Good managements produce a good average market price, and bad managements produce bad market prices.

Market Price Fluctuations:  An Added Consideration

Something should be said about the significance of average market prices as a measure of managerial competence. 

• The shareholder judges whether his own investment has been successful in terms both of dividends received and of the long-range trend of the average market value. 
• The same criteria should logically be applied in testing the effectiveness of a company’s management and the soundness of its attitude toward the owners of the business.

This statement may sound like a truism, but it needs to be emphasized.

• For as yet there is no accepted technique or approach by which management is brought to the bar of market opinion. 

On the contrary, managements have always insisted that they have no responsibility of any kind for what happens to the market value of their shares.

• It is true, of course, that they are not accountable for those fluctuations in price which, as we have been insisting, bear no relationship to underlying conditions and values. 
• But it is only the lack of alertness and intelligence among the rank and file of shareholders that permits this immunity to extend to the entire realm of market quotations, including the permanent establishment of a depreciated and unsatisfactory price level. 

Good managements produce a good average market price, and bad managements produce bad market prices.

The investor with a portfolio of sound stocks should expect their prices to fluctuate

The investor with a portfolio of sound stocks should expect their prices to fluctuate and should

• neither be concerned by sizable declines 
• nor become excited by sizable advances. 

He should always remember that market quotations are there for his convenience,

• either to be taken advantage of or 
• to be ignored. 

He should never 

• buy a stock because it has gone up or 
• sell one because it has gone down. 

He would not be far wrong if this motto read more simply: “Never buy a stock immediately after a substantial rise or sell one immediately after a substantial drop.”

Activities that emphasize price movements first and underlying values second tend to be self-neutralizing and self-defeating over the years.

Aside from forecasting the movements of the general market, much effort and ability are directed on Wall Street toward selecting stocks or industrial groups that in matter of price will “do better” than the rest over a fairly short period in the future. 

Logical as this endeavor may seem, we do not believe it is suited to the needs or temperament of the true investor—particularly since he would be competing with a large number of stock-market traders and firstclass financial analysts who are trying to do the same thing.

As  in all other activities that emphasize price movements first and underlying values second, the work of many intelligent minds constantly engaged in this field tends to be self-neutralizing and selfdefeating over the years.

When to Buy? When Not to Buy? It is far from certain that the typical investor should regularly hold off buying until low market levels appear.

It is far from certain that the typical investor should regularly hold off buying until low market levels appear, because

• this may involve a long wait, 
• very likely the loss of income, and 
• the possible missing of investment opportunities. 

On the whole it may be better for the investor to do his stock buying whenever he has money to put in stocks, except when the general market level is much higher than can be justified by well-established standards of value. 

If he wants to be shrewd he can look for the ever-present bargain opportunities in individual securities.

It is far from certain that the typical investor should regularly hold off buying until low market levels appear

It is far from certain that the typical investor should regularly hold off buying until low market levels appear, because

• this may involve a long wait, 
• very likely the loss of income, and 
• the possible missing of investment opportunities. 

On the whole it may be better for the investor to do his stock buying whenever he has money to put in stocks, except when the general market level is much higher than can be justified by well-established standards of value. 

If he wants to be shrewd he can look for the ever-present bargain opportunities in individual securities.

The most realistic distinction between the investor and the speculator is found in their attitude toward stock-market movements.

The most realistic distinction between the investor and the speculator is found in their attitude toward stock-market movements.  

The speculator’s primary interest lies in anticipating and profiting from market fluctuations. 

The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices.

Market movements are important to him in a practical sense, because they alternately create 

• low price levels at which he would be wise to buy and 
• high price levels at which he certainly should refrain from buying and probably would be wise to sell.

Market price fluctuations have only one significant meaning for the true investor.

Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity 

• to buy wisely when prices fall sharply and 
• to sell wisely when they advance a great deal. 

At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.

Do Not Overpay to Own a Company with Brilliant Prospects; Use the Vagaries of the Market to Play the Master Game of Buying Low and Selling High

Growth Stock Paradox: The more successful the company, the greater are likely to be the fluctuations in the price of its shares.

This leads us to a conclusion of practical importance to the conservative investor in common stocks.

• If he is to pay some special attention to the selection of his portfolio, it might be best for him to concentrate on issues selling at a reasonably close approximation to their tangible-asset value—say, at not more than one-third above that figure. 
• Purchases made at such  levels, or lower, may with logic be regarded as related to the company’s balance sheet, and as having a justification or support independent of the fluctuating market prices. 
• The premium over book value that may be involved can be considered as a kind of extra fee paid for the advantage of stock-exchange listing and the marketability that goes with it.

A caution is needed here.

• A stock does not become a sound investment merely because it can be bought at close to its asset value. 
• The investor should demand, in addition, a satisfactory ratio of earnings to price, a sufficiently strong financial position, and the prospect that its earnings will at least be maintained over the years. 

This may appear like demanding a lot from a modestly priced stock, but the prescription is not hard to fill under all but dangerously high market conditions. 


Once the investor is willing to forgo brilliant prospects—i.e., better than average expected growth—he will have no difficulty in finding a wide selection of issues meeting these criteria.



More than half of the DJIA issues met our asset-value criterion at the end of 1970.

• The most widely held investment of all—American Tel. & Tel.—actually sells below its tangible-asset value as we write. 
• Most of the light-and power shares, in addition to their other advantages, are now (early 1972) available at prices reasonably close to their asset values. 

The investor with a stock portfolio having such book values behind it can take a much more independent and detached view of stock-market fluctuations than those who have paid high multipliers of both earnings and tangible assets.


As long as the earning power of his holdings remains satisfactory, he can give as little attention as he pleases to the vagaries of the stock market. 

More than that, at times he can use these vagaries to play the master game of buying low and selling high.

Explanations for the Erratic Price Behaviour of some of the Most Successful and Impressive Enterprises

Growth Stock Paradox: The more successful the company, the greater are likely to be the fluctuations in the price of its shares.

The argument made above should explain the often erratic price behavior of our most successful and impressive enterprises. 

• Our favorite example is the monarch of them all—International Business Machines. The price of its shares fell from 607 to 300 in seven months in 1962–63; after two splits its price fell from 387 to 219 in 1970. 
• Similarly, Xerox—an even more impressive earnings gainer in recent decades—fell from 171 to 87 in 1962–63, and from 116 to 65 in 1970. 

These striking losses 

• did not indicate any doubt about the future long-term growth of IBM or Xerox; 
• they reflected instead a lack of confidence in the premium valuation that the stock market itself had placed on these excellent prospects.

Growth Stock Paradox: The more successful the company, the greater are likely to be the fluctuations in the price of its shares.

The development of the stock market in recent decades has made the typical investor

• more dependent on the course of price quotations and 
• less free than formerly to consider himself merely a business owner. 

The reason is that the successful enterprises in which he is likely to concentrate his holdings

• sell almost constantly at prices well above their net asset value (or book value, or  “balance-sheet value”). 
• In paying these market premiums the investor gives precious hostages to fortune, for he must depend on the stock market itself to validate his commitments.†

This is a factor of prime importance in present-day investing, and it has received less attention than it deserves. The whole structure of stock-market quotations contains a built-in contradiction. 

• The better a company’s record and prospects, the less relationship the price of its shares will have to their book value. 
• But the greater the premium above book value, the less certain the basis of determining its intrinsic value—i.e., the more this “value” will depend on the changing moods and measurements of the stock market.  

Thus we reach the final paradox, that the more successful the company, the greater are likely to be the fluctuations in the price of its shares. 

• This really means that, in a very real sense, the better the quality of a common stock, the more speculative it is likely to be—at least as compared with the unspectacular middle-grade issues.*  
• (What we have said applies to a comparison of the leading growth companies with the bulk of well-established concerns; we exclude from our purview here those issues which are highly speculative because the businesses themselves are speculative.)

† Net asset value, book value, balance-sheet value, and tangible-asset value are all synonyms for net worth, or the total value of a company’s physical and financial assets minus all its liabilities. It can be calculated using the balance sheets in a company’s annual and quarterly reports; from total shareholders’ equity, subtract all “soft” assets such as goodwill, trademarks, and other intangibles. Divide by the fully diluted number of shares outstanding to arrive at book value per share.



* Graham’s use of the word “paradox” is probably an allusion to a classic article by David Durand, “Growth Stocks and the Petersburg Paradox,” The Journal of Finance, vol. XII, no. 3, September, 1957, pp. 348–363, which compares investing in high-priced growth stocks to betting on a series of coin flips in which the payoff escalates with each flip of the coin. Durand points out that if a growth stock could continue to grow at a high rate for an indefinite period of time, an investor should (in theory) be willing to pay an infinite price for its shares. Why, then, has no stock ever sold for a price of infinity dollars per share? Because the higher the assumed future growth rate, and the longer the time period over which it is expected, the wider the margin for error grows, and the higher the cost of even a tiny miscalculation becomes. 


Ref:  Intelligent Investor by Benjamin Graham