercial business is measured by the chance of its losing money, not by what would happen if the owner, were forced to sell.
We would emphasize our conviction that the bona fide investor does not lose money merely because the market price of his holdings declines; the fact that a decline may occur does not mean that he is running a true risk of loss.
$$$$$
If a group of well-selected common-stock investments shows a satisfactory over-all return, as measured through a fair number of years, then this group investment has proved to be "safe".
During that period its market value is bound to fluctuate, and as likely as not it will sell for a while under the buyer's cost.
If that fact makes the investment "risky" it would then have to be called both risky and safe at the same time.
$$$$$
This confusion may be avoided if we apply the concept of risk solely to a loss of value which either:
(a) is realized through actual sale or
(b) is ascertained to be caused by a significant deterioration in the company's position.
Many common stocks do involve risks of such deterioration.
But it is our thesis that a properly executed group investment in common stocks does not carry any substantial risk of this sort and that therefore it should not be termed "risk" merely because of the element of price fluctuation.
Benjamin Graham
The Intelligent Investor
Substantial profits from the purchase of secondary companies at bargain prices arise in a variety of ways
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 it 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:
1. The dividend return is high.
2. 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.
3. 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.
4. 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.
Benjamin Graham
The Intelligent Investor
Related:
For if it 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:
1. The dividend return is high.
2. 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.
3. 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.
4. 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.
Benjamin Graham
The Intelligent Investor
Related:
Bargain-issue pattern in Secondary Companies
Friday 16 January 2015
Bargain-issue pattern in Secondary Companies
We have defined a secondary company as one which is not a leader in a fairly important industry.
Thus, it is usually one of the smaller concerns in its field, but it may equally well be the chief unit in an unimportant line.
By way of exception, any company that has established itself as a growth stock is not ordinarily considered as "secondary."
In the 1920's relatively little distinction was drawn between industry leaders and other listed issues, provided the latter were of respectable size.
The public felt that a middle-sized company was strong enough to weather storms and that it had a better chance for really spectacular expansion than one which was already of major dimensions.
The 1931-33 depression
The 1931-33 depression, however, had a particularly devastating impact on companies below the first rank either in size or in inherent stability.
As a result of that experience investors have since developed a pronounced preference for industry leaders and a corresponding lack of interest in the ordinary company of secondary importance.
This has meant that the latter group has usually sold at much lower prices in relation to earnings and assets than have the former.
It has also meant further that in many instances the price has fallen so low as to establish the issue in the bargain class.
When investors rejected the stocks of secondary companies, even though these sold at relatively low prices, they were expressing a belief or fear that such companies faced a dismal future.
In fact, at least subconsciously, they calculated that any price was too high for them because they were heading for extinction - just as in 1929 the companion theory for the "blue chips" was that no price was too high for them because their future possibilities were limitless.
Both of these views were exaggerations and were productive of serious investment errors.
Actually, the typical middle-sized listed company is a large one when compared with the average privately-owned business.
There is no sound reason why such companies should not continue indefinitely in operation, undergoing the vicissitudes characteristic of our economy but earnings on the whole a fair return on their invested capital.
This brief review indicates that the stock market's attitude toward secondary companies tends to be unrealistic and consequently to create in normal times innumerable instances of major undervaluation.
Benjamin Graham
The Intelligent Investor
Thus, it is usually one of the smaller concerns in its field, but it may equally well be the chief unit in an unimportant line.
By way of exception, any company that has established itself as a growth stock is not ordinarily considered as "secondary."
In the 1920's relatively little distinction was drawn between industry leaders and other listed issues, provided the latter were of respectable size.
The public felt that a middle-sized company was strong enough to weather storms and that it had a better chance for really spectacular expansion than one which was already of major dimensions.
The 1931-33 depression
The 1931-33 depression, however, had a particularly devastating impact on companies below the first rank either in size or in inherent stability.
As a result of that experience investors have since developed a pronounced preference for industry leaders and a corresponding lack of interest in the ordinary company of secondary importance.
This has meant that the latter group has usually sold at much lower prices in relation to earnings and assets than have the former.
It has also meant further that in many instances the price has fallen so low as to establish the issue in the bargain class.
When investors rejected the stocks of secondary companies, even though these sold at relatively low prices, they were expressing a belief or fear that such companies faced a dismal future.
In fact, at least subconsciously, they calculated that any price was too high for them because they were heading for extinction - just as in 1929 the companion theory for the "blue chips" was that no price was too high for them because their future possibilities were limitless.
Both of these views were exaggerations and were productive of serious investment errors.
Actually, the typical middle-sized listed company is a large one when compared with the average privately-owned business.
There is no sound reason why such companies should not continue indefinitely in operation, undergoing the vicissitudes characteristic of our economy but earnings on the whole a fair return on their invested capital.
This brief review indicates that the stock market's attitude toward secondary companies tends to be unrealistic and consequently to create in normal times innumerable instances of major undervaluation.
Benjamin Graham
The Intelligent Investor
Purchase of Bargain Issues
We define a bargain issue as one which, on the basis of facts established by analysis, appears to be worth considerably more than it is selling for.
The genus includes bonds and preferred stocks selling well under par, as well as common stocks.
To be concrete as possible, let us suggest that an issue is not a true "bargain" unless the indicated value is at least 50% more than the price.
What kind of facts would warrant the conclusion that so great a discrepancy exists?
How do bargains come into existence, and how does the investor profit from them?
There are two tests by which a bargain common stock is detected.
The first is by our method of appraisal. This relies largely on estimating future earnings and then multiplying these by a factor appropriate to the particular issue.
The second test is the value of the business to a private owner. This value also is often determined chiefly by expected future earnings - in which case the result may be identical with the first. But in the second test more attention is likely to be paid to the realizable value of the assets, with particular emphasis on the net current assets or working capital.
Courage in depressed markets
At low point in the general market a large proportion of common stocks are bargain issues, as measured by these standards.
It is true that current earnings and the immediate prospects may both be poor, but a level-headed appraisal of average future conditions would indicate values far above ruling prices.
Thus the wisdom of having courage in depressed markets is vindicated not only by the voice of experience but also by application of plausible techniques of value analysis.
The same vagaries of the marketplace which recurrently establish a bargain condition in the general list account for the existence of many individual bargains at almost all market levels.
The market is always making mountains out of molehills and exaggerating ordinary vicissitudes into major setbacks. Even a mere lack of interest or enthusiasm may impel a price decline to absurdly low levels.
Thus we have two major sources of undervaluation: (a) currently disappointing results, and (b) protracted neglect or unpopularity.
The private-owner test
The private-owner test would ordinarily start with the net worth as shown in the balance sheet. The question then arises as to whether the indicated earning power is sufficient to validate the net worth as a measure of what a private buyer would be justified in paying for the business as a whole.
If the answer is definitely yes, we suggest that an ordinary investor should find the common stock attractive at a price one-third or more below such a figure.
If instead of using all the net worth as a starting point the investor considered only the working capital and applied his test to that, he would have a more convincing demonstration of the existence of a bargain opportunity.
For it is something of an axiom that a business is worth to any private owner at least the amount of its working capital, since it could ordinarily be sold or liquidated for more than this figure.
Hence, if a common stock can be bought at no more than two-thirds of the working -capital value alone- disregarding all the other assets - and if the earnings record and prospects are reasonably satisfactory, there is strong reason to believe that the investor is getting substantially more than his money's worth.
Benjamin Graham
The Intelligent Investor
The genus includes bonds and preferred stocks selling well under par, as well as common stocks.
To be concrete as possible, let us suggest that an issue is not a true "bargain" unless the indicated value is at least 50% more than the price.
What kind of facts would warrant the conclusion that so great a discrepancy exists?
How do bargains come into existence, and how does the investor profit from them?
There are two tests by which a bargain common stock is detected.
The first is by our method of appraisal. This relies largely on estimating future earnings and then multiplying these by a factor appropriate to the particular issue.
The second test is the value of the business to a private owner. This value also is often determined chiefly by expected future earnings - in which case the result may be identical with the first. But in the second test more attention is likely to be paid to the realizable value of the assets, with particular emphasis on the net current assets or working capital.
Courage in depressed markets
At low point in the general market a large proportion of common stocks are bargain issues, as measured by these standards.
It is true that current earnings and the immediate prospects may both be poor, but a level-headed appraisal of average future conditions would indicate values far above ruling prices.
Thus the wisdom of having courage in depressed markets is vindicated not only by the voice of experience but also by application of plausible techniques of value analysis.
The same vagaries of the marketplace which recurrently establish a bargain condition in the general list account for the existence of many individual bargains at almost all market levels.
The market is always making mountains out of molehills and exaggerating ordinary vicissitudes into major setbacks. Even a mere lack of interest or enthusiasm may impel a price decline to absurdly low levels.
Thus we have two major sources of undervaluation: (a) currently disappointing results, and (b) protracted neglect or unpopularity.
The private-owner test
The private-owner test would ordinarily start with the net worth as shown in the balance sheet. The question then arises as to whether the indicated earning power is sufficient to validate the net worth as a measure of what a private buyer would be justified in paying for the business as a whole.
If the answer is definitely yes, we suggest that an ordinary investor should find the common stock attractive at a price one-third or more below such a figure.
If instead of using all the net worth as a starting point the investor considered only the working capital and applied his test to that, he would have a more convincing demonstration of the existence of a bargain opportunity.
For it is something of an axiom that a business is worth to any private owner at least the amount of its working capital, since it could ordinarily be sold or liquidated for more than this figure.
Hence, if a common stock can be bought at no more than two-thirds of the working -capital value alone- disregarding all the other assets - and if the earnings record and prospects are reasonably satisfactory, there is strong reason to believe that the investor is getting substantially more than his money's worth.
Benjamin Graham
The Intelligent Investor
Growth Stock Approach
Every investor would like to select a list of securities that will do better than the average over a period of years. A growth stock may be defined as one which has done this in the past and is expected to do so in the future.
(A company with an ordinary record cannot, without confusing the term, be called a growth company or a "growth stock" merely because its proponent expects it to do better than the average in the future. It is just a "promising company.")
Thus it seems only logical that the intelligent investor should concentrate upon the selection of growth stocks.
Actually the matter is more complicated.
The pursue of this aspect of investment policy require more ability and application than most investors can bring to bear on the problem.
The stock of a growing company, if purchasable at a suitable price, is obviously preferable to others.
No matter how enthusiastic the investor may feel about the prospects of a particular company, however, he should set a limit upon the price that he is willing to pay for such prospects.
In the case of a growth company, we should recommended payment of a premium for the growth potential not to exceed about 50% of the value determined without it.
Such a rule would result at times in the missing of an unusually good opportunity.
More often, it would mean the investor's saving himself from "going overboard" on an issue that looked especially good to him and everyone else and consequently was selling much too high.
The choice between the attractive issue that turns out well and the one that does poorly is by no means easy to make in the growth-stock field.
However, superior results may be obtained in this field if the choices are competently made. Even with careful selection, some of the individual issues may fare relatively poorly.
Thus for good results in the growth-stock field there is need not only for skillful analysis but for ample diversification as well.
Summary
The enterprising investor may properly buy growth stocks.
He should beware of paying excessively for them, and he might well limit the price by some practical rule.
A growth-stock program will not be automatically successful; its outcome will depend on the foresight and judgement of the investor or his advisers rather than on any clear-cut methods of analysis.
Benjamin Graham
Intelligent Investor
(A company with an ordinary record cannot, without confusing the term, be called a growth company or a "growth stock" merely because its proponent expects it to do better than the average in the future. It is just a "promising company.")
Thus it seems only logical that the intelligent investor should concentrate upon the selection of growth stocks.
Actually the matter is more complicated.
The pursue of this aspect of investment policy require more ability and application than most investors can bring to bear on the problem.
The stock of a growing company, if purchasable at a suitable price, is obviously preferable to others.
No matter how enthusiastic the investor may feel about the prospects of a particular company, however, he should set a limit upon the price that he is willing to pay for such prospects.
In the case of a growth company, we should recommended payment of a premium for the growth potential not to exceed about 50% of the value determined without it.
Such a rule would result at times in the missing of an unusually good opportunity.
More often, it would mean the investor's saving himself from "going overboard" on an issue that looked especially good to him and everyone else and consequently was selling much too high.
The choice between the attractive issue that turns out well and the one that does poorly is by no means easy to make in the growth-stock field.
However, superior results may be obtained in this field if the choices are competently made. Even with careful selection, some of the individual issues may fare relatively poorly.
Thus for good results in the growth-stock field there is need not only for skillful analysis but for ample diversification as well.
Summary
The enterprising investor may properly buy growth stocks.
He should beware of paying excessively for them, and he might well limit the price by some practical rule.
A growth-stock program will not be automatically successful; its outcome will depend on the foresight and judgement of the investor or his advisers rather than on any clear-cut methods of analysis.
Benjamin Graham
Intelligent Investor
Thursday 15 January 2015
Broader implications of adopting a sound investment policy
Investment policy, as it has been developed and taught by Benjamin Graham, depends in the first place upon a choice by the investor of either the defensive (passive) or aggressive (enterprising) role.
The aggressive investor must have a considerable knowledge of security values - enough, in fact, to warrant viewing his security operations as equivalent to a business enterprise.
There is no room in this philosophy for a middle ground, or a series of gradations, between the passive and aggressive status.
Many, perhaps most, investors seek to place themselves in such an intermediate category; in our opinion that is a compromise that is more likely to produce disappointment than achievement.
It follows from this reasoning that the majority of security owners should elect the defensive classification.
The enterprising investor may properly embark upon any security operation for which his training and judgement are adequate and which appears sufficiently promising when measured by established business standards.
Benjamin Graham
The Intelligent Investor
The aggressive investor must have a considerable knowledge of security values - enough, in fact, to warrant viewing his security operations as equivalent to a business enterprise.
There is no room in this philosophy for a middle ground, or a series of gradations, between the passive and aggressive status.
Many, perhaps most, investors seek to place themselves in such an intermediate category; in our opinion that is a compromise that is more likely to produce disappointment than achievement.
It follows from this reasoning that the majority of security owners should elect the defensive classification.
- They do not have the time, or the determination, or the mental equipment to embark upon investing as a quasi business.
- They should therefore be satisfied with the reasonably good return obtainable from a defensive portfolio, and they should stoutly resist the recurrent temptation to increase this return by deviating into other paths.
The enterprising investor may properly embark upon any security operation for which his training and judgement are adequate and which appears sufficiently promising when measured by established business standards.
Benjamin Graham
The Intelligent Investor
Investment in Giant Enterprises. But how successful are they from the standpoint of the investor?
Let us take a look at the top listed companies in the stock market with either the highest assets or highest sales. All of these enterprises have achieved enormous size, and by that token they have presumably made a great success.
But how successful are they from the standpoint of the investor?
What do you mean by success in this context?
"A successful listed company is one which earns sufficient to justify an average valuation of its shares in excess of the invested capital behind them."
This means that to be really successful (or prosperous) the company must have an earning-power value which exceeds the amount invested by and for the stockholder.
$$$$$$
It is evident from an analysis that the biggest companies are not the best companies to invest in, based on the percentage earned on invested capital.
It is equally true that small-sized companies are not suited to the needs of the average investor, although there may be remarkable opportunities in individual concerns in this field.
There is some basis here for suggesting that defensive investors show preference to companies in the asset range between $50 million and $250 million, although we have no idea of propounding this as a hard-and-fast rule.
Benjamin Graham
The Intelligent Investor
But how successful are they from the standpoint of the investor?
What do you mean by success in this context?
"A successful listed company is one which earns sufficient to justify an average valuation of its shares in excess of the invested capital behind them."
This means that to be really successful (or prosperous) the company must have an earning-power value which exceeds the amount invested by and for the stockholder.
$$$$$$
It is evident from an analysis that the biggest companies are not the best companies to invest in, based on the percentage earned on invested capital.
It is equally true that small-sized companies are not suited to the needs of the average investor, although there may be remarkable opportunities in individual concerns in this field.
There is some basis here for suggesting that defensive investors show preference to companies in the asset range between $50 million and $250 million, although we have no idea of propounding this as a hard-and-fast rule.
Benjamin Graham
The Intelligent Investor
How permanent are trends?
Wall Street's judgment has been influenced by past trends more than by any other single factor related to security values.
The avowed object of people in the market is to anticipate future developments, and the past is held to have no significance except as it aids in such anticipation.
Yet in practice it is almost the universal habit to base forecasts of future happenings on a projection of past trends.
This is notoriously true of both the professional's and the public's view of market prospects.
Nearly everyone is optimistic (or "bullish") because the market has been enjoying a spirited advance and pessimistic (or "bearish") after a decline.
In the same way, an industry or a company which has grown in the past is almost always expected to keep on progressing; those which have been on the downgrade are expected to get worse and worse.
Momentum
It is true that every established trend has a certain momentum, so that it is more likely to continue for at least a while longer than it is to reverse itself at the moment of observation.
But this is far from saying that any trend may be relied upon to continue long enough to create a profit for those who "get aboard."
Rather extensive studies which we have made of the subject lead us to conclude that reversals of trend in every part of the financial picture occur so frequently as to make reliance on a trend a particularly dangerous matter.
There must be strong independent reasons for investing money on the expectation of a continuance of past tendencies, and the investor must beware lest his weighing of future probabilities be unduly influenced by the trend line of the past.
Can money be made on balance by following the trend of the general market? This subject is too complicated and controversial to admit of our treating it her with out own selection of statistical evidence.
But it is appropriate to point out (a) that playing the trend is the standard formula of stock market trading by the general public and (b) that the general public loses money in the stock market.
Industrial groups
The public has a similar tendency to speculate in those industrial groups which have established the best market records in the recent past. It is easy to show that this naive effort to exploit a historical trend is dangerous.
The trend of industry profits is no more reliable than that of industry prices.
Using earnings as a percentage of invested capital, between 1939 and 1947 we find that the average of the five best industries declined from 24.6% to 17.7%, whereas that of the five poorest advanced from 4.2% to 18.5%.
War conditions and their aftermath, of course, have played an important part in bringing about this extraordinary change in the relative position of prosperous and non-prosperous industries.
There are many unexpected reasons for the changed performance; the important thing is that performance trends do change and investment values with them.
Benjamin Graham
The Intelligent Investor
The avowed object of people in the market is to anticipate future developments, and the past is held to have no significance except as it aids in such anticipation.
Yet in practice it is almost the universal habit to base forecasts of future happenings on a projection of past trends.
This is notoriously true of both the professional's and the public's view of market prospects.
Nearly everyone is optimistic (or "bullish") because the market has been enjoying a spirited advance and pessimistic (or "bearish") after a decline.
In the same way, an industry or a company which has grown in the past is almost always expected to keep on progressing; those which have been on the downgrade are expected to get worse and worse.
Momentum
It is true that every established trend has a certain momentum, so that it is more likely to continue for at least a while longer than it is to reverse itself at the moment of observation.
But this is far from saying that any trend may be relied upon to continue long enough to create a profit for those who "get aboard."
Rather extensive studies which we have made of the subject lead us to conclude that reversals of trend in every part of the financial picture occur so frequently as to make reliance on a trend a particularly dangerous matter.
There must be strong independent reasons for investing money on the expectation of a continuance of past tendencies, and the investor must beware lest his weighing of future probabilities be unduly influenced by the trend line of the past.
Can money be made on balance by following the trend of the general market? This subject is too complicated and controversial to admit of our treating it her with out own selection of statistical evidence.
But it is appropriate to point out (a) that playing the trend is the standard formula of stock market trading by the general public and (b) that the general public loses money in the stock market.
Industrial groups
The public has a similar tendency to speculate in those industrial groups which have established the best market records in the recent past. It is easy to show that this naive effort to exploit a historical trend is dangerous.
The trend of industry profits is no more reliable than that of industry prices.
Using earnings as a percentage of invested capital, between 1939 and 1947 we find that the average of the five best industries declined from 24.6% to 17.7%, whereas that of the five poorest advanced from 4.2% to 18.5%.
War conditions and their aftermath, of course, have played an important part in bringing about this extraordinary change in the relative position of prosperous and non-prosperous industries.
There are many unexpected reasons for the changed performance; the important thing is that performance trends do change and investment values with them.
Benjamin Graham
The Intelligent Investor
Can price changes in common stocks be ignored?
Can price changes in common stocks be ignored?
Does the investor become richer or poorer as his stocks advance and decline in the market?
1. NO
The bona fide investor who bought for income plus an incidental long-term increase in value, was supposed to be immune to the stock ticker and the market reports.
The nature of investment-grade common stocks before the First World War was their dividends were well maintained even in depression years and their prices did not soar to absurd heights in bull markets and consequently they did not fall into the abyss even in panic times.
Thus, it was possible for the "permanent holder" of these stocks to ignore their price fluctuations as irrelevant to his own purposes and philosophy.
2. YES
Nowadays the situation is different. No one believes seriously that the common-stock investor can remain indifferent to price fluctuations.
The reason for this about-face is found in a change in the stock market itself. Before the First World War common stocks could be divided into a small number of investment issues and a much larger number of speculative issues.
The price movements of the investment issues were relatively narrow, even when the market as a whole was fluctuating widely. Thus the holder of these quality stocks was under no real psychological pressure to pay attention to the market.
Beginning with the bull market of the 1920's this condition has changed. Because the high-grade issues have risen to excessive heights in period sof speculative enthusiasm, they have tended to swing far downward in the ensuing bear markets.
Confronted with price variations of the kind experienced since 1929, it is impossible for the modern investor to ignore these phenomena. Clearly the success of his investment program in common stocks must depend in great part on what happens ultimately to their prices.
$$$$$$$
But how far must he commit himself to concern with the market's conduct?
By what market tests should he consider that he has been successful or not?
Certainly not by short-term or minor fluctuations, for this attitude would make him indistinguishable from the stock trader.
Does the investor become richer or poorer as his stocks advance and decline in the market?
1. NO
The bona fide investor who bought for income plus an incidental long-term increase in value, was supposed to be immune to the stock ticker and the market reports.
The nature of investment-grade common stocks before the First World War was their dividends were well maintained even in depression years and their prices did not soar to absurd heights in bull markets and consequently they did not fall into the abyss even in panic times.
Thus, it was possible for the "permanent holder" of these stocks to ignore their price fluctuations as irrelevant to his own purposes and philosophy.
2. YES
Nowadays the situation is different. No one believes seriously that the common-stock investor can remain indifferent to price fluctuations.
The reason for this about-face is found in a change in the stock market itself. Before the First World War common stocks could be divided into a small number of investment issues and a much larger number of speculative issues.
The price movements of the investment issues were relatively narrow, even when the market as a whole was fluctuating widely. Thus the holder of these quality stocks was under no real psychological pressure to pay attention to the market.
Beginning with the bull market of the 1920's this condition has changed. Because the high-grade issues have risen to excessive heights in period sof speculative enthusiasm, they have tended to swing far downward in the ensuing bear markets.
Confronted with price variations of the kind experienced since 1929, it is impossible for the modern investor to ignore these phenomena. Clearly the success of his investment program in common stocks must depend in great part on what happens ultimately to their prices.
$$$$$$$
But how far must he commit himself to concern with the market's conduct?
By what market tests should he consider that he has been successful or not?
Certainly not by short-term or minor fluctuations, for this attitude would make him indistinguishable from the stock trader.
Practical suggestions on switching stocks
Let us summarize our practical suggestions in the matter of security switches as follows:
The investor who begins with a list of standard, first-grade common stocks can expect some of them to lose quality through the years.
His aim should be to replace these, with a minimum sacrifice of dividend return and with a fair chance of recouping any loss of principal value resulting from their sale.
The best means of accomplishing this is by seeking out attractive issues in the secondary group. A competent security analyst is usually in a position to recommend a number of such issues which by objective tests appear to be worth substantially above their selling price.
The fundamental principle of every security replacement should be the following:
Each dollar paid for the issue bought should appear to obtain more intrinsic value than was represented by a dollar's worth of the issue sold.
We believe, in sum, that quality may be approached soundly by way of value. If the value is abundant, the quality may be deemed sufficient.
Benjamin Graham
The investor who begins with a list of standard, first-grade common stocks can expect some of them to lose quality through the years.
His aim should be to replace these, with a minimum sacrifice of dividend return and with a fair chance of recouping any loss of principal value resulting from their sale.
The best means of accomplishing this is by seeking out attractive issues in the secondary group. A competent security analyst is usually in a position to recommend a number of such issues which by objective tests appear to be worth substantially above their selling price.
The fundamental principle of every security replacement should be the following:
Each dollar paid for the issue bought should appear to obtain more intrinsic value than was represented by a dollar's worth of the issue sold.
We believe, in sum, that quality may be approached soundly by way of value. If the value is abundant, the quality may be deemed sufficient.
Benjamin Graham
Behaviour of Growth Stocks
A growth stock is identified as such because it has an especially satisfactory past record coupled with the expectation that this will continue.
It is the inherent nature of corporate growth eventually to taper off or to cease entirely.
Thus, if the stock market possessed the penetrating qualities popularly accorded to it, many growth stocks would begin to lose their high price level some time BEFORE any decline in their earning power had become apparent.
What seems to happen, rather, is that the price remains high UNTIL the earnings ACTUALLY show a definite falling off - which invariably seems to take the followers of the issue by surprise.
Then we have the market decline usually associated with a disappointing development - a decline perhaps intensified by the fact that the price level of the growth stock had been dangerously high.
Sometimes, either because of a certain stubbornness or a real insight into the long term future on the part of the investors, the price of such a deteriorated growth stock remains higher than its current performance would justify.
The growth stock principle of investment carries with it a real danger of miscalculations. The average investor is likely to be most enthusiastic about such companies at the wrong time.
Past trends are generally an unsound basis for investment decision.
Benjamin Graham
It is the inherent nature of corporate growth eventually to taper off or to cease entirely.
Thus, if the stock market possessed the penetrating qualities popularly accorded to it, many growth stocks would begin to lose their high price level some time BEFORE any decline in their earning power had become apparent.
What seems to happen, rather, is that the price remains high UNTIL the earnings ACTUALLY show a definite falling off - which invariably seems to take the followers of the issue by surprise.
Then we have the market decline usually associated with a disappointing development - a decline perhaps intensified by the fact that the price level of the growth stock had been dangerously high.
Sometimes, either because of a certain stubbornness or a real insight into the long term future on the part of the investors, the price of such a deteriorated growth stock remains higher than its current performance would justify.
The growth stock principle of investment carries with it a real danger of miscalculations. The average investor is likely to be most enthusiastic about such companies at the wrong time.
Past trends are generally an unsound basis for investment decision.
Benjamin Graham
Extreme vicissitudes
Undoubtedly, the largest theoretical gains in the stock market are to be made not out of the continuously prosperous companies but out of those which experience wide vicissitudes - by buying their stocks at their depths and selling at their heights.
Profits of such amplitude are realized only in the paper calculations of hindsight. Yet these examples have practical significance for the intelligent investor.
They should confirm his conviction that outstanding characteristic of stock market is its tendency to react EXCESSIVELY to favourable and unfavorable influences.
The word "excessive" applied to the stock market's reactions indicates that they create many sound counter-opportunities for the investor with sense and courage.
Benjamin Graham
Profits of such amplitude are realized only in the paper calculations of hindsight. Yet these examples have practical significance for the intelligent investor.
They should confirm his conviction that outstanding characteristic of stock market is its tendency to react EXCESSIVELY to favourable and unfavorable influences.
The word "excessive" applied to the stock market's reactions indicates that they create many sound counter-opportunities for the investor with sense and courage.
Benjamin Graham
Price Changes of common stocks with highly stable earnings.
The stability of annual earnings per share of a selected common stock is extraordinary.
Record of earnings and dividends of S.H. Kress for 1924 - 45 and the more extreme price variations during that period.
It may properly be concluded that this record at no point showed any definite indications of permanent change for either the better or the worse in the company's affairs or prospects.
Hence the variation in market price must have been entirely psychological in their origin. They offer a fairly accurate measurement of the breadth of price change a scribble to the mere vagaries of the stock market - while the "article valued" changed its character not at all.
Under the circumstances, the range of price changes must be considered extraordinary.
It's price rose from 12 to 62, a fall to 9, a rise to 48, a fall to 20, and a rise to 49. For the 5 years 1933 - 37 the earnings varied between $2.11 and $2.31 per share, whereas the price ranged from 13 1/2 to 47 1/2. In the 6 years 1939- 45 the earnings varied between $1.93 and $2.25, but the price ranged from 19 1/2 to 40 1/2.
Reference
The Intelligent Investor, by Benjamin Graham
Record of earnings and dividends of S.H. Kress for 1924 - 45 and the more extreme price variations during that period.
In 16 out of 22 years, the earnings per share varied only between $1.93 and $2.32. In the other 6, including the boom and deepest depression years, the range widened only to $1.38 - $2.88.
It may properly be concluded that this record at no point showed any definite indications of permanent change for either the better or the worse in the company's affairs or prospects.
Hence the variation in market price must have been entirely psychological in their origin. They offer a fairly accurate measurement of the breadth of price change a scribble to the mere vagaries of the stock market - while the "article valued" changed its character not at all.
Under the circumstances, the range of price changes must be considered extraordinary.
It's price rose from 12 to 62, a fall to 9, a rise to 48, a fall to 20, and a rise to 49. For the 5 years 1933 - 37 the earnings varied between $2.11 and $2.31 per share, whereas the price ranged from 13 1/2 to 47 1/2. In the 6 years 1939- 45 the earnings varied between $1.93 and $2.25, but the price ranged from 19 1/2 to 40 1/2.
Reference
The Intelligent Investor, by Benjamin Graham
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