Business Valuations versus Stock-Market Valuations: Critics of the value approach to stock investment

1. 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 improtant attribute of liquidity."
2. 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.
3. Thus the existence of a quoted market gives the investor certain options that he does not have if his security is unquoted.
4. But it does not impose the current quotation on an investor who prefers to take his idea of value from some other source.

In these 113 words Graham sums up his lifetime of experience

1. Let us return to our comparison between the holder of marketable shares and the man with an interest in a private business.
2. 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.
3. But note this important fact: The true investor scarcely ever is forced to sell his shares, and at all 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 judgement.
4. (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.)
5. 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.
6. For example, people who owned first mortgages on real estate that continued to pay interest were able to tell themselves that their invesmtents had kept their full value, there being no market quotations to indicate otherwise.
7. 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.
8. In reality, the owners were better off with the listed securities, despite the low prices of these.
9. 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.
10. Or they could just as logically have ignored the market's action as temporary and basically meaningless.
11. 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.

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.

1. 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.
2. 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.
3. 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.
4. 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

* "Only to the extent that it suits his books" means "only to the extent that the price is favourable enough to justify selling the stock."

Business Valuations versus Stock-Market Valuations: The A & P Example

The A. & P. Example.

This was one of Graham's original examples, which dates back many years but which has a certain fascination because it combines so many aspects of corporate and investment experience. Here is the story:

1. It involves the Great Atlantic and Pacific Tea Co.
2. A&P shares were introduced to trading on the "Curb" market, now American Stock Exchange, in 1929 and sold as high as 494.
3. By 1932 they had declined to 104, although the company's earnings were nearly as large in that generally catastrophic year as previously.
4. In 1936 the range was between 111 and 131.
5. Then in the business recession and bear market of 1938 the shares fell to a new low of 36.
6. 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.
7. 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.
8. 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.
9. 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.
10. The first of these reasons was an exaggerated and eventually groundless fear; the other two were typical of temporary influences.
11. 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.
12. We are far from asserting that the ensuing decline to 36 was of no importance to him.
13. He would have been well advised to scrutinize the picture with some care, to see whether he had made any miscalculations.
14. 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.

Sequel and Reflections

1. 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.
2. Such a turnabout in the behaviour of common stocks is by no means uncommon, but in the case of A&P it was more striking than most.
3. 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.
4. This price of 70 1/2 was remarkable for the fact it was 30 times the earnings of 1961.
5. 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.
6. This optimism had no justification in the company's earnings record in the preceding years, and it proved completely wrong.
7. Instead of advancing rapidly, the course of earnings in the ensuing period was generally downward.
8. 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.
9. After varying sorts of fluctuations the price fell to another low of 21 1/2 in 1970 and 18 in 1972 - having reported the first quarterly deficit in its history.

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.

1. In 1938 the busines was really being given away, with no takers; in 1961 the public was clamoring fo the shares at a ridiculously high price.
2. After that came a quick loss of half the market value, and some years later a substantial further decline.
3. 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 dividdends not warranted by the current additions to surplus; and so forth.
4. 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.

There are two chief morals to this story.

1. 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.
   
2. 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.

Ref: Intelligent Investor by Benjamin Graham

The more recent history of A&P is no different. At year-end 1999, its share price was $27.875; at year -end 2000, $700; a year later, $23.78; at year-end 2002, $8.06. Although some accounting irregulariteis 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.

Business Valuations versus Stock-Market Valuations

1. The impact of market fluctuations upon the investor's true situation may be considered also from the standpoint of the shareholder as the part owner of various businesses.
2. The holder of marketable shares actually has a double status, and with it the privilege of taking advantage of either at his choice.
3. On the one hand his position is analogous to that of a minority shareholder or silent partner in a private business. Here his results are entirely dependent on the profits of the enterprise or on a change in the underlying value of its assets. He would usually determine the value of such a private-business interest by calculating his share of the net worth as shown in the most recent balance sheet.
4. On the other hand, the common-stock investor holds a piece of paper, an engraved stock certificate, which can be sold in a matter of minutes at a price which varies from moment to moment - when the market is open, that is - and often is far removed from the balance sheet value.
5. 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.
6. 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").
7. 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.
8. This is a factor of prime importance in present-day investing and it has received less attention tha it deserves.
9. 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.
10. 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.
11. Thus, we reach the final paradox, that the more successful the companyl, the greater are likely to be the fluctuations in the price of its shares.
12. 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.
13. (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.)
14. The argument made above should explain the often erratic price behaviour of our most successful and impressive enterprises.
15. Our favourite 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.
16. 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.
17. 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.
18. The previous discussion leads us to a conclusion of practical importance to the conservative investor in common stocks.
19. 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.
20. 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.
21. 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.
22. 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, (1) a sastisfactory ratio of earnings to price, (2) a sufficiently strong financial position, and (3) the prospect that its earnings will at least be maintained over the years.
23. 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.
24. 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.
25. 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.
26. 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 mutlpliers of both earnings and tangible assets.
27. 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.
28. More than that, at times he can use these vagaries to play the master game of buying low and selling high.

Ref: Intelligent Investor by Benjamin Graham

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 world "paradox" is probably an allusion to a classic article by David Durand, "Growth Stocks and the Petersburg Paradox," 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 inestor 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.

NTPM

28.7.09

FY ended 30.4.2009

No of ordinary shares: 1,123,200
Recent Price per share: 52c
Market cap: 584.06m
Earnings: 46.305m
Dividend: 38.413m
DPO: 83%

diluted EPS: 4.1c
DPS: 3.4c
NTA: 18c
PE = 12.7
DY = 6.58%
P/B = 2.9x

Historical PE range: (last 5 years) 7.3 - 9.9
Historical DY range: (last 5 years) 8.6% - 6.4%

Cash flow:
CFO: 58m
CFI: 24m
FCF: 34m

PBT/Revenue: 58.7 / 358.6 = 16.4%

STL: 36.4m
LTL: 8.4m
Equity: 203.9m
D/E: 0.22


Over the course of 5 years, the eps of NTPM grew from 2.5 sen (in 2004) to 4.1 sen (in 2009), its compound annual growth rate is 10.40%. (I usually like to study stocks giving an eps growth rate of > 15% per year.)

PEG = PE/EPS GR = 12.7/10.4 = 1.22


Quality and Management indicators are good. A good stock to look further into.

How to value this stock?

It is presently trading higher than its historical PE. Also, its DY has been at the lower end of its historical DY. From the above graph, you can visualise that the rate of growth of its share price has outpaced the rate of growth of its earnings.

Keep this company on your radar screen. Be patient.

Market Fluctuations of the Investor's Portfolio

1. Every investor who owns common stocks must expect to see them fluctuate in value over the years.
2. The behaviour of the DJIA since our last edition of Intelligent Investor was written in 1964 probably reflects pretty well what has happened to the stock portfolio of a conservative investor who limited his stock holdings to those of large, prominent, and conservatively financed corporations.
3. The overall value advanced from an average level of about 890 to a high of 995 in 1966 (and 985 again in 1968), fell to 631 in 1970, and made an almost full recovery to 940 in early 1971.
4. (Since the individual issues set their high and low marks at different times, the fluctuations in the Dow Jones group as a whole are less severe than those in the separate components.)
5. We have traced through the price fluctuations of other types of diversified and conservative common-stock portfolios and we find that the overall results are not likely to be markedly different from the above.
6. In general, the shares of second-line companies fluctuate more widely than the major ones, but this does not necessarily mean that a group of well-established but smaller companies will make a poorer showing over a fairly long period.
7. (Today's equivalent of what Graham calls "second-line companies" would be any of the thousands of stocks not included in the Standard & Poor's 500-stock index. A regularly revisited list of the 500 stocks in the S & P index is available at http://www.standardandpoors.com/. )
8. In any case, the investor may as well resign himself in advance to the probability rather than the mere possibility that most of his holdings will advance, say, 50% or more from their low point and decline the equivalent one-third or more from their high point at various periods in the next five years.
9. (Note carefully what Graham is saying here. It is not just possible, but probable, that most of the stocks you own will gain at least 50% from their lowest price and lose at least 33% from their highest price - regardless of which stocks you own or whether the market as a whole goes up or down. If you can't live with that - or you think your portfolio is somehow magically exempt from it - then you are not yet entitled to call yourself an investor.)
10. (Graham refers to a 33% decline as the "equivalent one-third" because a 50% gain takes a $10 stock to $15. From $15, a 33% loss [or $5 drop] takes it right back to $10, where it started.)
11. A serious investor is not likely to believe that the day-to-day or even month-to-month fluctuations of the stock market make him richer or poorer.
12. But what about the longer-term and wider changes? Here practical questions present themselves, and the psychological problems are likely to grow complicated.
13. A substantial rise in the marke is at once a legitimate reason for satisfaction and a cause for prudent concern, but it may also bring a strong temptation toward imprudent action.
14. Your shares have advanced, good! You are richer than you were, good! (1) But has the price risen too high, and should you think of selling? (2) Or should you kick yourself for not having bought more shares when the level was lower? (3) Or - worst thought of all - should you now give way to the bull-market atmosphere, become infected with the enthusiasm, the overconfidence and the greed of the great public (of which, after all, you are a part), and make larger and dangerous commitments?
15. Presented thus in print, the answer to the last question is a self-evident no, but even the intelligent investor is likely to need considerable will power to keep from following the crowd.
16. It is for these reasons of human nature, even more than by calculation of financial gain or loss, that we favour some kind of mechanical method for varying the proportion of bonds to stocks in the investor's portfolio.
17. The chief advantage, perhaps, is that such a formula will give him something to do.
18. As the market advances he will from time to time make sales out of his stockholdings, putting the proceeds into bonds; as it declines he will reverse the procedure. These activities will provide some outlet for his otherwise too-pent-up energies.
19. If he is the right kind of investor he will take added satisfaction from the thought that his operations are exactly opposite from those of the crowd.
20. (For today's investor, the ideal strategy for pursuing this "formula" is rebalancing.)

Ref: Intelligent Investor by Benjamin Graham

Formula Investment Plans

1. In the early years of the stock market rise that began in 1949-50 considerable interest was attracted to various methods of taking advantage of the stock market's cycles.
2. These have been known as "formula investment plans."
3. The essence of all such plans - except the simple case of dollar averaging - is that the investor automatically does some selling of common stocks when the market advances substantially.
4. In many of them a very large rise int he market level would result in the sale of all common-stock holdings; others provided for retention of a minor proportion of equities under all circumstances.
5. This approach had the double appeal of sounding logical (and conservative) and of showing excellent results when applied RETROSPECTIVELY to the stock market over many years in the past.
6. Unfortunately, its vogue grew greatest at the very time when it was destined to work least well.
7. Many of the "formula planners" found themselves entirely or nearly out of the stock market at some level in the middle 1950s. True, they had realized excellent profits, but in a broad sense the market "ran away" from them thereafter, and their formulas gave them little opportunity to buy back a common stock position.
8. (Many of these "formula planners" would have sold all their stocks at the end of 1954, after the US stock market rose 52.6%, the second-highest yearly return then on record. Over the next five years, these market-timers would likely have stood on the sidelines as stocks doubled.)
9. There is a similarity between the experience of those adopting the formula-investing approach in the early 1950s and those who embraced the purely mechanical version of the Dow theory some 20 years earlier.
10. In both cases the advent of popularity marked almost the exact moment when the system ceased to work well.
11. We have had a like discomfiting experience with our own "central value method" of determining indicated buying and selling levels of the Dow Jones Industrial Average. (Note that, in referring to his "discomfiting experience," Graham is - as always - honest in admitting his own failures.)
12. The moral seems to be that any approach to moneymaking in the stock market which can be easily described and followed by a lot of people is by its terms too simple and too easy to last.
13. (Easy ways to make money in the stock market fade for two reasons: (1) the natural tendency of trends to reverse over time, or "regress to the mean," and (2) the rapid adoption of the stock-picking scheme by large numbers of people, who pile in and spoil all the fun of those who got there first.)
14. Spinoza's concluding remark applies to Wall Street as well as to philosophy: "All things excellent are as difficult as they are rare."

Ref: Intelligent Investor by Benjamin Graham

Buy-Low-Sell-High Approach

1. We are convinced that the average investor cannot deal successfully with price movements by endeavoring to forecast them.
2. Can he benefit from them after they have taken place - i.e., by buying after each major decline and selliing out after each major advance?
3. The fluctuations of the market over a period of many years prior to 1950 lent considerable encouragement to that idea.
4. In fact, a classic definition of a "shrewd investor" was "one who bought in a bear market when everyone else was selling, and sold out in a bull market when everyone else was buying."
5. This viewpoint appeared valid until fairly recent years.
6. Between 1897 and 1949 there were ten complete market cycles, running from bear-market low to bull-market high and back to bear-market low.
7. Six of these took no longer than four years, four ran for six or seven years, and one - the famous "new-era" cycle of 1921-1932 - lasted eleven years.
8. The percentage of advance from the lows to highs ranged from 44% to 500%, with most between about 50% and 100%.
9. The percentage of subsequent declines ranged from 24% to 89%, with most found between 40% and 50%. (It should be remembered that a decline of 50% fully offsets a preceding advance of 100%.)
10. Nearly all the bull markets had a number of well-defined characteristics in common, such as:(1) a historically high price level,(2) high price/earnings ratio,(3) low dividend yields as against bond yields,(4) much speculation on margin, and(5) many offerings of new common-stock issues of poor quality.
11. Thus to the student of stock-market history it appeared that the intelligent investor should have been able to identify the recurrent bear and bull markets, to buy in the former and sell in the latter, and to do so for the most part at reasonably short intervals of time.
12. Various methods were developed for determining buying and selling levels of the general market, based on either value factors or percentage movements of prices or both.
13. But we must point out that even prior to the unprecedented bull market that began in 1949, there were sufficient variations in the successive market cycles to complicate and sometimes frustrate the desirable process of buying low and selling high.
14. The most notable of these departures, of course, was the great bull market of the late 1920s, which threw all calculations badly out of gear.
15. Even in 1949, therefore, it was by no means a certainty that the investor could base his financial policies and procedures mainly on the endeavor to buy at low levels in bear markets and to sell at high levels in bull markets.
16. It turned out, in the sequel, that the opposite was true.
17. The market's behaviour in the past 20 years has not followed the former pattern, nor obeyed what once were well-established danger signals, nor permitted its successful exploitation by applying old rules for buying low and selling high.
18. Whether the old, fairly regular bull-and-bear-market pattern will eventually return we do not know.
19. But it seems unrealistic to us for the investor to endeavour to base his present policy on the classic formula - i.e., to wait for demonstrable bear-market levels before buying any common stocks.
20. Our recommended policy has, however, made provision for changes in the proportion of common stocks to bonds in the portfolio, if the investor chooses to do so, according as the level of stock prices appears less or more attractive by value standards.
21. (This policy, now called "tactical asset allocation," is widely followed by institutional investors like pension funds and university endowments.)

Ref: Intelligent Investor by Benjamin Graham

All those who forget are doomed to be reminded

1. Without bear markets to take stock prices back down, anyone waiting to "buy low" will feel completely left behind - and, all too often, will end up abandoning any former caution and jumping in with both feet.
2. That's why Graham's message about the importance of emotional discipline is so important.
3. From October 1990 through January 2000, the Dow Jones Industrial Average marched relentlessly upward, never losing more than 20% and suffering a loss of 10% or more only three times. The total gain (not counting dividends): 395.7%.
4. According to Crandall, Pierce & Co., this was the second-longest uninterrupted bull market of the past century; only the 1949-1961 boom lasted longer.
5. The longer a bull market lasts, the more severely investors will be afflicted with amnesia; after five years or so, many people no longer believe that bear markets are even possible.
6. All those who forget are doomed to be reminded; and, in the stock market, recovered memories are always unpleasant.
   
   

Ref: Intelligent Investor by Benjamin Graham

The famous Dow theory for timing purchases and sales

1. The famous Dow theory for timing purchases and sales has had an unusual history.
2. Briefly, this technique takes its signal to buy from a special kind of "breakthrough" of the stock averages on the upside, and its selling signal from a similar breakthrough on the downside.
3. The calculated - not necessarily actual - results of using this method showed an almost unbroken series of profits in operations from 1897 to the early 1960s.
4. On the basis of this presentation the practical value of the Dow theory would have appeared firmly established; the doubt, if any, would apply to the dependability of this published "record" as a picture of what a Dow theorist would actually have done in the market.
5. A closer study of the figures indicates that the quality of the result shown by the Dow theory changed radically after 1938 - a few years after the theory had begun to be taken seriously on Wall Street.
6. Its spectacular achievement had been in giving a sell signal, at 306, about a month before the 1929 crash and in keeping its followers out of the long bear market until things had pretty well righted themselves, at 84, in 1933.
7. But from 1938 on the Dow theory operated mainly by taking its practitioners out at a pretty good price but then putting them back in again at a higher price. For nearly 30 years thereafter, one would have done appreciably better by just buying and holding the DJIA.
8. In our view, based on much study of this problem, the change in the Dow-theory results is not accidental. It demonstrates an inherent characteristic of forecasting and trading formulas in the fields of business and finance.
9. Those formulas that gain adherents and importance do so because they have worked well over a period, or sometimes merely because they have been plausibly adapted to the statistical record of the past.
10. But as their acceptance increase, their reliability tends to diminsh.
11. This happens for two reasons: First, the passage of time brings new conditions which the old formula no longer fits.
12. Second, in stock-market affairs the popularity of a trading theory has itself an influence on the market's behaviour which detracts in the long run from its profit-making possibilities.
13. (The popularity of something like the Dow theory may seem to create its own vindication, since it would make the market advance or decline by the very action of its followers when a buying or selling signal is given. A "stampede" of this kind is, of course, much more of a danger than an advantage to the public trader.)

Ref: Intelligent Investor by Benjamin Graham

Timing is of no real value to the investor unless it coincides with pricing

1. There is one aspect of the "timing" philosophy which seems to have escaped everyone's notice.
2. 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.
3. But a waiting period, as such, is of no consequence to the investor.
4. What advantage is there to him in having his money uninvested until he receives some (presumably) trustworthy signal that the time has come to buy?
5. 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.
6. 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.

Ref: Intelligent Investor by Benjamin Graham

Comment:

For the investor who sold at the high of the market, "timing" is of no real value, unless it enables him to repurchase his shares in the future at substantially lower than his previous selling price.

Many good quality stocks, badly sold down during the recent severe bear market, have risen above their previous highs.

Those who sold good quality stocks in the recent severe bear market would not have benefited unless they have also bought these shares back at substantially lower prices during the depth of the bear market.

Pros and Cons of Market Forecasting

1. A great deal of brain power goes into this field, and undoubtedly some people can make money by being good stock-market analysts.

2. But it is absurd to think that the general public can ever make money out of market forecasts.

3. For who will buy when the general public, at a given signal, rushes to sell out at a profit?

4. If you, the reader, expect to get rich over the years by following some system or leadership in market forecasting, you must be expecting to try to do what countless others are aiming at, and to be able to do it better than your numerous competitors in the market.

5. There is no basis either in logic or in experience for assuming that any typical or average investor can anticipate market movements more successfully than the general public, of which he is himself a part.

The forecasts of "market strategists" became more influential but not more accurate

1. In the late 1990s, the forecasts of "market strategists" became more influential than even before. They did not, unfortunately, become more accurate.

2. On March 10, 2000, the very day that the NASDAQ composite index hit its all-time high of 5048.62, Prudential Securities's chief technical analyst Ralph Acampora said in USA Today that he expected NASDAQ to hit 6000 within 12 to 18 months.

3. Five weeks later, NASDAQ had already shriveled to 3321.29 - but Thomas Galvin, a market strategist at Donaldson, Lufkin & Jenrette, declared that "there's only 200 or 300 points of downside for the NASDAQ and 2000 on the upside." It turned out that there were no points on the upside and more than 2000 on the downside, as NASDAQ kept crashing until it finally scraped bottom on Octorber 9, 2002, at 1114.11.

4. In March 2001, Abby Joseph Cohen, chief investment strategist at Goldman, Sachs & Co., predicted that the Standard & Poor's 500-stock index would close the year at 1,650 and that the Dow Jones Industrial Average would finish 2001 at 13,000. "We do not expect a recession," said Cohen, "and believe that corporate profits are likely to grow at close to trend growth rates later this year." The US economy was sinking into recession even as she spoke, and the S & P 500 ended 2001 at 1148.08, while the Dow finished at 10,021.50 - 30% and 23% below her forecasts, respectively.

Comment: We cannot predict with certainty what the future will bring, but we can take some comfort that in the long run, it will be alright.

Market Fluctuations as a Guide to Investment Decisions

1. Since common stocks, even of investment grade, are subject to recurrent and wide fluctuations in their prices, the intelligent investor should be interested in the possibilities of profiting from these pendulum swings.

2. There are two possible ways by which he may try to do this:

• the way of timing and
• the way of pricing.

3. By timing we mean the endeavor to anticipate the action of the stock market – to buy or hold when the future course is deemed to be upward, to sell or refrain from buying when the course is downwards.

4. By pricing, we mean the endeavour to buy stocks when they are quoted below their fair value and to sell them when they rise above such value.

5. A less ambitious form of pricing is the simple effort to make sure that when you buy you do not pay too much for your stocks. This may suffice for the defensive investor, whose emphasis is on long-pull holding; but as such it represents an essential minimum of attention to market levels.

6. We are convinced that the intelligent investor can derive satisfactory results from pricing of either type.

7. We are equally sure that if he places his emphasis on timing, in the sense of forecasting, he will end up as a speculator and with a speculator’s financial results. This distinction may seem rather tenuous to the layman, and it is not commonly accepted on Wall Street.

8. As a matter of business practice, or perhaps of thoroughgoing conviction, the stock brokers and the investment services seem wedded to the principle that both investors and speculators in common stocks should devote careful attention to market forecasts.

9. The farther one gets from Wall Street, the more skepticism one will find, we believe, as to the pretensions of stock-market forecasting or timing.

10. 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 upon them.

11. 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.

Ref: Intelligent Investor by Benjamin Graham

Price Changes in Common Stocks

This is an important subject.

Through historical survey of the stock market's action over the past many years, we hope to learn what the past record promises the investor - in either:

• the form of long-term appreciation of a portfolio held relatively unchanged through successive rises and declines, or,
• in the possibilities of buying near bear-market lows and selling not too far below bull-market highs.

The Investor and Market Fluctuations

The investors in these assets need not take market fluctuations into account.

1. To the extent that the investor’s funds placed in high-grade bonds of relatively short maturity – say, of seven years or less – will not be affected significantly by changes in market prices, and need not take them into account.
2. This applies also to his holdings of US savings bonds, which he can always turn in at his cost price or more.

The investors in these assets need to take market fluctuations into account.

1. His longer-term bonds may have relatively wide price swings during their lifetimes, and
2. his common-stock portfolio is almost certain to fluctuate in value over any period of several years.
3. The investor should know about these possibilities and should be prepared for them both financially and psychologically.
4. He will want to benefit from changes in market levels –

• certainly through an advance in the value of his stock holdings as time goes on, and
• perhaps also by making purchases and sales at advantageous prices.
• This interest on his part is inevitable, and legitimate enough. But it involves the very real danger that it will lead him into speculative attitudes and activities.
• It is easy for us to tell you not to speculate; the hard thing will be for you to follow this advice.

Let us repeat what we said at the outset: If you want to speculate do so with your eyes open, knowing that you will probably lose money in the end; be sure to limit the amount at risk and to separate it completely from your investment program.

Ref: Intelligent Investor by Benjamin Graham

Growing with growth stocks

Growing with growth stocks

Tags: Ang Kok Heng

Written by Ang Kok Heng
Monday, 27 July 2009 00:26

AXIATA Group Bhd, formerly TM International Bhd (6888), will cap capital expenditure (capex) at RM4.4 billion this year, in a move to cut costs amid a slowdown in the region's economies. "There are a few things we are doing given the economic situation — we are reducing capex from RM5.4 billion to RM4.4 billion, re-looking all operating costs and benchmarking ourselves to know where we stand," Axiata president and managing director Datuk Seri Jamaludin Ibrahim said.

Malaysia's third-placed mobile operator DiGi Telecommunications is planning to spend more than RM1.1 billion (US$318.9 million) in 2009, Reuters reports.

PPB GROUP BHD [] is planning to spend RM293 million on capex this year, its chairman Datuk Oh Siew Nam said. He said the group's flour-making subsidiary FFM Bhd, has been allocated RM173 million to build new flour mills in Kota Kinabalu, Sabah, and Jakarta, Indonesia.

Food-based QL RESOURCES BHD [] has earmarked RM280 million as capex for its current fiscal year and the next, deemed pivotal to spur its regional merger and acquisition (M&A) plans, and to improve its manufacturing facilities. Some RM130 million and RM150 million are allocated for the financial years (FY) ending March 2010 and 2011, respectively.

TA ANN HOLDINGS BHD [] plans to spend up to RM189 million in 2009, with most of the money going into oil palm PLANTATION []s, group managing director and chief executive officer Datuk Wong Kuo Hea said

TOMEI CONSOLIDATED BHD [] has budgeted about RM10 million for capex this year in a bid to expand amid the economic slowdown, the jeweller's group managing director Ng Yih Pyng said. "The amount allocated will be used mainly for our outlet expansion and also to improve our information TECHNOLOGY [] (IT) system," he told StarBiz in an interview.

Top Glove Corp Bhd chairman Tan Sri Dr Lim Wee-Chai said the group had allocated some RM80 million for capex, which would include organic expansion and potential acquisitions. TENAGA NASIONAL BHD []'s capex this year amounted to RM3.75 billion to RM4 billion, lower than RM4.5 billion previously. UMW HOLDINGS BHD [] plans some RM600 million in capex this year to beef up its oil and gas (O&G) business, according to managing director and chief executive officer Datuk Dr Abdul Halim Harun.

The capex planned by companies is mainly for future expansion. It is this capex that generates business and hence earnings growth for a company. Earnings growth is the main attraction in equity investment.

Stock grows
One of the main duties of the management is to grow the company. When a company is operating at full capacity, additional capex is needed to grow the earnings. The funds for capex could be internally generated or from borrowed capital. This type of reinvestment is the yearly expansion budget of a company. Every incremental investment will provide additional return which will add to the existing profit of a company.

Some companies may be faced with diminishing return which occurs when profitability falls over time either because of more competition or less lucrative investment return. So long as the return on investment (ROI) is higher than the bank's interest rates, there is value added from the expansion plan.

But the ROI of most investments is expected to be much higher than the bank's interest rates since every investment comes with a certain amount of risk. When ROI is substantially higher than borrowing rates, it will make sense to borrow to enhance business returns. Every capex may be viewed individually from the ROI point of view such that the return must be worth the effort and risk taken. In many cases, the return may not be immediate and some may even suffer losses for the initial few years before profit starts to flow in.


Growth stocks pay less dividends
Because of the need to grow, growth stocks normally pay less on dividends so that a larger portion of the profit is retained for future expansion. The amount of dividend paid to shareholders as a percentage of the profit is known as dividend payout ratio. The dividend payout of a growth stock could be less than 50% while some may be as low as 20%.

Generally, a stock with low dividend payout and low dividend yield is expected to have higher earnings growth. On the other hand, a stock with high dividend payout and thus high dividend yield has lower earnings growth. In this way, growth stocks tend to have higher price appreciation than high-dividend yield stocks.

It is not uncommon to come across management's explanation to its shareholders on the reasons for keeping some of the profit for future expansion. As every company has its own expansion plans, the company usually conserves some cash for future use and pay the balance to shareholders. In this way, there is no need to raise money from shareholders via rights issues for expansion purposes.

In certain cases, although the company may post profit, it may not have sufficient free cashflow to pay dividend, as the profit is just an "accounting profit". In this case, the "profit" is tied up in inventories or receivables and hence it cannot be paid to shareholders. A good company is one which can pay relatively high dividends and yet able to continue to provide reasonable growth.

More capex, higher growth
There are also many listed companies which did not pay high dividends and yet their earnings growth was mediocre. If the capex is not well spent, the earnings growth may not be forth coming. Although failed projects may not be entirely the fault of the management, a good manager should also avoid or minimise such losses.

More importantly bad investment should not be repeated. Unfortunately, it is not uncommon to see several companies listed on Bursa Malaysia which did not seem to get any of their investment strategies right year after year. The poor ROE (return on equity or shareholders' fund) in the past and non-improvement in ROE over the years prove the failures of the management to deliver basic economic profit to shareholders.

At the beginning of this article, several companies disclosed their capex requirements for the year. For a growth stock, the capex is likely to be higher relatively to its size. For the selected companies, we have listed them in Table 1. We have divided the capex by market capitalisation (a measure of value of a company) and also by fixed assets. Although these ratios may not be conclusive to determine which stock is a better growth stock, they provide some ideas on the expansion plans.



It should be noted that the low capex of a company in a particular year may not necessarily denote lower earnings growth going forward. It could be due to the adequate capacity for the time being or less need to expand due to the prevailing market conditions. Some companies may not be capital intensive and hence less need to spend as much.

Expansion path
Listed companies have many options to grow. They can grow organically through natural expansion or by way of acquisition. The growth can be financed by internally generated funds, borrowing or a combination of both. They may also issue new shares to acquire the target company or call for rights issues to finance the expansion (see Chart 1).



It is not uncommon for a company to move downstream by adding value to what it produces, for example, to process its products further. It can also go upstream to procure its own raw materials so as to be in a better position to control its supplies. A company facing limited growth in its existing business may also venture into new businesses to remain relevant. This type of diversification can also be useful to stabilise the cyclical business nature of a company.

Capital gain can be volatile
From an investor's perspective, the ROI is the dividend income received regularly and the capital gain from price appreciation.

For a high-dividend stock, the dividend yield is similar to assured return received, say 4% per annum. The capital gain, normally smaller for a high- dividend stock, is like a bonus on top of the dividend.

For growth stock, the dividend yield is smaller (see Chart 2) and capital gain is what an investor mainly aims for. Unfortunately, capital gain can be very volatile, since the share price could be influenced by market sentiment. Furthermore, as the business risk of a high-growth company is normally higher, the expected price appreciation will depend on the results of the expansion plan. Most investments provide both income and capital gain. Examples are unit trusts, bonds, PROPERTIES [] and foreign currencies.



There are also several investments which do not provide income. These are merely trading instruments. They include commodity trading, gold and similar types of commodity which bet purely on the price appreciation. Investors who "invest" in gold thinking that this is a good investment, must bear in mind that gold does not provide income, it only provides capital gain (or speculative gain). A kilogramme of gold remains a kilo after several years. A growth stock (provided it is a true growth stock and not speculative stock), on the other hand, will grow over time and will not be the same after several years.

Fixed-income instruments don't grow
Most investment grade stocks provide some growth. Even a low-growth high-dividend yield stock may have small growth. If the growth is only 2% per year, the dividend received is also likely to grow by 2% per annum. In this example, assuming the dividend yield is 4% per annum, a 2% growth in dividend will mean that after five years, the dividend yield will increase to 4.4%. As such, growth does make a difference in the return.

In the case of fixed-income instruments such as fixed deposits (FD) with the bank, the FD rate is fixed during the period of placement. If a one-year FD yields 3%, it is 3%. If the interest rate remains the same, the same FD will continue to give 3% return the following year.

While interest rate may go up one year later after the FD matures, it may possibly go down as well. There is no growth factor in FD placement. Some may argue that the growth in savings from interest rate is compounding. The compounding effect by reinvesting the interest earned is similar to the compounding effect achieved by reinvesting the dividend earned in the case of investing in a high-yield stock which may still provide some growth.

Some stocks don't grow
While investing in FD is a constant yield investment, there are also many stocks which don't grow over time. Unfortunately, the earnings of many stocks listed on Bursa Malaysia are very sluggish and they don't seem to increase even after ten years. It is a disappointing fact. These companies remain more or less the same after one or two rounds of the economic cycle. They seem to struggle with the same business year in year out.

Investing in non-growth stocks is like investing in FD with the same yield. The only difference is that non-growth stocks usually do not provide high dividend as they are not well-managed and hence their operating cashflow may not be stable. The lack of confidence to generate sufficient and consistent cashflow prevents these companies from paying higher dividend.

Some stocks degrade like their retiring owners
One of the reasons why some companies degrade and show stagnant earnings is the lost of drive (the oomph!) when the key promoters retire or on the verge of retiring. The lack of successors either among the owners' scion or from other professionals could not propel the companies forward. In some cases, the children who took over the businesses were not as capable as the founders were. As a result, these successors acted merely like a caretaker. Not only were they not able to grow the business, some of them were not even able to defend the companies' market shares.

Investing in non-growth stocks is already bad, investing in negative-growth stocks is even worst.

Investment provides yields and capital gains
In short, investment provides yields and capital gains. Some investments like FD provide pure yields but no growth at all. Some investments like gold and commodities only provide capital gains but not income. Pure capital gain investment is more speculative in nature and is not suitable for the buy-and-hold strategy. Trading strategy is more appropriate for this type of investment and market timing is crucial. Many other investments provide both yield and capital gain.

Yields are like a bird in hand and capital gains are like birds in the bushes. Some capital gains are easier to anticipate, while some capital gains are less predictive.

Ang has 20 years' experience in research and investment. He is currently the chief investment officer of Phillip Capital Management Sdn Bhd.


http://www.theedgemalaysia.com/business-news/129607-growing-with-growth-stocks.html

Margin of Safety as the Central Concept of Investment – Summary

Investment is most intelligent when it is most businesslike.

• It is amazing to see how many capable businessmen try to operate in Wall Street with complete disregard of all the sound principles through which they have gained success in their own undertakings.
• Yet every corporate security may best be viewed, in the first instance, as an ownership interest in, or a claim against, a specific business enterprise.
• And if a person sets out to make profits from security purchases and sales, he is embarking on a business venture of his own, which must be run in accordance with accepted business principles if it is to have a chance of success.
  
  

The first and most obvious of these principles is, “Know what you are doing – know your business.”

• For the investor this means: Do not try to make “business profits" out of securities – that is, returns in excess of normal interest and dividend income – unless you know as much about security values as you would need to know about the value of merchandise that you proposed to manufacture or deal in.
  

A second business principle: “Do not let anyone else run your business, unless (1) you can supervise his performance with adequate care and comprehensive or (2) you have unusually strong reasons for placing implicit confidence in his integrity and ability.”

• For the investor this rule should determine the conditions under which he will permit someone else to decide what is done with his money.
  

A third business principle: “Do not enter upon an operation – that is, manufacturing or trading in an item – unless a reliable calculation shows that it has a fair chance to yield a reasonable profit.

• In particular, keep away from ventures in which you have little to gain and much to lose.”
• For the enterprising investor this means that his operations from profit should be based not on optimism but on arithmetic.
• For every investor it means that when he limits his return to a small figure – as formerly, at least, in a conventional bond or preferred stock – he must demand convincing evidence that he is not risking a substantial part of his capital.
  

A fourth business rule is more positive: “Have the courage of your knowledge and experience. If you have formed a conclusion from the facts and if you know your judgement is sound, act on it – even though others may hesitate or differ.”

• (You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.)
• Similarly, in the world of securities, courage becomes the supreme virtue after adequate knowledge and a tested judgement are at hand.
  

Fortunately for the typical investor, it is by no means necessary for his success that he bring these qualities to bear upon his program – provided he limits his ambition to his capacity and confines his activities within the safe and narrow path of standard, defensive investment.

• To achieve satisfactory investment results is easier than most people realize; to achieve superior results I harder than it looks.

Ref: Intelligent Investor by Benjamin Graham

Margin of Safety and Unconventional Investments

Margin of Safety and Unconventional Investments - Extension of the Concept of Investment

Investment can be further distinguished between conventional and unconventional investments.
Conventional investments are appropriate for the typical portfolio.

• Under this heading have always come US government issues and high-grade, dividend-paying common stocks.
• We have added state and municipal bonds for those who will benefit sufficiently by their tax-exempt features.
• Also included are first-quality corporate bonds when, as now, they can be bought to yield sufficiently more than US savings bonds.
  

Unconventional investments are those that are suitable only for the enterprising investor. They cover a wide range.

• The broadest category is that of undervalued common stocks of secondary companies, which we recommend for purchase when they can be bought at two-thirds or less of their indicated value.
• Besides these, there is often a wide choice of medium-grade corporate bonds and preferred stocks when they are selling at such depressed prices as to be obtainable also at a considerable discount from their apparent value.
• In these cases, the average investor would be inclined to call the securities speculative, because in his mind their lack of a first-quality rating is synonymous with a lack of investment merit.
  

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1. It is our argument that a sufficiently low price can turn a security of mediocre quality into a sound investment opportunity – provided that the buyer is informed and experienced and that he practices adequate diversification.
2. For, if the price is low enough to create a substantial margin of safety, the security thereby meets our criterion of investment.
3. Our favourite supporting illustration is taken from the field of real-estate bonds.

• In the 1920s, billions of dollars’ worth of these issues were sold at par and widely recommended as sound investments.
• A large proportion had so little margin of value over debt as to be in fact highly speculative in character. In the depression of the 1930s, an enormous quantity of these bonds defaulted their interest, and their price collapsed – in some cases below 1 cents on the dollar.
• At that stage the same advisers who had recommended them at par as safe investments were rejecting them as paper of the most speculative and unattractive type.
• But as a matter of fact, the price depreciation of about 90% made many of these securities exceedingly attractive and reasonably safe – for the true values behind them were four or five times the market quotation.
• (Graham is saying that there is no such thing as a good or bad stock; there are only cheap stocks and expensive stocks. Even the best company becomes a “sell” when its stock price goes too high, while the worst company is worth buying if its stock goes low enough.)
• The fact that the purchase of these bonds actually resulted in what is generally called “a large speculative profit” did not prevent them from having true investment qualities at their low prices.
• The “speculative” profit was the purchaser’s reward for having made an unusually shrewd investment.
• They could properly be called investment opportunities, since a careful analysis would have shown that the excess of value over price provided a large margin of safety.
• Thus, the very class of “fair-weather investments” which we stated above is a chief source of serious loss to naïve security buyers is likely to afford many sound profit opportunities to the sophisticated operator who may buy them at pretty much his own price.
• [Wall Street’s analysts have always tended to call a stock a “strong buy” when its price is high, and to label it a “sell” after its price has fallen – the exact opposite of what Graham (and simple common sense) would dictate.]
• [As he does throughout the book, Graham is distinguishing speculation – or buying on the hope that a stock’s price will keep going up – from investing, or buying on the basis of what the underlying business is worth.]

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The whole field of “special situations” would come under our definition of investment operations, because the purchase is always predicated on a thoroughgoing analysis that promises a larger realization than the price paid.

Again there are risk factors in each individual case, but these are allowed for in the calculations and absorbed in the overall results of a diversified operation.

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To carry this discussion to a logical extreme, we might suggest that a defensive investment operation could be set up by buying such intangible values as are represented by a group of “common stock option warrants” selling at historically low prices. (This example is intended as somewhat of a shocker.)

1. The entire value of these warrants rests on the possibility that the related stocks may some day advance above the option price. At the moment they have no exercisable value.
2. Yet, since all investment rests on reasonable future expectations, it is proper to view these warrants in terms of the mathematical chances that some future bull market will create a large increase in their indicated value and in their price.
3. Such a study might well yield the conclusion that there is much more to be gained in such an operation than to be lost and that the chances of an ultimate profit are much better than those of an ultimate loss.
4. If that is so, there is a safety margin present even in this unprepossesing security form.
5. A sufficiently enterprising investor could then include an option-warrant operation in his miscellany of unconventional investments.

Ref: Intelligent Investor by Benjamin Graham

Margin of Safety as a Criterion of Investment versus Speculation

Margin of Safety concept can be used to distinguish an investment from a speculation

1. Since there is no single definition of investment in general acceptance, authorities have the right to define it pretty much as they please. Many of them deny that there is any useful or dependable difference between the concepts of investment and of speculation.
2. We think this skepticism is unnecessary and harmful. It is injurious because it lends encouragement to the innate leaning of many people toward the excitement and hazards of stock-market speculation. We suggest that the margin-of-safety concept may be used to advantage as the touchstone to distinguish an investment operation from a speculative one.
3. Probably most speculators believe they have the odds in their favour when they take their chances, and therefore they may lay claim to a safety margin in their proceedings.
4. Each one has the feeling that the time is propitious for his purchase, or that his skill is superior to the crowd’s, or that his adviser or system is trustworthy.
5. But such claims are unconvincing. They rest on subjective judgement, unsupported by any body of favourable evidence or any conclusive line of reasoning.
6. We greatly doubt whether the man who stakes money on his view that the market is heading up or down can ever be said to be protected by a margin of safety in any useful sense of the phrase.
7. By contrast, the investor’s concept of the margin of safety – as developed earlier in this chapter – rests upon simple and definite arithmetical reasoning from statistical data. We believe, also, that it is well supported by practical investment experience.
8. There is no guarantee that this fundamental quantitative approach will continue to show favourable results under the unknown conditions of the future. But, equally, there is no valid reason for pessimism on this score.
9. Thus, in sum, we say that to have a true investment there must be present a true margin of safety.
10. And a true margin of safety is one that can be demonstrated by figures, by persuasive reasoning, and by reference to a body of actual experience.

Ref: Intelligent Investor by Benjamin Graham