Keep these 113 words of Graham close at hand and let them guide you throughout your investing life.

The true investor scarcely ever is forced to sell his shares, and at  all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more.* Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons’ mistakes of judgment.†

* “Only to the extent that it suits his book” means “only to the extent that the price is favorable enough to justify selling the stock.” In traditional brokerage lingo, the “book” is an investor’s ledger of holdings and trades.

† This may well be the single most important paragraph in Graham’s entire book. In these 113 words Graham sums up his lifetime of experience. You cannot read these words too often; they are like Kryptonite for bear markets.  If you keep them close at hand and let them guide you throughout your investing life, you will survive whatever the markets throw at you.

Scientex (At a Glance)

Scientex	31.7.2011	31.7.2010	Change
Revenue	804.022	694.815	15.72%
Gross Profit	159.3	123.008	29.50%
Other Income	3.759	12.499	-69.93%
Operating Profit	97.437	70.046	39.10%
Finance costs	-1.573	-1.26	24.84%
PBT	96.64	70.753	36.59%
Income tax expense	-16.521	-8.613	91.81%
Earnings	80.118	62.14	28.93%
EPS (basic) sen	36	28	28.57%
NCA	444.069	435.676	1.93%
CA	281.005	239.386	17.39%
Total Assets	725.075	675.062	7.41%
CL	182.175	171.144	6.45%
NCL	36.778	53.121	-30.77%
Total Liabilities	218.985	224.265	-2.35%
Total Equity	506.121	450.796	12.27%
Total Equity and Liabilities	725.075	675.062	7.41%
Net asset per share *RM)	2.17	1.92	13.02%
Cash and bank balances	40.952	23.353	75.36%
ST Loans and borrowings	37.509	42.018	-10.73%
LT Loans and borrowings	10	26.168	-61.79%
Net Cash	-6.557	-44.833	-85.37%
Inventories	67.763	63.374	6.93%
Trade receivables	105.497	95.746	10.18%
Trade payables	136.721	125.184	9.22%
PBT	96.64	70.753	36.59%
OPFBWCC	118.915	90.431	31.50%
CFO	123.981	86.25	43.75%
Net CFO	110.941	78.137	41.98%
CFI	-39.682	-89.999	-55.91%
CFF	-53.666	19.596	-373.86%
Capex	-16.406	-24.017	-31.69%
FCF	94.535	54.12	74.68%
Dividends paid	-30.13	-10.77	179.76%
DPS sen	11	8	37.50%
No of ordinary shares	215.20	215.40	-0.10%
Net Profit Margin	0.10	0.09	11.42%
Asset Turnover	1.11	1.03	7.74%
Financial Leverage	1.43	1.50	-4.33%
ROA	0.11	0.09	20.04%
ROC	0.16	0.13	24.64%
ROE	0.16	0.14	14.84%
Price per share (2.3.2012)	2.55
Market cap	548.76
P/E	6.85
P/BV	1.08
P/FCF	5.80
P/Div	18.21
EY	14.60%
FCF/P	17.23%
DY	5.49%

Recent Financial Results

Announcement Date		Financial Yr. End		Qtr	Period End		Revenue RM '000		Profit/Lost RM'000		EPS		Amended
15-Dec-11		31-Jul-12		1	31-Oct-11		213,762		21,390		9.59		-
28-Sep-11		31-Jul-11		4	31-Jul-11		205,200		21,788		9.66		-
21-Jun-11		31-Jul-11		3	30-Apr-11		217,312		21,138		9.48		-
15-Mar-11		31-Jul-11		2	31-Jan-11		194,886		19,736		8.86		-

Recent Financial Results

Announcement Date

Financial Yr. End

Qtr

Period End

Revenue RM '000

Profit/Lost RM'000

EPS

Amended

15-Dec-10

31-Jul-11

1

31-Oct-10

186,625

17,457

7.89

-

Year	Revenue	Earnings
2007	613.092	35.184
2008	656.596	47.698
2009	509.731	37.458
2010	694.816	60.318
2011	804.023	77.246
Year	EPS	net DPS	NA/share	ROE
2007	18.29	9.44	1.5	12.19%
2008	24.14	16	1.61	14.99%
2009	17.41	10	1.74	10.01%
2010	28	18	1.92	14.58%
2011	35.9	24	2.17	16.54%

The Investor and Market Fluctuations: Price fluctuations have only one significant meaning for true investor (8)

The true investor when he owns a listed common stock, can take advantage of the daily market price or leave it alone, as dictated by his own judgment and inclination.

• He must take cognizance of important price movements, for otherwise his judgment will have nothing to work on. 
• Conceivably they may give him a warning signal which he will do well to heed—this in plain English means that he is to sell his shares because the price has gone down, foreboding worse things to come. 
• In our view such signals are misleading at least as often as they are helpful. 

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

The Investor and Market Fluctuations: Mr. Market Parable (7)

Mr.Market Parable.

Imagine that in some private business you own a small share that cost you $1,000. One of your partners, named Mr. Market, is very obliging indeed.

• Every day he tells you what he thinks your interest is worth and furthermore offers either to buy you out or to sell you an additional interest on that basis. 
• Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. 
• Often, on the other hand, Mr.Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you a little short of silly.

If you are a prudent investor or a sensible businessman, will you let Mr. Market’s daily communication determine your view of the value of a $1,000 interest in the enterprise? Only in case you agree with him, or in case you want to trade with him. 

• You may be happy to sell out to him when he quotes you a ridiculously high price, and 
• equally happy to buy from him when his price is low. 
• But the rest of the time you will be wiser to form your own ideas of the value of your holdings, based on full reports from the company about its operations and financial position.

The Investor and Market Fluctuations: Stock Market Equity Ownership has the important attribute of Liquidity (6)

Critics of the value approach to stock investment argue that listed common stocks cannot properly be regarded or appraised in the same way as an interest in a similar private enterprise, because the presence of an organized security market “injects into equity ownership the new and extremely important attribute of liquidity.”

But what this liquidity really means is, 

• first, that the investor has the benefit of the stock market’s daily and changing appraisal of his holdings, for whatever that appraisal may be worth, and, 
• second, that the investor is able to increase or decrease his investment at the market’s daily figure—if he chooses. 

Thus the existence of a quoted market gives the investor  certain options that he does not have if his security is unquoted.

But it does not impose the current quotation on an investor who prefers to take his idea of value from some other source.

The Investor and Market Fluctuations: The Single Most Important Paragraph in Graham's entire book for the Bear Markets (5)

Let us return to our comparison between the holder of marketable shares and the man with an interest in a private business.  We have said that the former has the option of considering himself merely

• as the part owner of the various businesses he has invested in, or 
• as the holder of shares which are salable at any time he wishes at their quoted market price.

But note this important fact:
The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more.* Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons’ mistakes of judgment.†



* “Only to the extent that it suits his book” means “only to the extent that the price is favorable enough to justify selling the stock.” In traditional brokerage lingo, the “book” is an investor’s ledger of holdings and trades.

† This may well be the single most important paragraph in Graham’s entire book. In these 113 words Graham sums up his lifetime of experience. You cannot read these words too often; they are like Kryptonite for bear markets.  If you keep them close at hand and let them guide you throughout your investing life, you will survive whatever the markets throw at you.






Incidentally, a widespread situation of this kind actually existed during the dark depression days of 1931–1933.  There was then a psychological advantage in owning business interests that had no quoted market. 

• For example, people who owned first mortgages on real estate that continued to pay interest were able to tell themselves that their investments had kept their full value, there being no market quotations to indicate otherwise. 
• On the other hand, many listed corporation bonds of even better quality and greater underlying strength suffered severe shrinkages in their market quotations, thus making their owners believe they were growing distinctly poorer. 

In reality the owners were better off with the listed securities, despite the low prices of these.

• For if they had wanted to, or were compelled to, they could at least have sold the issues—possibly to exchange them for even better bargains. 
• Or they could just as logically have ignored the market’s action as temporary and basically meaningless. 

But it is self-deception to tell yourself that you have suffered no shrinkage in value  merely because your securities have no quoted market at all.

Returning to our A. & P. shareholder in 1938, we assert that as long as he held on to his shares he suffered no loss in their price decline, beyond what his own judgment may have told him was occasioned by a shrinkage in their underlying or intrinsic value. 

• If no such shrinkage had occurred, he had a right to expect that in due course the market quotation would return to the 1937 level or better—as in fact it did the following year. 
• In this respect his position was at least as good as if he had owned an interest in a private business with no quoted market for its shares. 
• For in that case, too, he might or might not have been justified in mentally lopping off part of the cost of his holdings because of the impact of the 1938 recession—depending on what had happened to his company.

Ref:  Intelligent Investor by Benjamin Graham

The Investor and Market Fluctuations: The story of the Great Atlantic & Pacific Tea Company Shares (4)

There are two chief morals to this story.

• The first is that the stock market often goes far wrong, and sometimes an alert and courageous investor can take advantage of its patent errors. 
• The other is that most businesses change in character and quality over the years, sometimes for the better, perhaps more often for the worse.  The investor need not watch his companies’ performance like a hawk; but he should give it a good, hard look from time to time.

The Investor and Market Fluctuations: The story of the Great Atlantic & Pacific Tea Company Shares (3)

We see in this history how wide can be the vicissitudes of a major American enterprise in little more than a single generation, and also with what miscalculations and excesses of optimism and pessimism the public has valued its shares.

• In 1938 the business was really being given away, with no takers; 
• in 1961 the public was clamoring for the shares at a ridiculously high price. 
• After that came a quick loss of half the market value, and some years later a substantial further decline. 

In the meantime the company was to turn from an outstanding to a mediocre earnings performer; 

• its profit in the boom-year 1968 was to be less than in 1958;
• it had paid a series of confusing small stock dividends not warranted by the current additions to surplus; and so forth. 
• A. & P. was a larger company in 1961 and 1972 than in 1938, but not as well-run, not as profitable, and not as attractive.*

* The more recent history of A & P is no different.

• At year-end 1999, its share price was $27.875; 
• at year-end 2000, $7.00; 
• a year later, $23.78; 
• at year-end 2002, $8.06. 

Although some accounting irregularities later came to light at A & P, it defies all logic to believe that the value of a relatively stable business like groceries could

• fall by three-fourths in one year, 
• triple the next year, 
• then drop by two-thirds the year after that.

Ref:  Intelligent Investor  by Benjamin Graham

The Investor and Market Fluctuations: The story of the Great Atlantic & Pacific Tea Company Shares (2)

A. & P. shares  were introduced to trading on the “Curb” market, now the American Stock Exchange, in 1929 and sold as high as 494.  

• By 1932 they had declined to 104, although the company’s earnings were nearly as large in that generally catastrophic year as previously. 
• In 1936 the range was between 111 and 131. 
• Then in the business recession and bear market of 1938 the shares fell to a new low of 36.

Sequel and Reflections

The following year, 1939, A. & P. shares advanced to 117 1⁄2, or three times the low price of 1938 and well above the average of 1937. 

• Such a turnabout in the behavior of common stocks is by no means uncommon, but in the case of A. & P. it was more striking than most. 
• In the years after 1949 the grocery chain’s shares rose with the general market 
• until in 1961 the split-up stock (10 for 1) reached a high of 70 1⁄2 which was equivalent to 705 for the 1938 shares.  

This price of 70 1⁄2 was remarkable for the fact it was 30 times the earnings of 1961. 

• Such a price/earnings ratio—which compares with 23 times for the DJIA in that year—must have implied expectations of a brilliant growth in earnings. 
• This optimism had no justification in the company’s earnings record in the preceding years, and it proved completely wrong. 
• Instead of advancing rapidly, the course of earnings in the ensuing period was generally downward.  
• The year after the 70 1⁄2 high the price fell by more than half to 34.   
• But this time the shares did not have the bargain quality that they showed at the low quotation in 1938. 
• After varying sorts of fluctuations the price fell to another low of 211/2 in 1970 and 18 in 1972—having reported the first quarterly deficit in its history.

Ref: Intelligent Investor by Benjamin Graham

The Investor and Market Fluctuations: The story of the Great Atlantic & Pacific Tea Company Shares (1)

The A. & P. Example

At this point we shall introduce one of our original examples, which dates back many years but which has a certain fascination for us because it combines so many aspects of corporate and investment experience. It involves the Great Atlantic & Pacific Tea Co. Here is the story:

A. & P. shares  were introduced to trading on the “Curb” market, now the American Stock Exchange, in 1929 and sold as high as 494.  

• By 1932 they had declined to 104, although the company’s earnings were nearly as large in that generally catastrophic year as previously. 
• In 1936 the range was between 111 and 131. 
• Then in the business recession and bear market of 1938 the shares fell to a new low of 36.

That price was extraordinary.

• It meant that the preferred and common were together selling for $126 million, although the company had just reported that it held $85 million in cash alone and a working capital (or net current assets) of $134 million. 
• A. & P. was the largest retail enterprise in America, if not in the world, with a continuous and impressive record of large earnings for many years. 
• Yet in 1938 this outstanding business was considered on Wall Street to be worth less than its current assets alone—which means less as a going concern than if it were liquidated. 

Why? 

• First, because there were threats of special taxes on chain stores; 
• second, because net profits had fallen off in the previous year; and, 
• third, because the general market was depressed. 
• The first of these reasons was an exaggerated and eventually groundless fear; the other two were typical of temporary influences.

Let us assume that the investor had bought A. & P. common in 1937 at, say, 12 times its five-year average earnings, or about 80.  We are far from asserting that the ensuing decline to 36 was of no importance to him.

• He would have been well advised to scrutinize the picture with some care, to see whether he had made any miscalculations. 
• But if the results of his study were reassuring—as they should have been—he was entitled then to disregard the market decline as a temporary vagary of finance, unless he had the funds and the courage to take advantage of it by buying more on the bargain basis offered.

Ref; Intelligent Investor by Benjamin Graham