100 to1 in the Stock Market by Thomas W. Phelps A distinguished security analyst tells how to make more of your investment opportunities McGraw-Hill Book CompanyCopyright © 19709 Thomas W. Phys sade my te opetend kd ceed ‘Suen or amid; ny frm or by ay mens eto mcm feign ese oto oe HSCTOBPOIHNTESED, iano Gong Cag InP Da ook design by Chine Aicieo Contents Prstce 1 Ad ad I Shall Be Given You 1 Shab Valley of Diamonds 1 Learaing from Hlephonts 1 Lemmings Rollow the Crowd V Foresight vse Tenacity V1 Weld Die for Deat Old Globe & Rtgs Vu The Tree Doos Not Grow to she Sky ‘yan How to Argue and Wio 1 Pigaring the Odds The Quality of Earnings I Stained XI Manipulation Despite the SEC & ° 2 % 0 n st o as 4 st Experience Sometimes Poor Teacher 132 wv Why Computers Won't Rum the World 135, xv Profi ia Eales 1 xv The Almighty Ego vs the Almighty 144 Detar vt No laflaio- Control Pat 1st Money ist Inflation 1 weIeuerest Bond versus Sticks Convex xt Plein the Might One fener xe Where to Look forthe Mig Wi ‘ron Getting Away from HAIL The hora Cy ‘euseren xxt es Not Too Late cuartun xxst Choo forthe Younger Generation ‘eunere Xia Mow to Avo Missing the Boat Next ‘Time carats xxi “Buy Right and Hold On" i Practice fonaraes xx¥ Do Ie Youslt? CHAPTER Nxvt A Sense of Vales Ccnrrnn ivr What Makes Stock Grow ovnrten xx) Real Growh—Hlow to Spot I and vata Te “rAMLES ‘ranue +365 Millonaite Maker Stocks atte Price List of Fortune Maker Socks [FARE Ht (Appendis)Breder Reactors in the Stock Preface “This isa story fact, not fistion of hundreds of opportu rites toroake a railon dolar in the sock market by investing ‘10,00 in jst ome stock and holding on twat not neceary to pick the one ight stock oF tae one right time to invest. Starting with 1902 diferent stock could have teen boupht In each of thro diferent yeas, and very dollar Invested would have grown to S100 oF more by a ‘The latest milioniremher security was avaiable as re only a 1967 at 1 percent of is 1971 matket value. The book Hse move than 68 ferent secure value i 1971 a mee than 10 times the prices a which they could have been bought four to forty years. ell ow they looked bore tel big ‘ine and saggets how the next potently big winters ay De ‘coglzed In advane, 700 tl in he Stock Merketatempis to look 1 tomorow and eharta course to belp every investor, small or lave, novice ‘or profesional, improve bis sere ‘The author scknowledges with many thanks the Help of he Individuals ced In the book. He ie partially grate to Sruddle, Stevens and Clik forthe bats reproduced herein fd for acess tothe frm vas rexearh facie, without Stich this book could not have Beem write. "To the euthors wife, Christine Reed Peps, this book is detiate in roca of er contribution of the tle and hoe patience and lnspration while he did the research and hammered oot the text wr. 3100 t01 In the Stock MarketCHAPTER 1 Ask, and It Shall Be Given You je poor Arabs slept om the sand bight ight woke them }Out of came an ange “Each of you can have one wish” the angels eto Allah,” eld the ist Arab to cath his ‘breath "Give me a donkey" Tastany a donkey soad hs side. lesecond Arab "He shoul have asked for Give me ten donkey,” the sacond Arab beget [No sooner sald than done, He had ten doskeys ‘The thd Arab had Heard and seen how the fist two had facade To Allhall hings ate pons," he sad. “Give me caravan with hundred camels, hundted donkeys, ent ops ood, Wine, and servant "They came a0 fax that the thd Arab was axkamed 10 be seen in his aps before such an entourage” But bis shame did tot last fon. Defy his sotvatts resent rober belie tng is nw sta “The fowth Arab was move than ready when his tar cate. ‘Make me a king." he commanded So quietly did the crown appear on bis head tht fe beulsed hip knuckle seatching where an instant here there bad been hothing bat an leh. The palace garden stretched out betore him almost far as the eye could se, and the palace turrets reached wo high their pennants were fst inthe desert Haze Having seen is companions iv misery atk t0 litle the ‘en Arab roslved co make no sich mista100 1 the Sth Meret 2 Make me Alla” he ordered. Ina fa he found bianself nad onthe sand, covered with “The moral, of cous, that dhe of ws who a lite of Iie get ite. Those who ask ruch get much. Those who ask ‘much get noting But range ae may smn, human greed being what ii, most of ws make the mistake of asking for one donkey. Few ‘Nowhere thi more true cham in investing. Most try 10 smake's fo pointe ducky om ther tock market speculations. fr conten themselves with 4oF3 percent on their savings. Not ‘me insta seriously plas and ses a one rust to mae ‘fortune Most do not tlie they have a chanee. When they fe others doit, they salve their eps by expng “ural” ince information or "born in the Tigh Dod” instead of trying to find out how ie was done. Even when fate pus the pre in ther bunds hey throw aay tie after time Some an Fess the urge to cash im thelr winnings. however sal. ‘Others all good sock to get Into something That scm better, perhaps Bocase ite moving. Theis the fate of the og in Aesop fable. You remember the dog los the pices of ‘eatin his mouth by anapping ta seemingly lager pooe fst i the Water ew bosnesce ave more cums by halrths and specious ‘anime thin Wall Stet. But even there, whee the compet thon in soch matters eénea, would be hart ind a worse an than "oul never go broke tins a profi.” Forcines are made by buying saht and holding on. Now shat Wall Steet i acted by having more busines than it ‘an han, evem Brokers sight preach this gospel wih much tenet to tsi customers and na harm t thet own long range best interests. Few do ‘Since 1982 more than 340 ifferent securities have increased ‘one hundred sn market value inthe United Stter~not 10 ome interim price peak butt tee vale it 1971. Many have bhaen mich her i pior years. "What nonsense cf sy that Opportunity knocks hut once } Ask and It Shall Be Given You 3 “That haus ndy har been banging incesany on Everyman's door for moce than a quarter cela ‘String with 12 anyone could ave made «milion dollars con # S100) investment fo a diferent sock in each of 32 fiteret years, of which 1967 was the latest. To dK would have required neither the luck nor the silt zll out at tho Fight ime. Every one of the more than 34 ilerent socks {at could have been bought for S100 in 32 of te fase) Sears was worth amon dolls or more in 197. AIL hat was Fequired was to pck one of the hundreds of right ones and Fok om ‘ors Dare senior partner in the great faw fe of Sul Ivan & Crome a president of the prestisus American [Ew Instat, told me hs te stor, changing only the nam: "An elderly client ssh my advice om whether he sould sailor give 10 bie family a valuable piece of propery. This involved ena planning. including ealulations o alternative luxconscquences Todo tis propery T needed to know the old ‘enleman’s net worth, When | asked Kim fortis information, He sintea on giving te ony am admitedly abtary figure Co ‘wor ith This Te "Having been peared with the help he received inthe Gat ‘mater, ths some client later sought my help in planning his ‘wit sid posible ate sit to his hdr. 1 told hist 1 ‘would be sla odo ths, but Temphasized the vital importance ‘of my having accurate information as to his wet worth. Stil ‘elactant to dale that information, he wanted tne to tk, Shifew week later, he came to my oie wit his middleaged son. After the usual grectings. I waited to hear what the old fenlemar's decion would be. Thore war long pase: Then fe turned to his som and sid: ‘Shall 1 do it? “Yes, father replied the sn, "Think you should Whereupon the od gene ‘a reached in his sde pocket, pulled out ap of paper, tin banded i toon. had suspected thatthe fire he Rad given me to work iw he very large figure onthe alip he gave me, repreentngte ne Sk Matt ; ih and iat Be Ginn Pou os Cag rity here of ssc ports wid an Stestantis nee Sonsoftben were aap nantes incl uals how yon doi jen hate Widow ety any Sara Casas rec roles Tae a sying"= Ge coee orcas ees Me Bint eh ale tha be Bad he pot ul Inrctmers of non fone. Hes lien ee mentor good forme not o buy what should have been sa.) © ter potcncna myenthel tenance Belo te iitehi Metso Cave eum rb never wet ‘Stan ty acts tm ih echo Sac an donkey Fan eit af het New Yon eng goat so make ig moo he ot mets conmon eas hewak wed nny by Aled PS. tae 8 Idi of png ie of exch of te Ee oooh tot Basset tate yentetaloctte sea si reine sacs Sree cece cecum eret veers Die Gat ste ann tsi at Un ne coe tate sy one elie Rie. Thewrygtht poses cork eat ats Iie. Sloet owed outa bu he by ving Banca ok of tr ovn tu as we re Sang wit esi sepora snd nas, Ten be meds int sear Soap e Ua dling Carbs ig nea ronecs Has ce wettest bling vag one ic eos ths mu et purse Ours fomenied fo re ts titccat Realy fa tion te Mit aoe Kava aod itl gon hs bt Jen tr ou tn a os imran S100 a sock bon 8 cd 5 ok soe sth ODD steve Stes raha he ot Tie Toons inn capi der tntey Tinie sald above st ache pire nh pet tomes Shame Te ra Be oes tn tac he Gece eta nd a cf HAE re ashe ear ciara cto ne ee anne Tew okay nt tac seperate Seon tigsearn eects everovas compen ‘outa y peop obo alte ae tag sto ad fopan is search for one tha met thes four entra sth liked beter, or believed in diverication mo mater Tr lemon e sal Shoo ie ritates asin pest grow ‘What Aud finaly, he ad to hold on, and buy mote eles ” ‘epeood “well” Fecommendations he’ began W rexsive even 2. 1c must be relatively unknown, Popular grow socks ‘may keep on growing it to Gero hast pay for enpoced ‘eloe the stock had doubled in price. row too many years fm adkance Probably to meet tht Tevould be misleading io other investors, though, and wn ‘terion the stack he wanted woud be raed overhecounter fo Mr. Garret if Toft the impecsion that hi octane i father than on any stock exchange a ‘ved to a single Icky sock selection. He als ume 50,800 ‘Tc mist have a unique peoduct that would do an esata ‘shares o¢ Teleprompter at an average cost of 298 a share it sold Job tte. cheaper. and/or Taster than before, oF provide a above S30 lst year and has substantial lock of MCulloch how service wih prospects of great and long-condaud slot ‘Oi ook. The Fel bens of his wealth is “buy sight and hold increses ‘n'a Formula he has followed athtlly for many year. Doct . 4 Te mast have a strong, progresive, research-minded It work? Even after large nsttatinal benslatons since 1969, management Ie security holdings atthe end of 197 hada market value of LO Pata way, the quest may sound esky Bat even in dat doy” ‘more than $14000000. is hard to acpe with $140,000, ‘ere were more than filly thousand tacks to chow fo What docs a man of eighty want with ao auch money? 0% The ods om finding note n'a haystack would be about the Does he know Be ean’ ake with i? sme it one coud hunt wih» magnet "A Me Garrett hasan answer to those question to. His wife 09 "Mes Garett had no magnet, but he dd have frends in Wail Ae of cancer, Onfhe Sc ete aes. iemeismemte SEs meentiat 2 sient poareriesael ew weet of coporsecxcuvs ny beset © 9 See Seat eens “ean oe r aerans oe ee yacxcomen eo ar eae for a Sanit eae ee ms peerieten sae aoe ea Cat tyes he ta chee wa nas vances os cree at Ree a cat io mand, Wiha eet Sew eaes ey ee Oe Aen ewig he anid maeancennccse marie mn et oe ator col estas be ed "ta es ate gente, Cohla Univesiys a de ee AO Not inl cat cont cnt Bute Er cone ae Foe oe os tt ews me ined petponcus coos” Me. Ourecs parse ee a oar oan than my Se apes cate ae oe cea Se ee re teas bau latclactres fr ees we of em er oa Ton Et are, oun eal eee com rate metnare can ion Ft cyto ha Cary Hl Pr Spr tenn taste ax aucmreuat mn poets cm Ne eyes aon err Ss aaan er urea imate epee Se er Sec prio Ka. Pek & Socecp ie eae ace ae oor rt el tio on) ening tes esta itive wai oe oa a te cots eine rat rr he fo the top doce not prepare them for the socal and pita ‘hllenges that conivont the chief exscutve. Ax George V. nscton area He hs sold some aeceage for 100 times what Peer hon, Yet prtatly no man minal istry ha better Holton; retired chem of what snow Mobil Of Corporation, feason to advae "Buy ght and Bold 08 ut it “Unleas a company operating In a frcian coum Is “The story came cut one day wen we were unehig tometer. ondvting aio tha the people ofthat county are beter fio paul me some undeserved compliment and Tsai, °Kark, tf net alter the compny has realiod I prot than hey | Joven Know how stupid tam. To get capital to 20 to the would be Hf they nationalized the company and fan H thes: | Beevtiage buses nD I so, for $4.80, Dowdones stock ves that company ir Hving om borrowed time Mr. Helton row worth more than 8 msiion dollar.” “tat sacha company not only must operate to Benefit | Seep! to lnm, from experiene, one ould never waste the foreign country But mis sec #0 thatthe people of that “ing looking tack” Me Pett opie. Tn 19251 personaly ‘country Know it is doing so. And even thea, Mr. Holton con-| ‘ued 6800 shares of Computing Tabulaing Recording (now ‘hoods a sompany operating abroad may fd isl Ia hot THN Atthat tie there were only 12,000 shares cutting. Stee unless ite representatives can win for themselves por (TRAY fine for more than wmlin dalars—a lot of money in ‘onaly the respect and fsenisip of the nattonals where they | ese days. Today they would be worth imo ilion dollars (We etn ro pene? Tae Mn ‘Ml. Garett goes even further, He thinks in our rapidly 1Suy ory your ost evecesful sock invent 3 long changing wort Mr, Hoiton's words apply t domestic corpora ‘asthe componice ase Ineeasng ther earning. eonat a "Neve forget that people whose sl interest i ametsca- "Wen the ships are down, no mans te t any property ty opposed to Your own ae ying to persuade you 10 ac CVE tis home his automobile, his stocks and ons wort 85) sin easing often mans sore than what is said. TY tore than the ability and wiliagnes of his felowmen 0 te amty people whose interes correspond with yours | Setend it Mr Garrett hope that igher proportion of the Gea Bet nd Teen he See100101 th Siok Moker 8 Sours nthe mid908, Osogs a kept ot of is Dow ‘Shun stok tos ay ie now e950 hrs woh move thay 10 sh ogi ven $420. That ser Tong cosh ahs tr chen #00 sce eget bck {Syne eock yor mre han wee i ota on Si fur est ty sch ce brs oor “poo sce somone onsite tht, once or ‘Sit woh ogo bm ah He ha thee wack eed {itothommadtanto persed. Heh pay mo apa thin ute Heid no andy tne oo clin to ace” ‘Ryn ate he pu hat hae who i oer han me ying dei me esd, we tal omen, hse {Desens ae sci hist. No ge can. no Thfonundy for cur pone oft vee ha Up 20 nly ds ie toad hw cosamyresuine oporteniis iathcpen tur song ican thtthy aes pope wp. Silty mcs hey som telat ee us artes i cominud il prodies oe tundredad apprecaton In ita es ot foaey Fou Mat tows OS og oa member ihe ate Gore Fr bakers um: To make mone ince yon mut hve he oy tage the coca pth onthe pene ld Sb Pvence he Pret ie ine Waa ou to tbe tm howd dt. Many pois ant Bu one tnd dee ied in any oe sr 0 woah be gon ap 0 for ev bee 102 {Told be wort one tered hound dtr mow ou dol ve cre a houmnd Solar? Sorte i 30 foeie pu Tien reont tanto Googe "ea van tokmow youl be ish hei“ anewer ia Gon yor te aeye™ ® Foran Te had W Yor" D Weak qe waynte Kew Shenk ey teas Ba. eva oh EY Lo Srarrer ‘Sinbad's Valley of Diamonds femarked to me, "Anyone who can put his hands on $1000 1o Invent Inthe stock marke a those pres isa Pek nan” At the une likened is comment tothe quip that ite had some harm we have some harn and eg it we had tome cag That was because did mot have S100 oF aything Tike i tn fact the market was where was eoause Very fee oop did have S10.00 to tives. everyone Knows now that the stock market In 1932 was Ira studded with stocks im which a investment of $10,000, ‘would be worth 81 milion oe moce today. wat nat even ‘eceary to go ousie the Dow Jones Indstal Aterage 10 find them. Eastman Kodak wis one- In July 192, 144,000 share changed hands pein ranzing fom 3814 9 43/8, Een atthe monty high, 310.000 would fave bough 219 ‘ares of Eastman Kodak Today the bayer of those 29 shares ‘ould have 1191 shares without ever having invested another {olay or paid s penny of tax om his gin: Thee 1971 value ‘rcended $100000. "Mou of the Innis who tought astman Kodak stock in aly 1952 peobubly are dead by now ut thet heirs are alive, and so are most ofthe instars which were inthe make! fa {982 { wonder it anyone, indviual or stilton. sl bas Easiman Kodak sock bought at Ipercent ols corent market ‘ae, T doubt but woul be glad to be proved rong. And Jet know of no instttion that hus nereased the value of is Investment porto by anything le 100 times sine 1992 Iithout adding capita and without paying any brokerage ‘commision or cata yains taxes E= in tne summer of 1912 an oltimer in Wall Street ° i] pen2, dom ers 100101 in the Stock Mkt » ‘Twas not even necessary to buy Eastman Kodak in 1932 19 smake 10 for ene on your money Eastman Kodak stock could Bil ave been bought cn the Now York Stock Exchange In 1O30 a prizes ee than 1 percent of 1071 market values ut hi hindsight, How did Eastman Kodak Yok fa 1982 er shire earning in 1932 were $2.2, down fom 3957 in 4909 Butte pice othe stock was 391/4the 193 ow, and ‘ie the 1933 low, compared with is 1929 high of 204.0%, Enmings were down 74 percent fom thee high, wl the price tens down 87 percent in 1382 and 83 percent in 1935 trom the, “ {O00 peaks The prceearingr ratio had dropped from about 2% cies record high earings (0 14 times depression low amings: O83 5957 — S367. 14 X $2.52 — S38) ‘Compared with the Dowlooeetndusrial Average, Eastma Koad stock dd very wel in he 1929-32 bear market. As ho felaive price chart* shows, Eastman Kodak stock’ price Sinbad’ Valley of Diamonds " Improve sharply compared with the Dow-Jones average rm 1929 wo 1982. The company had mo neat iva in the phtographe Je busines, [i forse remon one did not like Eastman Kodak in 1902, he could have Howsht the stock ofthe lending tre and rber ‘company Goodyear. The sock soldat a tow of $172 im May. 58a share, 10,00 would have ought 111 shares of Goodyear $001 shares, amin withowt ever having put up another dolar [Hasan Kodak, Goodyeat matin the Dowsones Industral ‘Average. So wat Sears, Rocback. At ie 1032 low, $10.00 ‘would have Doupht 1.000 shares, now 24000 shar. helt Unlike Eastman Kedik, Goodyear reported a deficit of ‘830.000 for 1932. White Goodyear eared I fted charges 1 times in that year, fore rior terest, fae by a vie margin to cover fit preferred stock dividend ‘Azan, unlike Eastnan Kodak, Goodyear stock fost ground sharply compared with the DovJoner Industial Average from 1929 0 1982, ah the accompanying chart shows. Yet toth Eastman Kodak and Goodyear have sen one hundreifold ‘since T982: Goodyear in fat sold ia 1971 at more than 100 times its 1942 low ‘Sears, Roebuck als reported a detec for 1932, but seo tive price woot no lower than din 1900. BY hindsigh, I was almest a easy (© buy 10040-0N6 win ters in 193K, Bore the bak Hoy, atin 1502 Jat to cite {few examples at eandoa, S10000 could have been invested in Melille Shoe, Newont Mining. Philip Mortis, or Piney ‘Bowes in 1983 tobe worth more thas SI milena 971 In the fis three mouths of 1983, some 2.00 shares of Melle Shoe ‘Mock changed hands on the New York Sock Fachange. at Prices ranging fom 3/4 wo 10/8. AL97/8, sppeoximataly the vera pric, SU000 woud ave bought 1D shares. Tera, tvthout ever having put up any moe money, the bayer would Ihave 18.50 shares sled 1H at more thin $1 milion "The Newmont Mining story fel the ime except that theTs ae ae 3s Aa Sinbad’ Vatey of Diamonds 3 buyer ofthe stock atthe 1982197 would bave ad more than $8 lion to sow for this S10.000 vextsint while the bayer ft the 1833 low would have had wey $1,225.00. The 1933 low frat 11-472, Arthat price SID0) woul have gt Bhar By 1971 the buyer of those B58 shares bad 31238 Newmont ‘srs, without puting wp abate cent How did Mev Shoe and Nevanont Mi 33 Melle Show armed $1.51 common share tn 1932. At it 1982 ow of 7.7/8 the sock was sling 52 mes its earnings for that your. Newmont Mining cared 22 coms a common share ta ORD AC is (082 low of 45/8 Newmont wae selling 2 tines fi 1939 ease — Relative 10 Tis DowJonee Indussat Average, Mell Soe’ pice by 1992 was abont where fad boon at the start of 1939. Newmoats elaine pro M1952 was down precipitously from 193. ook in 1932 andWhen you compare the fio tlative prise charts as they Joke in 1932anl 1933, bea in ind hat, auating fo sock dividends and sock splits, each of the ive ssuesEostman ‘Kodak, Goodyear Tire, Melle Shoe; Newmont Mining. end Sears Roebuck has gen to more tha 10 times i 199 ena 190 fows. Yet two of the ve Fastman Kodak and Mvile Shoe—were in pronounced reatine pore upirens by 195%, ‘Two others—Coodyear and’ Newmont-could hay hve looked worse by mid-1032 Sear, Roebuck while down sharply from it 1929 ih was fading support a ie 1930 Fltive pce ‘Their prcexamings ratios computed from their 1922 lows and thet subsequently reported 1952 earings were there! Sinbad’ Valey of Diamonds 1s Price-Earings Rate Goodyear Incalelabe Sears, Roebuck Thacuisbe | (Newton 2x * Bastian Kodak lax Melle Shoe 52x, 1 this disparity etativ price ation and in pri aings”) ‘ato anges that thee may te 9 sete. mpl rele of | thumio by which a schoolboy can bea the market, the concur | ion Is yours. Tam tying t0 do is report fll and aly | Millions of dollars worth of stoche change hans onthe bass ‘fsuh dat, more often than no calulated from estimates af the murky faure. Who am To say there i no Santa Clas asl | ‘ring Virginia athe ghost of th New York Sundown on my) head? . Tew poople would have thought of Philip Mortis in 1933 as 1 soc destined to mulpy thse investment by 100. Yet Pri Morr stock traded Between alow cf and igh of 9 for the fist three montis of 1953. At the high of 9, $10,000 ‘would have Bought mere than 1.100 shaves Withoet puting Up fany more eaptal, the Ower of those 1100 shares would today Ive 2.790 shares. Their market value in 1971 was neatly 31.3 millon. Even in 94 Philip Moet could ave bee Fought Toc ess hom one percent ote I9TL val Philip Mortis was much stronger than the Dow-Jones Indus tral Average thoughout the 19-32 ear market ‘AC ts 1982 low of 57a share, Philip Mores sock was sling Tess than sx tes earings or that year Phiney Howes ithe lat ofthe works I mentioned as having then available for urchass 1% at es than percent of 8 1971 market value (As Table (= pager St2S—chows, there were sores of others) Inthe fis thrce months of 13, fll ‘8500 shares ‘of the stock ebanged hands at prices sanging {om 2103:V8, At the low nearly 5000 shares cou bave beet ‘bolt for $1000. Thos 3,00 share tis wong would ‘3.00 shaces a 1971 they soldat ove than 100 ines thle jst 1983 tow100101 the Stok Marker 6 Recitation of thet big winners becomes tiresome ‘because men oft fale to take advantage of them Dut because this al snoiem tory. What do we core i Peter ‘fit bought Manfatan Island for S24 ore kets? You find Linuat operate in toy real exae market, "Anipaing the fs cbjection, Ihave shove in Tate That ‘opportune to vest $1000 for ome hndeedoapprecio tn have boon presents 32 ofthe last 40 years~and a ecent Iya 1071 The secure listed Table IT Gee appends) are th same a in Table 1 Bat they ae sted alpberclly stead ‘ot being grouped by years of epurchare’ Many stoke other than those on my Ist have risen more than 100 for one in rie inthe Tat forty year or Less. To nie hindsight 1 eft out any that were mot quoted in publications avabe tows al tthe tne the seuss would fave iad to te bought to show one bundeedold appreciation by 1971 Every one | Have Isto was quoted in the all iret Joumal Moody’ manuals, the. Commercial and. Financial Chromite, othe Bart end Quotation Record when it was Selling stone percent oes oft 1971 market value Because 1982and 198 wereao fog ago, with mo ie chance shot we shall ever sce tet like apn, i profess and pos "Hhy annoying to spend moro time ot what could have een ‘Sone wit 31000 in those years Slice that the stocks Ihave Imcnitned are merely flstrations of the opportunites that bound in those dys. As you ean seein Table I there were many more, Remember, ton, Table i not alialusive even tt ates that would epost my standards T merely noted those ‘ar occurred ome You may think f many that I have mised [Bat every one you add strengthens my tase teas cha the tray fo wealth to bu Fig od ha om ‘Opportunies to tam-a SI0000iovestment mo 8 milion ia sll were plenifl fa 1934, Stocks which come vo mind Include Exell O and Texas Pacific Coat & Ol. “Sometinss one can make a fortune i tiguldation. Texas Pacile Coal & Oil sold in large volume on the New York Stock Exchange in lly 134 a prices ranging from a to of 2i/Awanighots. Astate ax Deceniber 1998 t sold aa low of 2-7) ta 19 he stock paid a stock dhdend of 100 vetcent Sinbad Valy of Diamonds ” nd in 1958 second stock dividend of 100 percent. The result tres that the buyer at 21/2 in 1938 found biel owning four mee as may shares as he warted with At 24/2, 10.000 ‘would have Sought 4000 shares. Malipled by four those ‘Tuo saree bevsme 16000 shires. In 1953 and 1964 Texas Paci Cost & Oil made Iqudating dstbuions totaling ‘645 a share. Again the gala more than 10 for one—withe (Ou allowing for any ret on the guiding Ustutions ‘nce 1964 Adding interest atthe ate ofS percent compounded mually would rise the total return trom $6889 a shave (0 $862, Tem tae om the ntrest, Pleo don't qui bout my failure to allow fr brokerage charges on the purchase. The marsin by which the sock’ Salus exceeded $1 milion Ia 1971 makes We unnecessary (0 pit nancial hakes over commissions. TEx Call sold at Tow of 3/4 om January 1, 1934, fol lowing alow of 1-1/4 on February 24 1958, AC the 1534 price SIOMiD would have howght 2.600 share. Today the buyer ‘would have simost 16 sss many sates, oF someting over "22500 shar, ln 1971 thelr market value passed the milion oilr mark. The oft opportunity tn buying Ex-Cel}O in 13 was thee tines os ge, of ours "Turning 0 193, kelly Oi could tll have been bought on the New York Stock Exchange at ess than percent oft 1971 ‘market value The same opportunity, or even restr, had Been [provided by Skely stock in 194 ar 1943.1 1935 low was {G:/2sn January. Ait price 310.000 woud have Bought more than 1.590 shares Today the buyer wold bave 22400 shares Yaled in 197 a¢ more than milion. "Wihat Is now koown ar Sesbesm Corporation was called (Chicago Fiesble Shalt Company sm 1938. The best market for fhe stock then was the Chicago Stock Exchange where i traded i Janay 195, fort low of 131/210 8 high of 18 ‘ACIS, the month's high, $10000 would have paid for 665 {hares Had the buye eld them snl now, without ever paying ‘ent of capa gus tates or making @ dollar of ational investment he would have 34299 shares gain valued ia 19 sit more than St milion Etcop by hindight these 1000-1 opportniis in the stock10040 Vn the Suck Meet 8 ‘market are hard t sp. Tis even more dificult o spot thom ‘when they come via mergers Por ctampe. another sock that Could have been bougbt for $10,000 ia 1935 to be worth 1 tli in 1971 was Wilcox Ost Company. Wilcox Ol & Ga, a+ {eas then called. sol at lw of SI share In Mare 1938 ‘The high that moh was 82. Subsequent stock dividends and & merger with Tenneace Gat Transniion Company (00% ‘Tenneco) in 1964 gave the buyer of one share of Wisox in 1008 spore than 38 shares of Tenncco in 1971. Thee 1971 market value exceeded 100 tines the 1588 purchiae rice. Thoso who booge! ‘Teanesiex Oat ‘Teaaniarion, Company ikewbe have mado money Dut ot neaey ay much ae te fortunate purchasers of Wiox i 1905 ‘By 1930 ch Dow Jones Indstal Average bad advanced to ‘more than for ies ite 1932 low: Many of fl that we had takened too late to the opportunites to mae fortune i the stock market But white we mere bemoaning os intty fe tallure to buy moe heavy in 52, the year T9S6 was pre nting eter wcks that would rn $10,000 into SI millon or more by 1971. One of them mas Lot, now Pepsico Lott old on the New York Stock Exchange ata of 2 on April 23, 1936, tnd ranged all year between that low and a high of 38/8, For SIG00 one could have bought 35 shares of Lat at 2.7% ut midway betwen the yea’ igh apd low. Each a those ‘hares would now be 608 shires of Pepsico, Ths the 1995 Investor of 10,00 to Lat could have had 21,030 shares of Pepsico in 1971, wort perl 31.5 milo, without ever puting Upramother eet or the benefit of those of ws who were sleepin 1935 and 1935, Loft sold in 1587 ata Jo of fan high of 7/8. Then, almost as thovgh the fates eonpined 0 sce that no one mised {his opportunity, Lt soldi 19383 show of 75 cents share ‘As'a mater of fc, javetor bad Yo tar ther backs on Lat ‘each year for seven consocutve yeas rom 1882 through 1938 to-avoid the opportunity 40 tara $10,000 into more than $1 millon. The stubbornness with which we mortals sometimes {eject the bladshment of Dame Fortune bs tobe ceo be ‘alowed Later on we tall examine more of these isstently persistent opportunity socks. Me <¥ 3) EES, Row adacy Wem ‘Sinbad Valley of Diamomte » “The stockmarket broke sharply in the fll f 1837. At the sine the tne wes muted tthe Governments ous ot {tr aistom brakes ‘Gold inprt were srl, tha by roened tom hniesung the money sop. The Feder Resewe tated ere reutement othe meer ta And President RocevehJowtnnod gaint ommodiy soe atvance. Palm the stock market there are often wo ‘explanations for a scree dene Te ft one—tht whi a ued ‘tensile and stir the bale. "The secon one i te ‘eareaon which snl sloom Bcomes pyre nao to do most o any goo nthe cae te ea eon bust ‘mtn won wih the begining ofthe Second Won War Sarthe dof the simmer of 198, “Te bat markt of 1997 dno atch me by sao. a “sty nthe ce Movement pbahed on the i pes of the Wall Sires Journal on September 8y 1937. 1 reported, \ "There seems no doubt that dhe major fend ofthe market i ‘downward Tue Dow Jones Industria Average closed the next. ‘Gay e166, W was more than seven anda ball years Nay 14S" efoce the market sold that high again. Yet would fave been smc beter fi instead of correctly forecasting 9 (oar market had focused my attention throphout the decline fom finding Mocks that would turn $10,000 io milion da lars Such opportunites were dete i 1957, 198891839, in 1040, in 19H, in 1942, In TOAD, spd in 1544, ae Table T and ate Tl show with to me. pf laity. ote fs another reason why profesional investors, except ‘owe managing, discretionary accounts, sbouls deemphasie ‘marketing: That ls became even ithe market forecaster fright, he sckiom ean pers others Wo act on his opinion No one intends t buy Hocke atthe top of the market, or 10 fell them athe lows. On the contrary, bull maet highs ae fade when the cutok for tl Tkeiood of stil lower prices scems overwhelming (0 the | preponderinee of reasonable, wetinormed moneyed men Since bull od bear markets qe to. a consderale extent ttunfctatlon of changes ns pychology ti fats for2 0 Fin the Sock Market y » anyone to baiee date ean persuade a repesentatveproup ‘of venors oscil stocks when int masa pychology i bls, ‘to buy stocks when i is Desh The wie professional. who Undestnds this, concentrates on sock selection. Most ives tors are fr lou emotionally fovoved in deciding which stock to buy or el than they are in deciding whether the macket Boing up or down. To eine the argument rely demon armore money ean bs made by good sack selec ton thas by 0d stock market ting. ‘at le wr return to the TOMoone opportunites in 1997 Sharp & Dobe was atively eraded onthe Nes York Stock Eetinge in tht year esol ata fw of 63/4 fn September 35/4 ia Ootober, 47/8 in November, and 4 in December, “Thus it should have bee easy to iavest $10.00 in Sharp & DDotine at $6 share. The buyer would have had 1,665 shares Invexchage foe them he would have rectved ia 198) some 7M shares of Merck & Company. Those shares weve spit ‘Soe in 1964, binsing the prseat (ial oldies Yo. 11215, Merck shares, valued at nary 313 rilion in 1971 As late as 1046 Sharp & Dohme could il have been boupkt 2 les thin {percent of the IT value ofthe Merck sock acquired in exchange. In fast me could have bog Sharp & Dohme in ich of 12 consecutive years fom 1982 dough 1983 at les {han T percent of ts peak 19TL value. We could have Bought egtabe highs of six of thse twelve years an ae fad eee on over Timi Tn 1938 T could have invested $10000 in Beech Aircraft, oF in Brunswick Balke Collnder, ois Camation. and ad sok ‘ror well above a milion dollars n 1971 Am investment of SHODD ia Lot tit 1938 lo of 75 coms shire would have Tad'a market value of ore than $85 milion lau year, In 1939 Columbia River Packers or Clark Egulpment would hve done the wick, In 140 Merck hell would have given ex TOD for one had we bought i and het wnt now. (Astualy st "he ISTH high Morck was sellag 161 times ft 190 low.) Tn 1941 (or 1943) one cold have based his illo Totune fom 2 $10.000 investment in Gillette or Louisa Land In Sinbals Vay of Diamonds 2 191, or as ate as 1945, Plough (now Schering Plough) would have done the fob, In 1943 one might have chosen Maytg oF Per. ln 1944 Black & Decker and Norzema Chemical wore Aavalale at pices ess than I ereoot of 11 market vals. T1045 Mintesots Mining an National Homes offered smar YOotoone opportunities, And atthe top of the market in 1946 and as teas 108, Calin (oor Motors) provided ‘vehicle for riding small sake to a big fortune ‘As you can seein Table I, pages 9-75, these were by no reams the only 1t-one stocks avaiable tho yas. ey fre meray lasteave of the goods anyone cold have had. ‘ll one had to do was recognize them, and 319,jpn GRIPE SEEGER raking ema OE WAYL OAH KE Deg Sale) wa Conyers 0 Sere Learning from Elephants ‘Me the bulder who provides landing on the sta to void analy fatiguing the elinber, Tet ws pause at hs. point fo ask why. with so many TODto-one opportunities frmund, even profesional fvestors 0 seldom have inereased {ein eapial in these same perads by even 10 for one. The laser ft be found both in pyeholosy and in satis, Let fe dea fine withthe paycholegial aspects of the problem, ‘ving the statistical for anor andl onthe Sars Toripan gen ngo, when | wea paying ary way throug ‘equatorial Ati by shooing elephants for voy, earned this Simple principle: When looking for the biggest pme. be Not {empued to shoot at anyiing stall, Elepas eats are very oem. Never alter fringe thot at guinea be, claus fmoniey. oe an antloge did | ace an elephant that day.) way ths ese eared the ir orest a van ‘fhe story of the five poor Arabs, When I asked for one ines hen, rgot ome pues hen no more |_SFew investors, private or profesional, seck the big game. “They focur om chances lose ve pois ere and ten pts there. They rsh to buy on infomation thatthe next quarer's ‘ceningswilshow a god intense, o osll rease Mey heat {that profit pains ave sackenes. Uroers wae to ten otis typeof stig. Ultimately became great that scores of {irmssuccumbedat atime when both the price and the demand for what they had for sle were the highest they ad ever Known. Il i scens contradictory for brokers to faten oa teamsctions in stocks ahd then to succumb when ey got ‘more transaction than they could handle, ox have ted one 5 ye by om Leering from Elephents 2 firm choked 1 death on prosperity. they hn overemphasised getting busines (sling) and under emphasized Keeping track a (bookkeeping). The in-and-out feuding that fant enticed and then impoverished So. many Tokers was allt the good forthe tat collectors federal, te, snd ie may ctser ety aswell, What i meant forthe Investors something eke agai Norte inva nsttaton really Ost make a fortune Inthe sock market team be ergued that every sale sa conte om of sor. wot the flly realizing that to eer human. T “Gor caf eicizeangome foe making afew erors of he bing T ve been mang for fortytve years. But problem trelldetined haf solved. Just av T garnered no ory OY ‘Souotng guinea hone as clephants,s0 sal {gather no forte inte sock market by counting lst Opportunies ax trading polit The shorter the me sook bas Boon b fold, tbe more palpable the evr ia buying it=goreo und ‘manager to te contrary norwthstanding. et not he construed as at hanging om Co every ‘hing wily-nlys The only thing worse than making a lest ‘ment misake iy refsing to amit and correct Usually the Fister amerror reviled the ls cons Batt ir ail a ero, ‘ost opportunity compared wth buying ight and boing Tn a ll market correcting mistakes often means taking”) profi, But when me do ao It wr noe Kid ounces we ate ‘king money. ‘The truth is we are acknowledging missing ‘sy biguer opporuniie, and Incurting » capital pine ta "Phe big rik in oreectng eros inthe stock marke that stocks lok bes to s0 many of uw when their pices ae hahest, tnd worst when their pices are lowest. Almost fret wo fre tempted ta shoo whee the rabbit as. 1 do now What Finds sbows would have been the right thing to yester: thy, st yar on even five or fom your a0. "Tne abty vo forsce the future cre, the ability rational {2 Gite HEY Susie 100201 the Stok Menor Py {np the preset aloo common, Hence when sock we bough ster careful investigation declines in price we often find i ‘That same housewife who buys the ross of bet for hor feeenr hocaso they are ofered at aspect low pce wil sl hee ConsfFlated Doorknobs stock becuse ts adi at ball that she pa oe Profesional Investors sometines do the sine thing. They sezn, often Coscty, tit someone knows mos then they 3 Rather thon wait for the "bad news" besowe publ, they sell thus accelerating the deine in the price of te ocd Posibly unnerving sil other investors Lets face A great eal of investing i 08 » pr with the nt maker ach bteon am Inedbe poner Docase ‘The fh reasons: "The las thing Tate was moving, Ie was 00d, Ths things mcvng. It must be pood™ "The investor reasons: "The lst stock T bought was ring yas good. This stock i eng Te st be ood.” ‘Goo socks do rie, and is, and ie. Ar we can 30 7 ‘Tablos Tand I, tere ate enoush of them 10 keep ave the sotion that any stock that ries must be gow. Perodally, ae 4 1960-9, we reducover hat ll ot gold thar pte. More sub illacis likewise inp the investors parent con th way to wealth: One ithe motion that ashi safe wile fl vestents are more or las esy. Yeti every succeive TOdyear pera since 180 tha 0 t0 1920, 1921 to 1921, 1822 10192, 1870 to 1970 our dollar has lost something ks 5 percent 107 percent ofits buying power. Over sucesve Toda periods the rae of aflaon hay been rolenesty lable. I ahall have mote fo sy about that inthe seston on Inflation (page 130 “Another often unrecognized fvestment fallacy is that ‘avoidance ft is move portant thin sutra of Opportunity. ‘Consider fst the artimete If you had lest equal mounts ‘of money in 10D stocks in any on othe years shown in Table Tan 9 of your 100 socks had become wortes, Yo sil Would have Your original caoita ntact jou ha! Bow jst ot okey an We Gah { Leasing from Elophane 2» ‘one ofthe 10b1oone socks avalble fa the year you chow. ‘Aamitedly picking a 00rone stock in advance wot ean ‘at ie would aso be dtcut wo pick 9 stock in one your all of which would become worthles Anyone wk Could do that ‘vould be Worth hb weight ln gold in Wal Strct ara guide to __Proitable short sling follows for thi second subtle fallacy that investrs tend ‘o overemphasve the Yok of tong in stocks, and onder cih {he cost of not buying. oF of sling ton soon. One af Wall Sears mout hackneyed relecencs & 10 tho beaming be Whiskered, complacent old gentleman whose face Is ptured ver the words "Taal oo som." T wonder how many milo ft sbareso unwarranted brokerage busines that ol col hat generate Selling 0 soon ean be fghtlly expensive. Some pot ‘Toons oFFseT soutane Pau PS] Sauna cen cemien meerOD Renisen Nov to seeu:— {10 in the Sack Mat 2» fouls sold 700 shares of Computing Tabulting Recording Sock in ly of 1721 for $21,700 In 1974, wow selling under The name IBM, those share wece worth Tove than SED ma Tio To go fom one to 10 fn twenty-five years the price of tock tust increase ata compound annual rate of tore than ‘nh percent, not eluding dividends The seller of ach a sock fiver twenty yours gets Heat than 40 for one before tues and Ihoterage commision. The remaining 0 for one comes inthe Jas five year I the rte of pce increase is constant. "There fo reason, of couse 0 sell at any tne jst Deease ‘one has by profit vem a 10Dsoume poi Infact one of he [Bsc ruler of vesting ‘Hever if you can help take an investment action fora rominvestnen anon ‘Wharare some ofthe moniavestment reasons for which tens cof thousands of ivestors go wrong? ete cite jot few 1a sock "to High 2 Tinea the relied capital gan 1 fst realized capital loner for tx purposes 2. My sock not moving. Others ae 4 Veannot or wil not put up more money to meet my sears call, 5, Tases wl be hier nex year. 6 New management. 7 17. New compstiion ‘To poset that on ol f these reasons may wares ‘sil or auch sold be weighed carefully, ofcourse. But the ‘Siteronce betwoon a posilty snd realy fs roughly the dllrence tstween tratksoup and moose steak, Trask-oup {s what bunter ave fr supper wen they come home empty handed. Ja Binge once said of a ean he admired with gre Festain “The rouble ith nan’ that he Ts iran Dut that be Lnows so mich tha iat 30.” ‘Much has icen sid since 1932 about keeping investors fully Informed sometimes wonder if we ae BO fold more han Se Were iste gh Se tae om Bapans NTS = 5 CEE RE conte Sra SZ Foc od fran each pnt om 4°57 a cher Hw of ‘Nery inarunent in font the ils his mores onl ot {he comtctve actions taken byte pls: Sach te elation ‘tip bennett and acompetest ompany manage cir should heware of contsng cynicism with sph ‘ation Sometimes what the salesman offers you in the sock ‘markets fond or beter than ath Yu Gould have found {br yours Take the Scheng Corporation stock offering of 1952 for example. Investors paid 830800000 for 1720000 Schsring share If they a bv Wt het paper prof a of the" 1M high was more than 51290.000000, Wil Sern Stock hs nt yet made ie holsee 10) for one, those ho Tournt on th’ oripml offering fas than twenty years ago Arend have cen thet bong reuse (04 tines her par hase price (Those who bought Plough, sow pat of Schein longs a 13474 i 1948 have gained one Hundrefold. See ‘Taber and 1) “Schering was seized as enemy propery atthe outset of [World War ewan sld competitive ing 1982 bythe ‘Atomey General of the United Sttex- The wining tid {Sas eb, wae entered by group composed ol Meri Tiynch, Pere, Fenner & Beane; Kier Pestoay & Company, tnd Brot & Company. The second Highest ids $20.88 SVL The towest id ns $14 00000 ‘Doieyouri investors may be ncrested im the fact that he winning bd smoued to 56020 m sare for Schering sock UNGihad a ook ve oF 8258 a share “The wnving ders pomp spi he sock Mor, then sol the new shares a 170 shar. At that price the ros {eccints were S300 000 compared th their purchase ace USB IM ea, « pon of Sans. Thor geosspei ts Sasaboutt0 oneachS1An that the buyers ofthe Schering ‘Msi tave made ft lt ineteenyears—asuing of ‘Shure hat the buyers have Hel on. Same thm ay hve viet ino “somsting ster] 1 haveeten done tat mya ‘By une way, you dk no ned rend ina brokerage howe doa mace aad eat 8 atssete Sl ere 100 w 1 be the Stock Market {4 FON, uw chor Fae to cat you in on this Schering “hot sue” The public ering 51720 was made on March 11 1982. For the balance of the Sone locke price range wat fom a Hn of 131/110 8 igh F777 ad you been lucky enough to buy at de low, and patient enoupl to bold on unl now. your stock atthe 1971 Tigh would have boon wort mare tan 54 ines what you paid foe i “You could even have waited a year anda hal and bought the stock at $11 «share in September of 1983 and aain in October ‘Ot that year From that figure your investment woul! have Increased ty 1971 to more than 63 nes you cost “This nt fo secemmend waiting for te bottom eighth If ‘you relly thnk a stock ie atractive, bu Wat the market. Then Wtdecomes avalabe sta ower price buy more you can, The tiference between making #0 ties your Investment and. 0 timer your investment st nearly ae portant as ming the Copporonity aogether, Thre iz much wasdom in the Wall. Shree sping, "There room in the tock market fr bulls and for tear, but not for begs” “Other golden underortings come to nnd On May 2, 198 Goldman Socks & Company and Lekman Brothers offered Sone shares of Merek & Company stock at 2875 a share “The sock was spit fort in 149. Hor ia 15h, and Hrd in f9e4 Thus cach share offeted oa May 2, 194146 now 18 shores, Everyone who ought 100 shares of that Galiman SoctscLehman Bothers offering for 5287S and beld them {nil pow Har 900 shares wih a peak 1971 market value of hore than SMH At the curentvidend fate of $8 een ‘Gosery, his entire oil inverinent being ected 10 flim 139 cimes each year: Unfortunately those dividends are taxable. The pu No "Te entre underwriting, by the way, which ase 3881800, than pea sarket vale ist year of move chan 78 milion, "Nimost wif the fates waned to ive everybody a second fiance the sie wnderuiters came along with 30.000 adh pene ene Gata ego ath ot {ar em eh mt ee Learning Jom Elephants » tional shares of the same sock at $304 share on December 17, 1941. Noone ies to fy a 390 when he could Rave had at 52379 just seven mont eater, but each of thse $30 shares Td peak markt vale in 971 of 8 mes their cont itis te that investors who wated forthe Goldman Sachs and Lshinan Bother sseaen ave not yet cen tele Merck Hock adince to 10 times what they pa fori To achieve any rn 7 vets mae Dough Nock Hock on ther own in 1340 Test Ht be suspected tht I used the Schering and Merck ndereriigs as examples becaune Ia no eter des, lt ux tum to Pir, On June 23, 142, «syndicate headed by F. hore & Cos New York, offered 240,00) stares at $2453 share I'you had been pereuded bythe Eberadt salesmen {ebay IOD shares for $2475, and yo had ek! ther ant ovr, you would be the omer of 6.100 shares At thle I9TL igh thir marke value Was 8349312. oF 141 times your pur ‘hse price. ear in mind you did ao hae to ott anne 0 buy that stock. The company wanted move money with Which ‘operate. All yu hn to do to make your forme in Piz wax {o accommodate the company and make syndicate salesman pps. 2p and wil cite other examples of fortune making under ua The pola ha ts not RESesny Bay TUCO ‘Mocks i the dark of the mo to get Hold ofa fortanemaker ‘Mot of ws have owed one ot more of them at some time ‘ur lives Our failure has been told "Thinking too much about what the market going to. ca “tthe weeks Btore the Wall Sireot Journal fetured nif 1997 boar market aaljis under a two-car beading onthe fist page, Russell Maguice & Company, In of New York, folfeed 81.33) shares of General American Oil Company of ‘Texas at 8620 a share. Suppose Thad not been keen enough toee the 1937 bear market coming Suppose, iatead, ke the ‘ples public, hod been persuaded to pet my Me savings of $10.00 into General American OW Company tock onthe eve fof a major bear market. What would ave happened tome?YFlpping of STO Lo moc hem Han 10 Tin te Suck Market FEI AX Ley ny For $1000 would have fought 1.58 share an ad a fo enmteeit over I hod pu thse shares sony an Fron Sam, 1 woud now ve 34930 saver no eer ang invest another contin the company or pido hin dime {api gin ta 971 tone 30 shares Nee yal on {RE New York Suck Encame amore an 31.2000 My {cn ident would Have been nt under $1300 oF at Sua at 2 pect on my rn! invest Trot nt ansoae who Yous any tose 8.09 shares ef General Aon Oi Company cf Teas ot Aunt Th {hora 36. sare on hls em ul Row hen doubt ‘ether anyon ho dd buy esteckn 1937 an site isto net metng beer as well of oy He ‘ould have boon Rade jt ight fer tho eas. TE {Eye derail ad Gener Aercan Oi sto bout om th 1 ering oul be tried on TV. “ai may wy th thew inh But gone who (canst of more tan 30 soc hat could mae ben Suen in any oe oth deen jer a pest Force orn othr 1971 mart sles mst once that {reat mony peopl hae ba milo fran nth ‘Pipa ne the hy ing bn omething hat 5 “orem sheen yh ate re hart gy ei ad tat oie i aos etn ‘onomat sowigh ne to price of Geert Amari Ol wock hs fae [Seles aed toe low oh shar Bh pate Bes rma sm fe tg se ra hae Gre Soa kee arp spre ih hr Brey aad erp {fp ht bgt ore Arona he lt No 39 12th ale mea mh rr te Bs se ent he en ‘Poi hy (RN Se ae a as ee aT ee ee TOT ve tho. 1in tte Sch Maker ~~ Bear i mind too that General American Oit Company of ‘Tera stock nota plamour ie. Ihave never scent tice tioned inthe company of Polaroid. Symes, ant Xerox. But Ie theft tht wom he Face withthe hare by beeping st ‘tile the much faster hare explored the byway. the pain tivo sad unflappable yer of S1000 worth of Rese Magsires 1937 offering was million in 1771 be never saved ansher dol ‘As ir cealy shown by the accompanying chast* of the price of General American ‘Oil rlatne to the Dow Jones Tica Average, mo one demanding quarter by quarter even fear by year, “perfomance” cult ave S60 ‘Generat ijerican OM vn ade Bia fortune: Tor sineon “Fars Tor TE TTR ck ated Wap up ih he Dowiones Industral Average. Few any cliente would have aye with a jvestmentadoe tough sch apes, Even fewer, Usepect, have done titer with thei invstnents tinoe 1997 dan the owe bundedfeldsppecaion ehown by ‘Someday “performance tx the mame ofthe game” wil take iis proper place i the history ofthe 194s as an index of the specu tani ofthat ine Tavis ave a ight a expect ‘eas trom professional couseors But if the mvesor a tise they wll encourage oat eat permit their porto nd dividends regards of markt fitatons ater than by clever trading ie wo ives bythe sword sal perish by the sword. When “ retaliate te Do. ae VAsaat Foes Learning from Elephants x experienced investors rowa on gambling with price lcttions Inthestock market ts no becnse they don ike money ut ‘because both experience and history have convinced them that fenduting fren are not bull that va Another fabulous underaiing wae of Ae Products sock by Reynolds & Company of Now York on May 6, 1946. The lfering comprised 00/00 Class A shares and 160.000 om mon shares in ums of one sre each at St po unit, 130000, ‘Common shares at $1 ashore 40,000 corn shares a $1 & ‘har for certain officers and employees, "Today each of hose common shares ist over 24/2 shares volved at S144 at the 197 high It the oicers and employees Inve beld the stock they bought twenty fie years ago for ‘40000, chy now ow 100445 shares with acket valve i 1871 of more than $3,800.00. [AS for you andre, $10,000 would have bought ws 10000 shares, Today those. 10000 shares would be 25.117 shares Valued in 197 at $1,450,000. ld ot buy eny. Four days ater the Reynolds & Company ‘fering wrote under date Of May 10, 198, mielyguoted ‘market eter concluding, "Under the circumstunce, retention ‘1 fly svesed poston in common stocks would seem to Dee lke second marrage, trumpl of hope over experience T could hardly have been more rght on the mut. The Dowdones Industral Average reached ts 1980 high of 312-0 before the end ofthat month, and then decline 24 percom Not for neal four year did the Dow ones Indust Average setback tothe Level against which Thad wrod. But by that ime Air Products sock had treble in rie and another op tunity to make SYG) on a 81 investecat hd sca "The point Tam tying to make, of course, hat even if. |] ‘know wha the stockmarket was going todo, Mould sil be ‘more profitable to forget it and eoneeneas on tying to fn {he sight stock 10 bay ‘Some wil arpuo, a | have argued for many years, that goad timing plas good section i beter tun either sl. ut ‘bear market smoke ges ito ome’ cyet and blinds hm 0 buying opportunities Ihe to iatet marke timing. AndSere See pe Bahan : x BY) RRA ALA SEY, iI Cement bet by Ce idee a [oo] ei G a ae uubene 2 NEL ASR Sean Hay ite an explorer Boing down am wemapped vr in» dugout canoe, the investor ttst Keep alert forte signs and sounds thar warn ofan uncovered Niagra Falls: But the lst 100 dyeasr most nvestory have NOL encountered such allenguling iigudaion more than once orice busines ifetime "Por the rest you nro reasonably col and skill, history ngpests you probably wil do beter to shoot the rapids. el’bought stocks than to portage afound them in exh, But Jou man know yourself wal enough to be sare you will not elie plies in midstream, Much peotilsssecondsuesing, toch shooting mhere the rabbit was, masquerads as adopting thew polly to mest changed conditions Bost deception shad bu eifdeecpion is worse because is done to such nice py Lemmings Follow the Crowd Should buy a good sock when nobody Ukes The a te sod stooks seldom are sidiout fiends What icra sock good? When asked that question, most people think of earning Tey are right, point. But stock hocan be pod becuoof ames even thoag hose aes are ‘rnin nothing atthe moment. Good assets are potenti teaming pome. Since most people focts oo eninge os ea ‘SSinive acts at borgain prices once ima while ecause the ‘companies owing them aw operating at Los and there no Han of change for the Better ‘Sch wat the sation inthe col Industry In tbe 1930s. Oi wot in abundant supply at what now seem intel low prices. ‘Cende ol sold a ow a8 10 cents bare. Ks many adeantages ver con a 2 convenience nel convinced many people that ‘Coal ha no future whatsoever. From the pot of view ofthe ‘Seal operators, the lor station was bad. and with John T wis heading the United Mine Workers it oromised 10 20 "Ar might have Deen expected, coal company securities were 1 Gime s doach. OM Bon Coal Conporation 31.000 1st Gold 6 percent bonds due 1944 coal have been bought for 8 in {980:Old Mens Debentae Goll 71/2 percent bonds, dei 19), sold as low 8 30 for a 31.00 bon "A capital readjurtent plan i 1938 pave 14 shares of new ‘common sock pls one 5,00 fist income 6 percent bond of ange fr each of the old 6 percent tends At the now bons wore 17 bal and the new common was even years ater the new bonds were tied at $1,010 cach T: rake die most money inthe shortest posible time you{1 the Siok Marker % Lemmings Follow the Crow a Twelve years Inter the now stock was split Sort 0 that och nays would have helped only to show how areat were the fie old bondholrs i adaton to Maing sea received Speculative os tht von and fit proved corect. Sino for hs redeemed bond now bat 70 shes of the now Some ofthe rent opportunist ex Te, twenty hits, common stick, In 1968 thst new stock was exchanged, share cor orty years are bound fo be eae only by ives Wi {Grshre forthe common sock ofthe Sanda! 4 Company Sar ion an faith ‘oho. a 97 thene 10 shares sold sh 8 3640. a There small comfort ooistiners ike myelin saying hat od th bolder ofthe Old Ben Coal bonds edseme in 1946 ‘no one hal ay money In 192. The fac shat Old en Coat reimeted the proeonds In OM Bem Coal Corporation como {is percent Yond could have been tht stow ss St for Sock athe high of tha ear, he would Have acquired 202/10 £'51.000 bond 533, a low as $15 193, and a lw at Shores per bond n 197 those shares were spit Sor giving $1972 te 1038 For taxexempt fan the prot potential fim 01 thares sutwequeniy exchanged sare for share fr {tom the highest of those tigen was moe than 100 fo one Stndard Olof Oho Those shes wld in 1971 for 92.200 or out and ov speclator the rea ling could hve best “Thus its tavexempt nsuton bad invented 40 in one of sade by buying the new common sock of Old Ben Coal Cor th ten Goat Corporation at 6 percent bods in 1932 and portion urbe inthe resumen pan of 193 Ar of Sep- |. adioved at every opportunity ite direction ofthe Od Ben Fember 19, 1955, that new common was quoted 8 cents bi Cont Corporation common stock, iis hoklings by ast year ‘Acruming one could have invented SHOJ00 at double that ould une reached aot val of S152, a figure 262 tes Price, he would fave owed 10000 ofthe new shares. They the ovina! invesimene Eves private investor in he 50 Were ape for in v7 which wld have Boot hs Hodis fetcontincome txbracket n 1946 oui ave been abl o get {otal ion sare Thon shares were exchanged sate for Standard Oi of Ot sock worth 16) times what cost hin Share for Standard Oil of Ohio in 1968. Ths the man who “The prot opporuniy tn the OL) Ben Coal 71/2 percent {ambled $10,000 Old Ben Coal new common sock at ice Debentures of 194, wich cout have Been bought at $30 per the bid pie of 1935 would ave tony Hala milion shares of [St00 ond in 982, nas eve larger. The points to remember Sanda Oi of Ohio. They were vue ia 197 at Sab lion fog “next tne” ae tex Oe byperhsticalspecustor would have made that fortune 11002 the coal nes was unpopular with investors ‘itu overpaying cea of taxon hi capil gan 2. O1 Ben Coal Corporation cened 34200 acres of coal ‘Actual i probably would have been tnpossible wo make tunis of which 1000 ores wore wumined, Te owned and ‘ny sch ily hoon re were cml 194 hares he fpetated ton mines with an ansval capcty ct milion tons few common sec of Od Ben Coal Coxpraton oustanding, Piituminous con. Thosands of adional acres were Bed Bot for $5.000 a man in movrate circumstances might have {der ue nether word the ast were there. The question ows 100 shares at cents share tn T97T they would ‘Nis would they eve recive a gher market evaluation ave boon worth $40.00, 3 "Ste amurican demand for energy was due 1 ierese "The pint i thal one peed ot have mons in Per to coma. Imaksmilions Asa matter of fact it fen easier to make a “Thre ts Wal Srct saying that a stution is worth mre ‘elaively sal commitment of thi sot than to invest ml SK gan esate. Censny tn ths ease the tvesor relying O8 Hon dll The advantage the ite man as over the big mn (Gow snd prot mizing rater of etch om vested in haming leptin Wall irc thatthe ite mas 24m Seplab and pice ating tbr would have been heft st the Saker sich iss noe. Unforenately ifthe ile ass pon Totay Old en Coal in 1552 would have ruled exe food he soon loses that advantage by becoming a bi Ma esa von and great fath im Americ’ ftur. Statist! "Fo make such kiling aU have rose! O14 Bon Coat + Pelpig mean vision Hae an ne Me c= St Sum op Phone PE Rosia, Ro& cte-Study, 100 in the Sock Market ey Tons oF stock woul ave requ the vison 1 see the portly, he cape amd dsperdone of ino bY when inst noon favored ding 2 and, most important of al the pence to al on throgh he tad basins ears of tne through Word War Hand tough al he ings rows of outages fete sacs that time ‘Ae sing ge aoe hava hae CW you can Selom found nomen, nove found fn man acetone prov he Fl asl Gace Be ume stoi: Bo ho not lone. ‘When war inthe bokerae usines inthe 1405 the grape vine had tat Cha Stan had taken 4 postion a Mowston Od fc Time Incorporate i king that poston In Heston Oi Mf, lima avoided tworof the mort Gosumgn vestment errors. The st of those oor whih | hasoem made oll ft devo Beat ‘Se tprh nd sndyt ane aan ivsue O Ste rac on hn econ so eau thy wat ‘he Bu Sow are Wows. The converse, of course, Is tha i “Git nord your any Wficane good you are right. When one ‘owns more than 10 percent o age company he can be hurt Novy badly tha company goes sour Hut when the pice of Mock advances more tan 100 for one the rewards sre signif fame oven to am organ a big a Time, Tocorporated ’Ar of Febrvary 1, 1985, Time, Incorporated ved 1-510 stares of Howton Oi toc, which wat 10.73 percent of al the Shares cutsanding. AtSIGO50 9 share, Times holdings were ‘North more than 324 milion i the ial Tiguan, “The second common invewment error avowed by ME. Sillan i 10 taks smell roti Gut yn profs a et jour lms eun:"isone ofthe surest formas for winning pace oa the rele ral, Peshops the peatt forte sak opportunity of then al pug byseturn om investment was alordd by the defaited Fist gold ee of 1916 of H. Ke Porter Co. Moods 1029 Inde Irate mane vpn he 1932 peice of the bonds a 5 bd. This ‘eant $30 foreach $1,000 bond. The bondhoercommlice Feaquesed each deponting bonholdee to pay 88 a thousind st {he ime of the deposit of is ons, so anyone buying the bonds fe in 1982 may be assumed to have td cont of atleast 555.2 bond. Moreover. since Mads reports only atid pic, let ub ‘ume that o buy more than oncor two bonds the buyer woud Fave mato pay oul the bid, making i ttl cost 3108 poe 51.000 bond deposited. “The face anon ofthe bonds oustanding was nly $4000, ‘To nave tought them all $108 per $1,000 bond ould have out $88,200 Under the pla of reorganization confirmed by the court fa 1909, cael $1000 First gold 6 percent bond of 846 received 10 shares of percent prefered convertible ito 120 shares, ‘tcommon, and shares of common, making atta of 125 common shares assuming conversion of the peterted T1945 the common was spit (eT turing the 125 shares {nto 730 share: In 1958 the common was spli-for, ening the 3.730 shares ito. 15400 shares Three 2 percent stock dividends in 198, 1959, and 1969 inerewsed the cominon ‘hares received in exchange fr ach of the defaulted 6 percent bonds of 1946 1015918 shares Tn 1966 the common was spit Sfor3, rising the total number of shares received for each Wd to 19401 ‘At the 1971 high of 24472 fr HK. Porter stock the 19.101 sates hada mathel valve of S885. Fr anyone lucky cnough to ave bovght the bonds at their 1952 bd price of S80, that meant 8:97 for each SI need or anyone who bought the ond at double thet 1992 bd price of $50 and pai the bondholders’ committee 38 a bond ess, the 1971 market value was 4274 tines his Yale ‘Moody's 1943 Indusrits manual reported: “A substantial part of plant fotos has beom sonverted to war materials |TIM Evans was listed ay president Moody's 1939 Indusrias manal repented: "AL Nov. 13, 1988,"T. M. Beans owned of record and beneticaly 813,486 shores (77 percent)” "The lint officers sowed Me. Exans ‘hatrman. His stock then had a warhet value of 42402000. TE hel unt 171 theB5,46 shares would have ecome DIRS shares with a peak market value of 323924000, decline that {uicky shoal signs of reaverForesight vs. Tenacity Corp, Thinty years ago Moody 19 Public. Uuies fmamval reported that tof the end of 1940 Adas Corp. hd ir subaidinies owned 284.100 Opden Corp. shares, 0 $591 percent of the wt The sick igh that year was 31/2. ‘Thirtson years later the same source feported that Alien & Company of New Yeek owed approximately 80 percent ofthe ‘outtanding Ogden Corp. shares Ta the inerim the market fice of Opden Corp. ck had destined to alow eC 38/4 ents a share a 1920 and again In 198 To 1950 a total of S7rat0 Open Corp. shares changed hands on the Amerie Stock Exchange a price raging tom a high of 31.25 10.9 {ow of 40/4 cents. In HSI there were 285300 Oaden Corp. Sores ded at prices anging trom a high of $L.75 to a low ‘Bava cent. you or ad bought al of tbe Ogden Corp. stock tae in 1950. and bad pad the high f the year for every share, ou total cont wos have boon $122.7. ad we pad the high of the year fr al of he sock traded in 951 ba otal cost would favclocen 412825, We would hase boos the owes of 333.50) shores of Oaden Corp. In 1988 we would ave rected rights {otuy 8890 share of Syatex at $24 share, Had we exercsed thor rihts our lnvesiment would have been increased by ‘169900 to a grand tua of $702,100. In 1971 our holding Sronid have bad m market vale of mor han $86 lion. Had SNe bboutht midvayGeteen the low an the high prices of 1950 TINTS, ead of paging the yea’ high for every share, ove ota investments including he gost of the Sytex eights, would * F: stocks adoro a tae api pont 2 moral beter than Open Foresight ve: Tenacity a wm nae been $506,634. The market value of our holdings Tad Allen & Company kept the Ogden Corp. shares Moody’ ssi they owned sevenoon years ago, and exeriod all thelr ‘inh Sonex atk, thei holdings ast year ould ave been “ale a more than $300 millon. According tO Moody's 1959 Turia! manual. however, by that time Allen & Co. 00 longer owned 80 percent of Open Corp. bat aly approx tatly percents Even ith hat sharply duces bola. ab Soin execne of al Syrex rights the 1959 Alle & Co. bold _,Ingr would ave been worth more than $225 mon ts 197 a ‘What ae the morals to be drawn from the Ogden Corp. ot 7 SS oon cn ro rth as acta gan eeeeree tae Coe sok pes a yin shat Soiareane Cai ow oe eer Brant Secombe a8 Oljn Crp. sol ae Sener ps tage ey eran {eso a is Opie Clap wold sete snee ot St A Se item pe nck Sit Ms andes Celle SF oy iepecesy hernia Sete coa pant be mari: woes orate Tr he nih ot dt ens a ny ya nS a Se cry. meteicetamn slay nthe ea tt weh taoe & SOW pas Opa Se nes es a Ca dei tno byte athe cone Solo pat ar sl woe so nes She nance Pee a pn tt lan abe ume hcp one set nt rene ens Coy ome on Sr tyetney eben fat Lifes ts Cg Oe ‘cat a0 a 9 ane gl SoC yi ting sagt iccaog he St conNYT AE JON me IR toate Seely Joo was in RARE QE BMA eee “Faeig va. Toney 8 seice HERP Fou nee mecnmiy Susie » Set caphareer a iri oe inporaat Be Wai ae Se agise ate aiouatc Das Poceong ovement Ines Tastee yeu since enty 196 the Hook as advaneed ‘ne hundred: Yer war aaa fr fifteen como ‘monthestaring with Apeilof 161 and ening wi Tune {Sca—ac prices fw tan peeem we naka au 0 intone -Thore who bowght the tock n September of 1961 when was fis quote the Bonk ond Quotation Record at 618 on i" onred hd ibe oth ely tated er by te nd Cotter 16h te ck nd deseo 8 ey 1 Siero, Yet even thixe who pa the aking pie o 1/2 at the September 161 igh swe mathe tae of tbl ae ‘sumer 15 tines tect by Tire was asock whch ceed 70 percent a mate aud ints font thitcon otha of eecorde tending, only totam ‘ound and mais 4100 bls out ef vestonte betwesn toes and 97H would be hart fan eter example of the harden eli om price movement neta gue invesment decnonmabing. "You ay cl tat patos wa one of the tre pron tai ed y the lite George F. Baker ax preregues10 ‘Baking fore he stock tak, Probl aver has more Patene bon requred y any sock tha by Octdetal Pot {Eun anyone cn sl to aves 1000 sn Occidental Pearle st 832 ow 025 cot aera held oi Occidental Petleum would hove tached # maket vale of $5,670 lat year, eamtine, however, he woul have seen ti 10100 imseumcat sn ss markt vale Yon 13 Tow of ‘nly $1.0. Even at late at Janay 9, 1986 afer nearly ur cemury of wating about Send on his nv tis olin had a mart value only SHRC00, sain of {© poreat, Mestine tbe Dowlons Indu Avra had Te o more than etme 358 inthe pio tow 199 trong 188 Oceienal Pereum stock cod have boen bought the bigest rcs fenced a {enysino of tore ten foMr yea, Sad every sare would100 Vin the Sick Marker SYS “ ‘have shown the buyer & profit of more than Gne hundredold init. encath the surface something war ting. More than 1.20100 shares of OseldentalPteseutn change nds onthe {Los Angler and San Pranciaco Stock Exehanges in the ewelve yeas unmeately peesedag 1956 when the stock Vegan i St re "Asis tim of maa of the ober 10 tone stocks, Occidental Pewoteum showed that gui in TL even though at Hs high IRyos down neasly perent fom ks record hgh reached in Tm the stock market Fortune wears aay dsguises. Those isguies taken topatber wih mankind's Known inaiiy (0 {oresee the future cinch te cae for busing ght od holing ‘Dame Fortune never wore a more impenetrable disguise than tao hich Kept so any investors fom seeing the pri potenti in Tampax. “As the Ist of Oocone stocks shows, Tampa con have ‘con tough as late as 109 for less than percent of is 1971 ‘se. Batty 1949 the stock’ lor was $160 a share. Tampax Sock could have been bough both in 194 and 190 ot 77%, ‘Arthat price 81001 could have msade you and me the owner {OF Sod shares, Withowt our puting up anothes penn. those ‘Sho0 hares would now be 45/00 shares, wort in 1971. well or the benefit of thore who xoff at “might have been” ‘pris in buying toe the Lows, Because in real ie no-one ‘an ever donee mote thatthe 1941 ag for Tarps Was ‘Seas and the 102 high S879 ashre. Ie had tought our ‘Hock athe Aig of those two yrs we would have aegulred Sin Siaren By now hey mould have intense, to 22-500 Shares with mcket ylue i 1971 of move than $7,000,000. Bari id tha his $10.00 nverment would ave grown to 57100 000 had the orginal commiament been made atthe Aik {Of evo comecutive years. Tha conclusion ssems inescapable {Banh be buys Te Te woul Rave been imac Tor you or Foresight ve. Tenacity 48 ‘me fo inves $10.00 i Tampa anytine from 1938 through [Dis witout making more than 10Dfore on our ivesinent ty 197h 7 we had jut held on ow a Tampa tok to fvestors thirty yeas ago? Moot 198) Inder soa "Dusen: Manufactures and sais Tapa, ctameral device ted fo emnne hygiene purpose “Tested reference tothe Tampax product was symptom ti ofthe timer, Hardeated tvexorecncoumed the com bony ftore because "heyil never be able to adverts ny the mow imaginative an faniged could hae foreaen that ty 1 Tampa would be adverse on tcleison. Snel ine rete peculaive opportune of al ine was silondod by TeContnesa Navan To THT and 162. The srarrantsoldin December 158 and again Ape of 1902 a U/a2 which & 3478 cents cach. Their 197 high was $7230. “The ine in thity years mah No 10 mcs, noe even 100 times but 2920 timer. Tater words, for every dol vested In'TeiContnenalwarans athe 181-191 lows the specular {or who held on had 520m athe value tity Jee ate “As with Temps and Lott was nok necessary be let wo dapocday maret factuations to make a fortune in Te Com tient warrant While up rom thet ows they could i ave teen bought in 193 snd a 1544 ales hon T percem oftheir 1911 valu. The 1984 low for Te} Continental warrants was (82/4 cons tn 197 thy sold a 108 times that 194 pees. "Actually for Gah conceive years, fom TBST tough tt, Tet Continsntal warrants chaz hands in large vole ries ethan prcent of thor 171 market vale. Roking 510.000 them nan of tose yes would have made you and the a millon doar Timing Got rater exept tog the Iiy ot opportunity. Amulon dollars was n store for the pur ‘husr ry of tone yar Perfecting wid merely Have thade the afernce between raking 31 mlon and Making 52 lon on 2310400 investment Coulda we have made jos much money wihowt the speculative sk we had bought T-Contnena Corp. cone thon sock?1 01 the Sto Menket “ Say the aver no. To fave made $100 fr $1 in TH Comical sonmon ne would vend toe mpd to buy Stistowot 62472 census tn 91 Toy ne would have {hoshrcrforevehone we boght in, and hse to shares tat yur sl a gh S64 ieee one the lw jac 3 mee "Wal Seta tefl and fishions ot a8 Pas does. A stock tha nti vee may ope Jo fr His owners bout aracing mee jeer atom, One example Syne D Coay not wknown, Square D ha rected es init comment stenon than ay lou bees wih or long cm reson . “hie Square D mol have tne IC00 investment toss ino well over 34 milion mart value at the 971 in seat operant fra ing wos tn 932 and 19% tn both pease socks pce range mas fom tow of 21 igh 35's stare Volume of tadng inte sock on the Det Stock Hachangetualed 53) share in tg wo yer, I 308 tnt nod boughs every ooo hss sare athe Mie thse {mo gens ur itl cst wosld have bas $1038. Without ever funda op another pony our holds ey woud be 375450 Thaesoed ate 197 gh at well ove 1 oni we | fj el nt Prob everyone who has ever owned a sare of stock inows thou Xeron At Mr. Garters experince demons ould be hard to ida beter cxamp of he vale of bung take and bling on but Me Gave was 9 anf lone ex ference in fnace with mynd Ta igh aes. Nou eryone col hve ud the Xero oppo the my Bo Tut many peole owned the sock sort Became a markt semmation, Are ho al ich Ora some of thew eke thet frotiswen moved up the otto point now several Uo dl De you tnow ayr Most peo do nat ike wo hk Mout i ty make these bake aga a an. Tina ntereu neces toferetont he ero oppo. ‘Alanyone had to dwar sy "yee to becery lesan one wey bck to 192, Se! & Stone Company. Tne of Woche New Yer, offre 300 srs of Hold (he hd Foresight v% Tenaticy a rate foe Xerox) 7 percent preferred sock sod $000 shares of Haloid common in urtsol one share preferred and ne share ft common at 3110. unt. Al the prefeed was redeemed at ‘Shisigh yar ater But cach of thoye 1998 shares ef aond common is now S10 shares of Xexox common wi market Saluation i 1971 of more han $66,000. anyone had been Peruaded by the Steel & Stone secures sleten to savext, ‘10.0 in tose unis, be would have aequred 903/10 pre fovied shares an 803/10 common snes, When the prefered ‘rat rete in T886 he would have gostn bask ll but S355 of is s10,000 investment Hd he continue ork tha maining $555 im Hold common stock, he Would now own 19.085 Xero shares whose 1971 market value topped! $6 millon alld of cours, didnot have the tatlous Xerox copying ‘machine in 1925. No-one even imagined i Ar Inte 98 1988 ‘Moody's Indwsrats sid of Halo "Produces and markets phowgraphic paper exclsively, Plant feated tn Rochster, Now York has the capacity for costing over ten mi lng, AV Inches wide, of paper eve day" know that ore than half the people alive in the United Sues unay were not even born by 1949 but they may be fenteriained bythe thought of what grandfather cull have done for the family by being nie to 2 secur salesman in 1928. Bear Inn he coud ooly have done i by holding on YotedehcoulTnoT have elped bint was not uti Nove i135, that Hato acquired Recaraph Company of Roches: tc ct prot of which mas the Restaraph phony ‘Opportunity. tke the postman, always ings twice, at Las. Following 3for4 spl of Halold sock im February 1935, Donoto, Moore & Company, of New York, and. Mitchell, Hortick & Company of Cleveland offered 58,000 shares of the ‘new stock at $20 share, For $10,100 one ould have BOusht 0 shares. Today those 40 shares wou be 90,00 shares of ‘Xerox with a market value i 1971 Of more than $11 milion Somebody id buy those 55000 shares. Only thone oo] ‘Mr. Dares cleat “hover sll anything” reaped the Tantastic Ihave fate pt in their hands “As late a Jly 1980 Fst Boston Corporation of New York104 inthe Stok Marko “* fered 10.91 shares of Haid stock at $29.25 a shar. For $1000 one could have bought 34 shaves. I he held ther, he Srould now own 61300 Xerox sates, valued in 1971 at more than $700000. "You and {nay not have boon on the Xerox security aks men's Tougt luck, not to Be invited to that party. But we yer Vibe Win aed, tvek.9 Asa Set = Foresight va Tenacity ry ‘ould have come uninvited as ate a 1958, and il ave made ‘ore than S10 foreach $1 we invested in Xero ‘As the accompanying ehat ofthe price of Xerox relative (0 {ne Dovwlones Industral Average clearly sows, by 1958, Xeron hd begun one ofthe scepert price advances instock {market hntony. Iwas ine years fore that advance felative fo the Dowlonce Industral average was icerrupted foe 35 tone es twelve mont, Beat in mind ar you look a this relative price char thatthe DowJonss Industral Average was avane Ie atthe sometime if Xerox bad advanced a fata the Dow thio fatr this elative price line would have Bech nrenn fd perfectly straight, Remember, plese, these relative price ‘hart thow the pice ofthe sack divided by the pee of the DDoweJoner Industral Average on the same day. I the stock fell ar 30 und the DoweJones Indl Average 3890. the Felatve price 10 or 10 percent. I the stock goer up o 150 Imile the Dow gosto 1.00, the relative price becomes 13 0¢ Tsipercent Ths arising reve pice ie shows that @ stock thas been sdvancing faster than the Dow, or deciing more Sly than the Dow i ‘Many wil ange that ne one could have foresen the fabulous succes of the machine which na single decade made Xevo a "Synonym Tor cope ost as Keak bas log boen a synonym for Chern: That tay be true, The mote nearly true Ht ir the Stronger makes tho cass for Rong on. Fortunes made hat tray are whit my ol rend und cllegue Dwight Rogers call ‘stmph of lethargy." In tho same vein Decatur Higgins of ‘Sudo, Stevens & Clark quote «former asia a aoUng ‘edly, Telfer from an absence of inet” oo Mon RED NY Sey, SUE OF Ses Conner asi GueUa | yoo SStorn SO» BOY Vg Aad on ae See Yeigh Cay GICIE WOR OH SS yooEB HQ A RA on. CHAPTER WI . We'd Die for Dear Old Globe & Rutgers ‘hundreds of diferent secre we hav cen demonsteated {he widom of buying "gt snd Holding om The sonteion ‘Sem nescapabl- fat one com buy nigh, Bo amount of trading orswtching theeattr bikes Lo presse ress al nha tmp boing on By doing he wos work brkrege comouaoon a capital gia tat, juno tango ating his hunches about wat the markt wil o tomorrow agaist the bunches of everyone ‘ic who wating, the ssafacion of taking fst Duck, ‘ue ot in ai ‘Notan avout she wadom of holding om even when ne tos mot bon srewd enough rocky enough o buy ait ish. IX dass erampie of hl he market sory of Globe ‘Rotgere Fre Insorance Company sock, now American Tote nthe pany market just after che bank hotday fa 1933, Globe & Rutgers ec lnrance Company Common wa uote a ow a0 278 i eiph te yar before 1902 hod teen 257 a share Te Ben! Steet Journal Bond Ci of Now ‘York parody cf Wal Sve oura cal tention othe fice catatophe in a page one advertisement at the top of Solum one. Fhe a read asx neo Iunance Srocxs Weed for dear od Globe & Rutger Satie & Co ‘Anyone who hd been nave enough to buy Globe & Rutgers sek on reading that ad in 198) would Rave pid someting QI even < ‘Gay Sees odin Pear MeN osMGK ti en. Wits Die for Deor OM Gabe & Rar s etwoen $0.0 and $70 0 share for it Nine yea Iter when Gove & Ruigerssoldat alow of $8 a share the naive purchaser Init have concluded thatthe Ba! Steet Jounal hud indeed een joins. But the funny part of wis that anyone who howght the stock at say $68.80 on the strength of that Ba! Street Journeladverseen in 183~and eld on—would have had fecurter worth more than 48 times bis purchase price by 1971 is 1935 S100 would have grown to S48.00, om 9 purchase hats aos timed, “TeiContnental Corp. and its afiite Selected tndtos couned a total of 48,20 shares of Globe & Rutgers in 1943. At {he high ofthat year the 45,20 share had a arket valve of 5723.20 1 held unl 1971 that block of stock would hve mounted to 1484358 American International Group shares alued at more than 3144 milion, The ttt Te¥Con neta Feport shows jus four ames under "Finance and Insurance" ‘American Re'inurance, CAT: Fauncil, Fist National Cy, ‘and Helle Inertia. Their apereeate market valve a8 of Same 3, 1971, wae $234750, cr 34 percent ofthe Te ‘Continent porto of 679.5839 invextment asst ‘Aso the end of 1953, C. V. Starr & Cov, Beld 151,584 Gobo & Rutzes common soars, 3.17 percent of he tot ‘At at tne the Starr block had a make valve of $5600 ighteen years ltr that same tock, herent by sock splits and stock uividends vo 14804 shares, had a market valve of ‘ore than SIH CODIND ioe ml le eg es 7 ith Reig Soinon now RereMcCee In 1058 W. Ea Phinney & Co. of Chicago offered 18 (Class A common shares $5 «share. Each Claes A common sare was convertible share for share into Class 1 comion For 10,00 anyone could have becorse the ewer of 2.000 Five year later their market value would have shrunk to $4500, Many buyer ofthe 1935 offering donbllese sold ont because their stock was not acting well though i cid pay ividends tthe rate of 38 ents a yer. Others who failed (0 ‘convert their Clas A shares into Chins 8 fad cm called in10010 Hin the Stock Marker 2 1944 at 97 share The di no do badly, Anyone who bousht 510,00 wonthol Clas A common on the 938 offering ara eld fa othe Clas A stock not only reeled dividends a the rte C7 percent snovaly but had a 40 percent capital gain by 144514,00 forbs 10 00 original Investment ‘Bur how abou the perion who bought 2000 shares of Cass ‘Aan comerted them into Cass BE By the end of 1971, without evce puting up another cent oF payin dime of capital puns anes Re was the owner of 38.180, ives of RereMcGos, Their market volue had exceeded St 700.000. ‘hs in so many other eases, Opportunity knocked emie. In Ogober TiM6. Staus Secures Corp. of Chicago offered {25000 Kesyn Oil Clas A shares at $60 a share. Any S10L00 vor in hat sfring who mas tenacious enough to hang on rowgh the "840 decting to $2.25 4 shay and courageous (Roath to comers hs Clase A shares into Class By owned ‘Jro%s shares of Kerr MeGve ty the end of 197L a! a peak norket value of more than 810000, T wonder there iw anyone alive who Bought Kestyp Oil shares om thor offering ad held on uti now. 1 doubt it. Yet Hundreds of people had fortanes a thir grap. Al eey had 10 ‘das boon ‘When sid Opporcnity knocked twice, {id that good indy an njuntice, She hocked tho times. Five yeas after the 135 and 19% offerings of Key Oi sock anyone ould have thousht Kerja Oi! Class A common shares in the Overthe: {Courter market for half theft frig pice. The gain on a 10.00 invesinent st either the 940 oF 1941 jow, had th Iyer lected to romain a sharsholder antl 1971, would have bean tore than $3000.00, Tall he story ofthe stock market it would be hao find batter ample ofthe value of Boling on tough adversity than is provided by Richfield Oits bonds. in December 1925, Bur & Company, Tac New York, ‘offered $15 milion of Pan Americen Petroleum) Company of {Caloris It Convertible Gold 6, de 140, a $990 for each S000 bond: Pan American Petroicum was wholly owned by Weid Die for Dear O18 Globe & Rusgors 3 Richfield Oil Company, In May 1929, $25 milion of Rchild Oils Ist Convert Gold 6s, Series A, duc 1944, weee offered ty Hempnil Noyes & Company, HasJen Stone & Company, Casatt & Company, and Bank America Bla Copal ot Now ‘York, and Bond & Goodwin & Tucker, Ie of Stn Francisco, find Tamer, Dain & Company of Low Angles Those bonds Tikewise were aller at $90 foreach 81.000 denomination. By 1932 both Pan American Pevvolcun and Richild Oi ‘Coripany were in Feeivership. The Pan American 6s of 190 ‘old on the New York Stock Exchange in 1982 at alow of 378 for each $1,000 bond while the Certificates of Depeit or the ‘nie Bonde sold as low as $40, The Richfield OW & of 1984 {odin 1022 alow a $9730 per $1.0 fd wl dhe Cente ‘tes of Deposit old a ow au $80 each. Thus the investor in {he two bond issues had lost” more than 90 percen of the ‘luc of thei ivestint in trve to seven years. Those who lol out in 1532 i indeed Yoxe nore dan 90 percent of what they ha pa for the bonds om the orginal fei How about those who Just grted thet feet ade anit In 1097 both Pan American Petroleum and Riceld Ost ote reorganized. Tor act $1000 Ricetd OW bond the Toler received 48-172 hares of new Richlckl Oi stock. Each an American Petroleum tnd was exebansed for 0.45 shares ‘OF Richield Oi stock, Tonay awa ovat of tock spits nd the Inerger ito Atantic Relining the Pan American Potoleum tondholde who held om has 117-7 shares of Alanieichiild ovk foreach $990 invested in 1925. The Richld Oi bond Folder hae 1649 sharon of Allene Ricoh stock for each $990 inyested in 1929. ine 1971 high the nvestor who bows ‘Pan American Petroleum $1,000 boa and ha oa Uough ‘eclne to 10 market value i 1932 owns stock valued at more {han $11.50, Sinan the buyer of Rick Od $1,000 bom ‘who elon in the fac of a decline to $0 in 1982 cued stock ald ast yor at nearly S130 doubt if Coney Ind has a Fide to equ that. “The ows bonds are inhi in the Hist of securities that have sian more than one hondredfold in value Because obviously nyone who had the money aa the gos Tuek to buy thesia{100101 the Sock Market Fy Weld Die for Dear Old Globe & Rutgers ss 1902 and has bel on has made a god des more than 109 for Mee amt tne ow hi avestent Arn agonent fr buying ht ond iuaeua a ‘at Va ing om, homenor, it may be even more noteworthy tat “ {howe nb bons tho bonds i 1925 and 1929 when thee AIMOUN & 60 AMOK ow timing could hardly have Been worn hd nt let go Aaa Aorta fave tows Inereaed thei aptly HI-U2 (013 es. Oe AL a a Sich astry uy help you to underand how Me Deere wis Ey lene amassed wealthy mver sling anh. iba Weer) ot e © Betoe we fee thie example Tete more thatthe 1932 onan SiR 88 trices wre rea The bond ould have Been Sout, Baweon UTE BROT = on Roe} and ane 10, om tan Gof the Rcd Of OST, ids changed hands onthe Now York Stock Exchange a an torte forest 9 ‘Sveape peo xe than S100 bod cae Coe Se a @ eer, Ss se schine ou amy eos corte ance Si m8 2 MILIONAIRE MAKER STOCKS Skown cone seat N¥8e ed Mt ne Ca tnd Th BT ve ISSUANCE SHARES = Sere rth re ht now ae rp i) ae yo 2 ee = smitonas tegrated oma ali ja ona aan keene icine NRA a Nat apa eters the eat hat cov an een boat Stee ae Soars et amore ees ee Supa IeaTIoNaL am Nota ch van at eer 10 tines he eat a wie 7 erearion Tinieh Gamal CORN IDATED ConPER wo we JOHRRON MOTOR INEINA CASUALTY Outre Mane bs Se OME taeda SB. SISK 5 3998 ‘Newmont ata) | NYSE as we asi Lee sho Stan hnown, (hit Canaiy) OTC sas aa “Me Peb. (ere Chapman AMMEN HEE UTR cn ore st ‘donee Gye ge NYSE a) sic es eave ACORSTRTUTION FIRE MET CHAPMAN & RSUEANCE en a veo cut a4 ea 13 "Sa PRODUCTS (MilandRos) NYSE 20 om100 0 Hn the Suck Market operas meses tat tear ae SEER me ves ei a Reeser TEER wer OR eros Cates uence! Seat ne higie ai tay cealerte ‘Sencar Rett seihiN ster. $3 REFERENCE (nena Maron) one Chisago Sofie 8 nyse nyse. nyse Sie SE cu nyse am 2 1s ‘000 100 108 as 2003 Wo's ie for Door OM Globe & Rutgers noni “wma ie ou we amos ES co eerie HEEB oper ET eae SEE nn “EB so am ee ‘enebcit Com wisvaco CilbhacaL ss ‘Daye [AMERICAN CHAIN & ‘CABLE nyse ut ign Nyse. 20 1 0 it 6 ”100101 the Stock Meret 1933 |Condnwe) Stes sea sane Haan ts ofc ae eae BUTTE COPPER & ZINC oc Se mice sree nyse nyse a0 xs BE wo 1» u oe Wot Di or Doar Otd Gobe & Rutgers ‘Dimes \Dyewer Inga) EVANS PRODUCTS ‘oXRDNER DENVER "Genel leaance Tada odmKIC co.) Sete dese INDIAN REFINING. ‘eneo) Bisse. age ono nist 5, Mise con uo an 12s 2300 ° Value 10m ibn Pa 1st10001 nthe Stok Market 1933 (Conde [TERNATIONAL ‘coMBUSTION ENGINEERING. CONVERTIBLE PRuPeReD. Cuieririeates, {Combustion Enpinceing INTERNATIONAL. PAPER & POWER a arate) sate tous EALCOLATING, Sxcuine se MASONITE Me-ckoRy stores: iMecrory Co MeILETAN Stones iatecrot Camp) MC_LECLAN STORES, Ree IReCrvy Corp. common) MELVILLE SHOE NATIONAL DEAL AeNT ‘srokts 7 aden oe aati aoe Hees eee ey nyse nyse nyse RSE ae 600 20 22s ey 2 13, os Wei Die for Dear Old Globe & Rutgors 1951 (Conde [SMITH (HOWARD) ape Mis (ener Foods) sree aa UNION BAG © PAPER deren Bir Eros ei eee Nyse wvse con nyse St Lowa Si iy a0 20 900 o 155 28 9 0 san 103100 Fn the Sock Mater wt fontena eee aes wae suas hoa ne Sn ane ae sat oven eh ae eee ae (ies Serie mixAS Pale cont & DURIVERSAL WINDING WHITMAN & BARNES Tne nyse nse Chicano 8.2 Devo 5. os Anse 8. hicagy SE ore Syst nyse nyse coats Det SE, ass 1000 a 20 1109 sae aa m a Weid Die for Dear Ott Globe & Rugers aera, ‘SHAFT Sunbeam) Chiengo SE, (inematnal Toph) NYSE see ee a aE ow a ae re ws See SS re eennae 8S eet, Bera, Ti SES. on aon one eee ae sa as o m sao 5 “0 sucha Smt le tea pga Sopa pps ot Wl nl cal hey1 Tn the Stock Market RUSTLESS ROW & ‘Diamond Shamcoek) ieee SQUARE 'D CLASS B— eee es a ‘en chara rien neon one cu ore nyse sie flag ss 120 Weid Die for Dear Od Globe & Ruigors im AMERICAN ATRLINES AMERICA HOM RUA eA {Seo COLLAR RIVER Cate ook Mcrae) (OF Texas (Matos (Geewon UATTES Cueatcacs wc) elit Per comme) Tinie nyse cont 1s 6 a un ase100101 nthe Stock Meher 1900 Contos) IREAND et Pataric Conver ‘thn cite [EDDY PARE CORP. (Weseucten. PALENOMIDGE NICKEL INDIANA STEEL PRODUCTS {Elcromie Memores & Masect) ua WALLEY “COAL CORD. $3) Par CONVERTIOLE Pe. ILetigh Vay nda) ar ee BES SEER common pce ae ows oie Set tera We aan os" Yass nyse. ‘Covlnt cut m0 ia 2000 1st iS ase ai 2am 19 SEE ont nhl op Spt Wold bie for Dear Olé Globe & Rutgers ee = See can a eae oe TE ee Meeker, ore i Ty a cs es soe EGS aes oon an10040 Vin the Stock Market ASE este ‘ASSOCIATED DRY ” AvESHtRE PATORA otyanette ae CE ues cefties SERVICE eae Se us Saw ee Cacontaend onocERY sroRe toputs cure nyse. aon Chicgo SE ns 20. hoy Weis Die for Dear Olt Globe & Ruagers cmt oie, on pos (Sten). Nebyig Byer “TRANSPORTATION pittinsionts (Pipe Hewes) ‘ST. TAWRENCE CORP. stuertb SIGNODE Sten wie ti le = Yai cu 10 00 an 8g Sich B 2 ate 2001 rs AE pment 967, tidings toe inte,{0101 the Siok Market we BE mee) Se et a Soe, | ore oe ies on let ue He yore ema ane OBE KERLYN OM CLASS A (Ker adet ore KINNEN (GR) & CO, ‘Geo Sto Nyse cot 10 we vs ans aan 11 a 5 10 ~ rei Die for Dear Ot Globe & Rutgers mentor crac rates ee Re (McCord Corp) Cont Getto EF MICHIGAN’ BUMPER . Acinic west on. Piet, Ine.) ore ees Seimce feta er ce Span HE ce one AIG Ore “Reet ae aa ie fee can tan wingibriew™ ore Se ms cc vse as 2s a6 a ae ano mm 1m a9100101 the Sick Market 2 Weld Die for Dear OU Globe & Ruigers 2 os women Coe ee ee pe, meena plea A Soc geen HE sa SE one att Ss ae oe wou) ore 4 q Ghmerican Egrew) ore a0 2a PACIFIC PORTLAND aan INTERNATIONAL cee “ e "AMERICAN HOME ah ro ee ee MINMESOTA wang SM? band TRSURANCE ore fam 405 eae arr at eeae ce tee 3 tS tate (Atmesican International fat PHILADELPHIA LIFE, te GOVERNMENT cos MAGNAVOX Syste om mtiCenate Cae sto S482 pas oma | ee Nea oe awe10 40 Hin the Sock Maher wayne ec ‘gem Ey ena we meee be se, ore ore ore wos 92s so We'd Die for Deus Old Globe & Rutgers 8 MONROE AUTO ouImENT ore wo 136 (oie Comp) Dewkse 6am (Sisine Cort Ames 83 AMERICAN LABORATORIES ‘crm ore a) 168 “Bvetormienr ore a” ss6r leis pif for many of ws to read such record. Confronted with te sar stadded back Jeop of lst opportunites, we stand Tike Aristo gloomily contemplating the Homeric bus of o¥e ing fnaoesl ambiiows. Some people doubles will get ‘mad atthe write. Kings in dae of yore beheaded Beaters of| {tad news Thi ble boded dencendantsnod sorte otinnry issn 100 vent er with on the Inlfensve telephone ceiver when they get uy signal three times a row ‘But ry wo remember that denigrating or even exterminating the messcnger mil nt alter or expunge the record 1 have been reporter for lily years. Soveral Uos T have ebanged the100101 nthe Sick Menke 6 ams of my calling, and eack time the price hs gone up. But Tam sil a eporter and tha sa ror, not am opinion you are not rsh, and if you heepron taking abut ine sestments a you have been thinking. this record cou break Your hears But if this topo should help you to took bead Tnvtead of back, think ig instead of salt eould enable You to find tne oad to fortune, That road al ies open Before eT have never sam Kt cored ‘Even i you are rich, pers ofthe record of the last forty sours mig help you better your iverirtent score. Remernbe ve Uitiich and poornay be apprekensve Ts they be ted nto ccHAPTER Vi The Tree Does Not Grow to the Sky fometimes the arguments 10 whether one should buy frowth stocks puzzler me. Money f made by buying Srything that going to he mort moe i the tue that ‘he har to pay fore now Since the pat fr isble 0 al there ‘Seldom nrc esptl gain in buying stocks that continue to tum in dhe future what they have esed i the pst. Exeryong. ‘am se the past Hence stocks tht faithfully earn next Sear Seat they eared ast year tend to be fully peed. That can ‘ko be tre of socks whose earings continue to grow ithe [Prospect of tha continued growth is apparent all The only tiny fo make more than the gong rate of retura on your capital [to buy values not apparent to most people atthe ime you by. ‘Because ever stock buyer wants o make money it almost «tulm that noching kl money making opportunity faster {ham is widespread popslarity. This apple fast as srely 10 prow stocks a st does t Flvida real estas. What shall It Droit a man to buy a afock whose earings quadeaple i the {ngs now? Tr tve that time ison the side of the growth stock buyer ‘tse provth and the expectation of growth continue. That imple arlimee, Tho pce of» growth stock wil increase {oar by year at whatever rte the earnings ow 1 the Rock= Drce-arings rao remains constant. For example: Earinge {his your SI. Price $25. Pricecarnings rao (325 dived by ‘39.38. Ieyeactovyear earnings promt i 15 percent, eartnge ike ses yar he 1. the pesmi ratMey pts hart sw how Arc Ca pe amped SR fie fe Dvds na rae Ean mnt ep of “rman Cu wand ty he etapa rc he Denes rho Pr os pron hac, [Focen apes ls wan dan fon prc 1 porn. Ao Eon Sn tr Bow toca BS a ok Rah See yw & By ine ne bt Ove gD a. 5 25, the price must be 26 ties $1.15 which equals SOW Vented D conn 52475, That, of course ie 18 percent over $25, the stme Pe. ‘eninge gaia shown by excrings Tncontesbly, growth Mocks ae highly attractive if they continue o grow ata faster than they have ben grow Ing. and (buyers conte to expect them o continue to grow ‘fat of Taster, and If Otte at WHT Tate ean ad Aividends must be discounted does not icrease material ‘Those are tree tgs” ee we were Harpy Toaided i Bay 1970, when tond vice rose to historic hight while growth stock prices collapsed, No ineligent investment Jeon 1 Possible without considering all three if.” Rae a ee | ‘or filtcm years is no warranty that {Ml conti ‘2c OnG-MIMEVe. Here's 6 lave price char of @ Dig Board fisted om the New York Stock Exchange) blue chip (hiah quality. Mehpeced secur) for fftecn years. People to sehom T have shown the chart wibout ldentying i com pay oF the time period covered hve taually exclaimed, FYeah, thats Xerox” ‘What the chart shows isthe market price ofthis stock divided ty the Dowslones Indus Averagey month by month I the Sock had risen 20 percent when the Dow rose 8 percent, and fallen 25 percent when the Dow fel 25 percent, the relative Price would es horsontal sigh ine. For example: Stock Bice 10, Dow 10, sock pice vide by Dom pice 10 percent Sock ptice 12, Dow 12h, tock price divided by Daw pres Topercont Sock pce 9, Dow 9, stock price divided by Dow price 10 percent. At you eam se, for fteen years. month in land month oa, his stock went up more oF devine lew tha the Dow, with the result that relave price stey ros. “The sock ix American Can. The tine the ie youre ‘rom te beginning 0 1921 to the end of 1515 Since 1538 American Can sock adjusted for all sock dv ends and stock spits has fallen from tore than 25 perent ‘tthe ow to less than 4 percent. AL te 1971 pk the investor hd stock worth aout wt he cull ave sold fo, Kory -~10 40 Fi the Stock Market © ears before. Meantime the Dow had inereabed ebout 24/2 8 in pre. Tn 1936 American Can’spriceearings satio was about 50 percent higher than the Dow's. That ould only mean that fvestora were expecting American Can's caren wo increase ‘lai tothe Dow's. In 1036 American Cam's earnings pet tare were more than 87 pereat of the Dow's earnings. Five oars later, in I94D, Ameriean Cans earnings wete less than Biipercent of the Dow's. No wonder American Cans price ‘eclned rlave tthe Dow's Computed on the same Das {Sin 940, American Can’ earaings had fallen (0 27 percent ‘ofthe Dow by 1970 So enduring wae the Halo American Can ‘Stanivbaek inthe 1920s abd early 30s, however. tht the farket Gi ot sop putting 4 premium value on ‘American Cans earnings ntl 939. The halo was lon hinds rom te 1903 ow to Hs 1929 high Amercan Can rose 3 fold. rom iy 1911 tow to 5 1929 high the rise was 128 times From the end of 1920 #0 the 1929 high the csc was neal From the 1929 high the 1971 high theese wes er, En for those who buy right. as Cinderella di fine spins if one sys 10 Ln aaa MGtice dope not every sock bas i dy. tm Wall Steet a stock that doesnot ave sda felled on. ‘Even when stock door have i day, tere is no assurance tae the stock ull be a leader forever. ow do I acunelle tat statement with my advice 0 boy Peay. At wo have asen, hundreds Mocks have ren more thon one hundredfold” A few have then one hundredfold, and then have gone on to double or luple pice after that But tomorrow iz mew day Tor every Eompany, every accurity. Ete vance tthe price 20 ‘aly of Tbe bat of sisngye My advice To Boy ht and Ait on i aRdRd to eounter waproductivewetiiy, not 40 commend puting them away and forgeting thet “A anyone ean buy in the sock market at say Ge isthe tuknown fuse The past sno forsale. Someone already as ‘The Tree Does Not Grow tothe Sky st ‘nad it, American Cn’ future was shaped by new competion, frozen loads, and plac contuiner. none of which lomsed ‘agge on i ives orion i T535. would have been a mistake to boy American Can then even at a discount from the Dow. What wade ute buyers in 1993 doubiod and vulnerable ‘war that they pail for expected superoe growth when they Should have been anticipating a dastic decine im relative roti, Ta limiting myself as 1 have inthis book to cosideraton of socks that ave appreciated ope hundred, Tdo not want to Bre tim ioprenien tint Tam, taking sell nod ipaoring ‘Spportniies to make « good deal moe than 100 for one. ‘Take Avon Products stock for ostince. You and Lou ave bought iim March 1938 foe S88 ashate. That was che offered price tthe en of the month, Each of thaw shares, which Mv mow necome S42 shares, ssid 8 market value of $3490. Thur anyone wo had avened $10,000 ln Avon Prod fects in the spring of 1958 had stock worth more than 8 fiom dois 197 "To stop there wovid eto ignore the much bigger opportanity ‘of buying Avon Products ia 948 or 109, The IBIS low vas {0-5 the 1949 Tom, TO. Anyone who invested SIOLOD at ‘atte gt between 380 and 80 shares. ‘Without cver investing another penny the buyer of those ‘940 snares would nom have ABIT2 sive of Avon Prods took. That stock Feuched a market valve Of more han $9, 75000 in 197 “The poitt Tam tying to make i not How leh you and T could fe i our foresight wa an good a our hindsight. To ‘ink dat vay b an unplatant a well a unproiale way to pen ime. No, the point i that someone did buy Avon Prod. ‘wt 10'9/8 ih 1998, and someone did buy Avon Product at 1034 in 1988. Someone also bought Avon Products inthe spring of 1959 at 83 a share Evary one of those “someones” ‘would be mllonaie or a ldoniionaie tay if, baving ‘made an initial investment of S000, he had jt st pt “That infact the mora ofthis story of move un 30 stocks tat in IST were worth more than 10 times wha they could10 to Fn the Stock Marker 2 have been bought for in my ative nes etme, Someone {Gu buy every one of thos hundreds of stocks a les that 1 fetcent of what they were worth in 1971, The investment {fagedy io that vo few Nek thom long enought reap the te tard aleady i their gasp Tn mnoat cates only an” uausually farsighted oF stubbora tavostor Soul ave sped wh is TOOToome ‘he pertns of aveiiy tat have punctate Oe heres of ‘mostof those vues. Avon Products was Bi eXeepun. ATFOne ‘io nd besr-waching is elative price for he lst twen Yeats would have kad ile pround for uneasiness om that [Se ompared withthe DowtJones Instat Average. Avon Protcls stock rone with extraordinary steadiness throughovt fh lat two decades hse that one shold never sell anything? Mankind made may amusing ad pattie eros in underetinat fing the future of the hua race that tempting to adopt ite pie af Mr. Davtellschent who never old anything. But Tet us fa back onthe principle st when any rule or formula become aubstoe for toh eather than a aid haking, is dangerous and should pe isarded. As we have seen and seg again and apn, the toe does not guow to the sky. "To grow at the rate of 20 petcent compounded snnwaly for ity years, a company most be 9.100 tes as big at he end the perl avi wa tthe Benning. 1 you projet that hind fom fora company with 100 milion of annual sles, yo rst capeet those sale 4 reach $910 tion aualy By the fear Sst you stat with 3 company whose sles already are A Stion dfs a yen, to count om 29 percent compounded owe! growth forthe next hall entry, You must foresee the tes of tain 100 lion dlls nthe ear 202, idiulows, you say. No praca tan Wis 1 Took ahead that fre Buy 30 percent growth compounded anowally ll Increase acompanyssze by more hans tes nthe nex fen ear: The siaticnce of thi io book advocating "buy ht Rint hold ont twoto "tm human felons 8 nature. there Scems toe a Tae Timiess growth, yond point, people simply won't on on Ly 4 a ‘The Tree Does Not Grow to the Sky 8 tolerate any more, whether the growth i in busines, eure, 2. Whom you payin advance forthe earings of sock to triple or quadruple at you do wen you buy fat tice ot four ties the prceesminge tao of the Dowones, Industral ‘Average, you should forece sal only the growth you are paying forat farther above average prowth Beyond hat, Tas Means that you mist evaluate the competitive sttan ofthe company not at I today But at Wt wil be sx to eight years fron now. when it thes of four tines bigs “To win tbe sock market as ebookers, one must tink atleast one move fortber and than the other lw sll have more t say about this materi the chapter centile Figuring the Oudecuaeren va How to Argue and Win How to Argue end Win s tombstone of many an invesinentavsor, Bu the reasons for lan expert opinion may be worth mach more tha thet weight in gold And when we my his reasons, we mean hs asumpuons nd why he makes them. Tos dlsioned hy expert a8 the value of opinions per ‘sen tho fall of 1929, when the Dow-Jones Industral Average plunged fom high of 381 alow of jst under 20, the head ‘what wa then the world's Ingest Bonk tot ws the stock ‘uarkot had undergose a healthy correction and the country tres ready to move onward and upward to new heights of Trospery. The market raed Into the spring of 1830, thon [lunged tothe depression low of 1932 Te was seventeen years Eefore the DowJones Indutal Average potas igh ar 200 Tn this sme period we got the word from the floor of the New York Stock Exchange ata Morgan boker was bidding 100 for thowsands of haces of US Steel US. Stool wat a ‘Morgan ereation. Noone knew more about than the house [N23 Wall Bu hy 1992 the stock sol a 8 low of 21/8 ‘One day fom 26 Broadway, tbe headguares of Standard Cit came the word hat the fonder, lon. Rockefeller ad hie son, John D. Rockefeller were mocing the press. “My som and "the ehler Rockeelcr announced, "are bing 5 for one milion shates of Standard Od ot New Jersey” NO ‘one could be better informed abou be il business i general ‘or Standard Oil of New Jersey in particular than is founder fn pineipal shareholder. Yet ate a bri ally Standatd Ol tt New Jeney stock so down to 20 ‘Tho pont not that any’ of the men involved more willy misleading the public Tele they were ll sincere. Bat {hove three experonses tauaht me tis Tr Never mind opinions. They are not worth a dine a OE dnan Tey to goth eas for thom. tho asm pon tearing the 2. Rovine Knows or ever can know for se what the future nods che Almighty had tended us to now {hat He would have equipped with soother ssnne tric one of Ur has THe Iishnan highlghted theSeweg ane FR ROSE RRA any 100 to Tin the Stock Market 6 rmater when he si, “Sore and wih Chew where Tas going to di. 1 nonce po ear the place.” I we ‘ve no certainty to whch where our own fe tried, how ean we presume to be sure of frure {evelopments with regard to mars no Ooarly ‘oe mt 1s thie a comnel of despair? Not it of 1. 1s simply a recognition that investing we dea always with probabiis {ind pombies never with certains, 1 follows igh he ay atin inves the eae al portant. andick Sires as heen a partner in Scudder, Stovens & cai, probably the words cldet and largest investment coumsl firm, for 40 years the period covered by tis book For slow that many years he hay been a member of the sins Covel, one ofthe pine inks tetera business and {he Aadminkaration in Washington. His iventmem philosophy tat bon developed and tempered by two tor depression, fhe second Wold War and the sl tnesoved bate aga ‘ntaton Risky” he says am exenieloment inthe investment ques for capital gain. Dow be dismayed by ass. Recopize MS ome of the Cons without which you could not have met in z "At bridge Ihave been gold that iC am mt set oecasonaly i undeidding not king enough To. make the best ive score. Eetere a Togend that the founder ofthe Moris Plan banks called manager to account for having mo ese. "Sho make such trocar the founder soi, "you must have ‘een tring down good tans. Next year Twat to te some Teaser not foo many, it you, Dut enough 0 show that ou have been dang something om your judgment sist toy that he rk a vay be commensurate fi ne rai Theat of specslation i one sense the aby to rocoptse when seeming rik soot fel risk or whem 2 teal ik not neatly au preat the tock taketaiiats. Even so an investor would have t0 be sartveyed indeed thnk cat he could ern IOSD ito lion dlr without taking any chances of losing his money. St & weve ory soen Ss 1 know of no rule, syne of philosophy that wil Keep an Investor Wom taking takes oF Hold han hares: whom Be wrong, M'me never risk ou money, however, except when sree convinced te odds are Rewy in our favor, i ‘eapatle lose should Took smal beside our profit, But how fam we igre the os? ‘One of the most persistent sions of the business of i esting i that information i ll you eed to make money ‘Organizations that ell aformation foster that sso. 1 {ood for their busines Tone jst stops to think about the wo paris to every tea the fallacy in this notion tat fforsation tata to money-making investment decisions becomes panty 8p pufen For every buyer there mast be 4 sller For every seller Tere mot bea buyer Sometimes an Inform buyer ha the {ood Luck to meat an uninformed sll snd vive ves. Fragood guest moat ofthe time=practialy ll tthe de ‘where insttatons aro on both sis of the tnd both bayer tnd seler are fnlorsed. I informa i everthing, how cn {wo informed professionals come to opposite celions about the same security atthe mame prise at the mime nant In "There are several answers. One f that the seller may think the tas beter pace to favet the proceeds even thowsh he likes the stock Ne i seling I remember wviy back ia 1919 ‘when an enormously wealthy Investor sold Socony. Vacuum Mock at what proved to be alow ext the hottom of the srket-Not until many mont er ddI hear that he had put he proceeds nto Superior Oi which went up more than ce ete ‘A second reason why one informed investor may sell what anoaher informed tovextar is buying i that no ome can be Informed abou the futee Since al decisions as othe tare ‘must te based on assumptions, informed Investors may make ‘feren assumtions and Hence come to opposite conclusions shoot buying o sling a particular saek at particule mo. 1 hid eeason for ifrences of pinion amone informed Investors is that noone ever oF canbe fly vaocmed. The FMD PRU ARC Cos SA OM ey{10010 inthe Stock Merket 8 Investor who is 98 percent informed may come tothe opposite fonction from that reached by one who is 99 pereumt i formed, . "The llusion that information i he be all and end all of the investment busines logical ead tothe positon of penalis fon tone who sek to benefit fom sure tia” inside informs tio. I you believe that information Leads you In a saizh line o covet invertment decktons it follows that anyone wo {et information ahead of you hasan advantage which should fot be alowed, in 196 when Iwas wring am article fr the Acetic Monthy ‘enlted “The Hazards ofthe Stack Market” I asked Joseph Br Keanody for an intrvion- I nd fst mot him twenty Ave Jeors calor when he was cirman ofthe Secures Exchange oramision and Twas cht ofthe Wall Street Joumals Was Ington Buren. Ours then was heist ews patherngorpanizae tion to assign a reporter al ine 0 the SEC. ‘es Rene ngreed see my ut because Ns son was President of the Unled States the interview had to be af the coord Now that oth father and son are gone, However, and fen yeas have lado since the interview T think T have [striea Heeme to report these two points 1: When {asked Me Kennedy ithe tepardd fs formar tion as major problem or taza fo investors inthe excited. Stock market of 1961 he buat out wih this compen “It Tho all the money that hat been lest on sie information Ltsreally be rick" “2 Regarding fading n secur, Me. Kennedy volunteered the statement that he had not ade a round ter in le ‘Sock singe he had become chairman of the SEC more than trontyfive years before By tha he meant hat be had no nonce si sock in hope of Bayi tack cheaper and RCE TIE TWH Tt perceptive enough w infer that Me Xeanody ke Me Garret, hoes rght and bel on Tet mo one dstort ny commen on information to allege that | belle geting the fate AIT am teying to point out {hot information at fet nothing bu the ea mate Gut Of How to Argue and Win » rhich some people will concoct good investment deivons {tu odhor people wil make bod ‘ones. From Clarence, W. Barco. publisher of the Wal Strevt Journal when T went 10 ware there in 1977, 1 Teurned, “Th fat without the teat be fate, Always connect” Eves i of6 formation is complete and accurate, it can sulle misleading ivestentwise i iy lates A temon that Fas been fatened by a sea roller as more joie int than a rece of information the sock market tas already dacounted, ‘To we another analogy. the difeence between fresh end stale information tik the ference between soa wate that has just Been uncapped and soda water that has been eft anding open all tgkt. Just as uncapped side water 0m lowest fiw uncorked news ew Tades into history of blsion How can one tll whether is fformation i fresh of stale? [Axis tru of wo many agpeets ofthe investment busine, there {So way wo bo nur. Eton i 10.00 investors have Beard the ew shed of you, ma} a ove pede ge TT ‘plo investor af gong 1 Rab ad aot on H MUST yOu ‘Sparta the beat ocnton forth we of Ss a se Investment decisionmaking i that experienced hands charts ff stock pices often sugsest whether pod ews forestadows fm advance inthe price or explains an advance that has already {ken pace. New ike pit the old adage, "Citta heath tre golden. Gifts ines are sler, Gifts a death ate Tea” "Really fresh nows—nows to which the stock market has not reacted~can indeed be gokden. News that comes as no suprise ‘o ubwtantial markt iteress may yet have enough Kick mi to be aver tothe remainder. News that haw been fully de ‘outed ead and thew wh atom are ad 'Since information never comes nbc grade A, grade B, Se rade C, those who stempt ro tase investment detsons omit Ist devise means of hee own Co rade Chas and charts roby nosmeansinflibe but they area ot better than nothing, then they show tht bad news tat been beavily discounted by & [recipitous decline in price or that ged news hasbeen wily hd even eabusstcally andcpated te the marketplace.10 0 Fin the Stock Nar ey ine market vibrates 08 Dow-Jones news al sight, bat 90 ‘necesarily im step. When you read your morning newspaper inever forget as you pot the paper dawn tht your homework fos jst begun, Herman Melle sid beter when Re Wrote ‘Of serenely concocting information into wisdom.” Figuring the Odds erudite way of refering tothe od in stock investing it {6 tlk shoot the opportunityak ral. Por example ou aoe chance wo make 10D point na stock anda ek of fosig 10 points, the opportumigesk ato It 040 Un forauately figuring the odds not tha imple. Ely i portant she Shane of gai relative to the chance TOS: T Sn nine chances in 10 that i wl go down 10 points. the 30" Called Toco opportunist rato comer to be atractv. ‘Meaning opportunity ratios ela the prospective in 8nd the potty of achieving 10 tbe prospective kes and ‘he rik that wil mater” ‘nce we ate dealing withthe unknown futere anyway, why bother wo go through soc exerci? Wouldnt we do fost 3 swell bln ourselves, suck pins i the quotation page of {he ul Sree Journal sb buy ourselves whatever stock we appened to hit Phe gestion reminds me ofthe story ofthe gambler who ‘wat arested in a small town for visatng am ordinance again {Samer of chances defense was tat poker was no game of hance, To prove I he played all night with the proncwtng ftom, the fades, ana fow of the town’s Isading eliza Inthe morning, alter he had piven them Back the clothing e nd won from them, they dropped the charges and sped hin co nin way a “The pt that in the wock market aim poker the wid nestor tres to make even money bet when the ods ae ‘eal inh favor How ean this be done? orDeimwernn Wy) uahery Romie jeu te Won coae Steno: Pretatsyy Som mabanerwch ite Redan te 6% Dy secing favorable probabilities that_are_greater_than sgn appresated o Wing aoc pce a eel WRC ‘Aigner ail tbe unfavorable probbilies apparent to [In the ist insence the bayer sinply recognizes a valu tha filers do not see Im the sscond cave the buyer sas in effec, “Since the price ofthis stock already i scouning tbe woos that can beset for here no downside rik. And since the oup i raely eaten ae hota it 5 cooked, the Buyer is Ukely tovget more thane paying (82 How cam you micauire what others are expecting? Who can read the minds of milion of lavestore, mom of who he has Tt that way the problem sounds Insoluble. But there is 8 logical solution we van ares om three simple premises. They 1. The vlue of any security Is the dicounted present sor of al fture payments. 2K dotor of income tom one fully eazable source is tron as ch ae a dole of income (om any other Filly table source. 3. Hnce i follows that when investors pay more for & dollar of income from one sour than they need 10 Day toet an equivalent doll of iceme fom another urce they are expressing smplicly te opinion that the income stream frm the fit soce wl ie faster ‘rary up more lomly than he Sacome steam fom the Second ours, Oterwse what they do maker BO overt G- Wiese, scholarly Seuder, Stevens & Clark dean ‘of inestnent reaareh and partner in Boston, pus it more teaty “Investor dom pay ferent pies forthe sme thing ‘When they se to be dong so they ae paying Ike pices for ‘iflerent aaicpations” “Two commonly sod gauges of dieing aniipations are: [Rete gleon socks and on es Sn alison stocks. “Tae prince of sca mics en sol as the Bit “The mun who bused th talents Bi aster Flt with him poe hosing Figuring the Olds 2 served is capital bu lst out in competition with eters who Ina increased dst capital. ‘All values ace relative inal expects. In the country ofthe ‘ind, the one-eyed ani King Bond values are relative to stock values and wee versa. Ani stock sles ave reltve fo each other. A fee years ago there twere sme sock men who paid no attention to ond. Most of Them are adder and wie now = "While nothing i sure tn investing, porbape te fast wneore of anyof the sumptions we tnake that ighet grade bonds svi pay thei interest and principal when due. Provided sich onde ave not callable for tn years or more a ue of say ‘ies, the buyer who Inverts is money toyed 812 percent Is ver likly to rveive ®1/2 percent trough good times and ‘bad until the bone are redeemed or refunded . “The man who buys socks yilding hal wat much most foresees ig increase in the dividends on his stocks or his ‘ction makes no sense at all. He may scoff at dividends because fie buying for capital gain bt wales eamogs and dividends ‘se, bie capital gains wil be S# ephemeral asthe oltted nowt bell Tine in ‘961 when the sock macket was exuberant T re raried tothe Gat chairman ofthe SEC, Joseph P. Kennedy, “People dott cae about dividends any moee. “yitere are thesn poopie?” Me. Keonedy challenged. “I Thernational Business Machines, the greatest growth stock ‘of them ll sod twenty years ago to ye about 1/4 percent. Cicaty, you might think, the people who bought were Mot looking for dividend But i€shey ail bold the stock they ovght atthe TOSI high they are geting dividends, In cast faow at the rate of more than 70 percent of thee 19S east ‘Witout that increase In dividends, and in earings out of tich to pay them, the phenomenal rire im the price of IBM ‘Hook simply could nt hve taken place. ore expected to go up: Wise investors buy beesuse they fore ‘leaminoroave in earings and dividends hat wl make toyHeomyany spell an Stee A peel on bendy. 10401 the Stock Market o once tok cheap in years to come, Even the wisest somtimes 2 ‘digo the ate of eras and Unidends Only fols—and perhape some. protesdonal shorvterm taders~uy, wihout in that Fo 9 thot ‘Over the years, comparing the yckl on bonds with the © [ jictdon stocks nas ronded n remkable page of vesor | Spiminn nod pend, ns to secompunog sha shows : Beween tweniyfve and thirty yeas ago dead yes om ; stocks were thre times ae peat as interest yields of bonds ‘This made sense only sone sumed that dividends on stocks revel cipal an wry Uy to dine ovr the Years come Tey tend of dining, viens rose sey nt siout tne peur ago he mene ce por del of Shades tae ede vote pce per oar of bond ner Atte est aah te vet el pte oe ok . fiastel on the bs copente ond ass Gud gece te Eee ates eee eeetincegers a Shut gor te piso Unde oe omar the t piardl more transl wen tn pice mit oad Sevburd to musing mor dresase domomeaion ot te Siyet f'n change ftom pein optima on say tm mado no sum for ioe incon to a» | ickaiee pase ct Coos ete ca ake ec ened dots denn mathe ther exe mateo eee for ded Inco i sl macy we tm pe ot — = Svante a ie yer he as fia centr avers vs tnd be pt B i boo foe rete Wands when thy tad Tins ben pes ort ey Ln ted br pr LiL | Site aba the tere of dents wien het Hat Sf hinds we san fee thy show have eon otis ‘They wee, however, corey optimise about the fate of | 43 inden te tise the dal wut eed in 1904 ad geeaees Stain ohn on fi ed ot x pom evter ‘Bas Wither rnve opm today be no? Ony he ———— "To STOGK YIELDS g [RATIO OF TAXABLE 80ND YIELDS{1 4 Fin the Siok Market % face can tll, What we do know is that vied om i tuto eam ie todays sock Bayes what they already Ba¥e tym here te tend of the sock maeket wil depend Pa or era viens incranc that i aceady i the ot Oat wheter the increase in dvds is more OF Tes tan expected. Fa ese of avidend income relative to the price of ‘nna Paces reveals the stock market expectations gard ian rue rend of ideas, 0 do comparative pies of ing the (a aed stocks foveal investors expestatons epnding the relative futre ends fae rc bincaes develop tii own jargon wb ik ar ee taing and at worst incomprehensible 10 the a en Greet i no exception. Since the financial iat aths of intrest ils on bonds and dividend Socks, mould be merely content 1 alk eat ee ofa aswel at as though 1 avoid the imputation that ngs yids 9 wea of smal minds he financial community Sade inden by the rie to ge the dividend ck Fee ed and divides the price by the earings fo ¢ (he ta orgs rat or examples 2 xock peys $30 8 34 ce earine cso 100 ta dividend ged 3 percent. I tn iver cares 350 a share is pcecarins rao a ve meaning would be the same i Wall Steet talked of stem caring ye tat shop nthe ange se Main one stock sells 10 times earings while anther sels 20 es oedng te inference that the market (hs the 29 times care curr money) expects the eaiings of the onsen ing atthe higher pice 10 ineease much more Jamfordecne mach more wl) than he easing ft ‘Eiingunyseliag athe ower pee, ye od the iver ail ha t guess what the Loe te athe ean be elaively press nis exons tara the sock markt experts the future 1 Hol ha te point ou sme of the pitfalls in une lta on Samings rates for comparative purposes, Like Tee etn th hands ofa hid, they can be deadly dangstOu Bilt sen pmm eter ay ena i ci ied 9 tO nore ri, When et lef omen if ae ir moc ee crm a I ee rm ta id Pa ea100 nthe Stock Mkt 8 “To the expert they are an essential tool Properly adjusted and {elated Yor good general markt page such ss the Dow Jones Industral Average they become Hope Therometers No goed doctor would presrie for 3 paint om te buss cof a thermometer reading alone, But Ihave seldom seen a Aocigewha dd not take my Lemperatare as prt of his examin “Goad invesment dactors vse Hope Thermometers the sme ‘ways Because a piste is orth a thousnad words, and ean bo read much more quicly Seudder, Stevens & Clack Keep Hope "Thermometers on thotsands of stocks. On page 7 i one ‘on Polaroid forthe lax wenty year. 1 indeats that hopes for Polaroids futire earings exacly equlled hopes for the they Tend companies inthe” Dowrlones. Insti Ero the 1970 low the market price of a dollar of Petaroid earnings was rll more than twice the pice of @ dalla of Enmnings of the Dowlones Industral Average. To warrant ‘har rlaionshi, Posto earnings rst more than double felave tothe Bowlones lndustial Averige enrings and do fe well asthe Dow thotetter. But there wil be no sound thas for expecting Poros stock to oan the Dow Jones Instat ASerage unos. after Polo's earings more thm outs, the outick esl more favorable for Polaroid than forthe Dow: In effect at the 1970 lowe the Polaroid buyer wae fying tothe Polaroid soll: “Tam s se Paros earsngs ‘il more than double relative tothe Dem that Lam wing 10 ‘ay you now what Polaroid would be worth if hey hod already ‘ore than double, Why wil do that? caine Tebow that fatter Polaroids earnings have rsoa 10 the level Tam pow ‘ying for ey will continue t rise faster chan the Dow's ‘Al ths shows a high dopree of contideace In Polaroids ‘utero, and great saifconsidence tn the buyer's ability 10 fore ‘Soe Polurl fue, Both may be justified. Time wil tl Bat fs investors we play blind mars bu wless we thus define the implications of lave prices "The careful observer will mote thatthe price of Polaroid anticipated a record Fei searing tlave to the Wrage iui the Olde » pe i lt ‘of they leading stocks atthe sume time the price of teding Mocks was satipating a record rise in divdende-eort of 8 ‘ouble whammy! Becawe ws bate talked aboot relative prices, relative care ‘ngs. and relative price-carnings ratios of relative eutipher, itmay be helpful to look ata chart which shows all three fogethce Here is one of Aon Precis covering the IGyear Period In which an inital $10,000 investment sa the stock ‘would lave made ox milhoaies by 1971 ‘A stock's pice may ese because ts easing rte or because ‘he price ofeach dollar of those earnings ses, 0 Doth. Ik a1000 Tn the Stock Market PE On pirerty stk I crnag $2. share ad cling $0, he prc ofeach ‘Sa often crings 10 Ite sok ears 83 a sha the mex yours an he price of ech dolar of hens ering {nas a 31, the took rp wil be $30 Dat tas fen {Sppensthe pce ofeach dlr of te soc’ ering ee teraay fw Si0 fo HB then the stock’ price wil Tse 1 {inch vor oS ure ow grew advnces nth sock ‘mule ea om som such combination Of Tag sana SREWE ie Fac The relive price of any stock mot be derived roma fs ily cave caning hs O mis ony hangs (ni slave male or pecans rao. That Sp atime AS'he von Product chart shows, te peu se Un tbe refine pes of he sock war bared os a sicep al estat Savance i Avon Preuss eative earings. But io he {SCompmying vanes he eave pc pa foreach dae SF hole Ctingy, the Hae In Avon Prog clave pce Slolinthve Scent more than bl wh actualy wo "Tis may are to bao the Ovi, bat many nos actan iment om earnest hy al 6 appreciate the of ‘ing prec snare of changes ino market pr of ‘Sh dlr tne arming coer as and ate fekvenrnlogs ron tenis invesorcxpecationsOines Tore thon hu of herein the pe of sock de 108 Shane neo yebooe. ‘Papago wo he pchoopcal coment of any sock {ce advance impor for two fess Tc Whar goce upon a rae in iver enpectations ean go | ovo fa tote expectations Hot ean occur wit Sy change repre caring 2. tire for seasoned ska hate rice | xsi area fence when a stot sos at | Bimeears eh Dow hea 15 mc a ins the pemostne tye bom nse (0) tht is opin out the wks future is widely shared, and (0) that the hance af fer toe i he price ofthe sk due (0 8 fren iff psetrigs rato ae im. What ings ration. Figuring the Os 101 ‘hs mans he bayer mus lok o fre nro a arog wo cay al of he burden of ony futbrSnrese i {ie ments pce which Norettre has teen Med to by 8 ‘Soins telatv earings andy te Wwe pce _Enmings tin “Ast een res one bundrefod i coming incraiy ‘mnie fold whe tpi earings rai inten fOr. (554 100, but i es pecan rao remain. we ‘hanged ite earnings man Inrease one une 1 pr hae tas au, pep atm bores Bh ka pee ‘arming cao shuld be halved, Ks cumige mus dub us ‘ote is pos encnnea ‘tie mo more unsound to buy a stock in anticipation ofa rag] Rebod in ite elativeprice-carnings rato than it to bay a stock in | PE “nteipaton of arse in ts relative earnings. Deparunet store | Ray buyers would be atpid indeed they paid po atention to fae | ‘and ashons Bat ts unsound to buy any stock without kaos. | 1D int what extent it evened om Ke elative rang ad how mc iti aed is eave pice craigs "Thera is such thing 8 rect pege senda al ‘Nor is thre a “oerec™ aie pss sings raliow All de ‘eal what the Gatnown fete Bape Tor Bt ove oes fot have 19 bea financial genus fo tele tha when he bys ideal ol ane igh rete prcocartags rato by omeone hati St now Tor What & hoped or iv ihe aie? sagan tue. “Trg ain to the Avon Products char, note that ate | ‘a 1987 Avon Products sock sok at lower price-earines ‘ato than the DowJones Industal Average. By the etd of 1569 each dollar of Avon Prodcts aruings way valued inthe ark at moe than +172 tes the pice of each dalla ofthe Dow'Jonos industri Average earings TT Avon Products price had advanced and declined propor tionataly to the Dow from 1955 to I9TL it eelative price Tne ‘would Have been sight and horizontal, IF Avon Products {plate erring had increased and decreas proportionately {Whe Dow's, Avon Produc relative earnings line would have ‘been stmigh and hora. Finally f Avon Products pre:a sugyat, once ge Sought Used og cttieke We car RA Na “Soings vaio Had Yemained equal rhe Dow's, that fine 400 ‘would Rave been stright and horizontal Going forward in ine {rom any pint on any ofthe tte lines, an advance above the orion! ora dectie below the horizontal shows that Avon Product price, earnings, or mulipicr has gained of lost omar with the DowJones Industrial Average "To me the pltore naguests tha: 1 "Farther tse in the pres of Avon Prodocts stock must tepondTargely on further gains in Avon Products caring. “Fines confidence n those further gsi in Avon Prod cis eamings must stay High or go higher te sock price ima of ting eanings ie not to be offset by a declining tpi. von Products sles and earings must grow co thes oF for dacs the greatet they over have Deen fest 0 suppoet the 7 prise of Avon Products sock unless iis assuned that leven ter Avon Prods hak eipled or quadruple in ie i oapect or frie growth sl wl be eter than prospects for tee Dow ee Tce" comments seem inconsistent with my theme of| Wy Fh and hold oh" T welcome the chance 10 make a (Es ‘Buying ight wil do you litle good unless you bold on. holding on wil do yow tle goot—and may Jo you great reyunlese yom have ough sgh. ‘Ater a sock as en to 3 times what you paid for you ‘ean be quite sure you have tousht right. If i doubles once ies yru have your 10 for one. You ca afford (0 run sme Tak fora teward of that Ss fe The new buyer face diferent problem, He mist ask and 7 angmer coset the question! "What are my chances of making {00 forone fom hore?” Ax we saw in the ease of American {nity no bp, a eomet asm it he uur aveveivant And unless those esumpuons ace matecal- Iy better than the stock's pice altemy t= aniipaing tere Esl po pro in them, = Tae alue analysis provides no final answers. 1t does help to define what expected, and thus afford benchmatk eatest which the investor cam gauge the pit poten in ‘Mhateverasumptions be chooses to make. Figuring the Odds 103, ne ght ght of nih cn te be sen ta the otk nantt ha gone wanted evens: cok et ihe eu fo pote on he tote int hse ear Tou temas tom he cone teeny o fee ef ie ha om spy Rea mato tein tec nc monty ea omer om sp Klien tne "Tin wold oumtiouar toon ma Sie The incnpent ost son b dog ound Seen one ats to ves ek mht he aioli wat Iisa beens howie,Wis shoul ge Ta le aS ent se ns tts mt geen ar conmanty rltng oF apn. caus ‘hr anctitbyfspeemel Jog et earning the hard way. = onder fore tno hat Bc 20 one, s] wine the future holds lof ts are ened to gues about ‘We shoud not forest ‘sige ower a wid ove ‘tow ean ou eilculate thi hope element (clave price camings eal) for youre? ery Mond, atthe Hotton of the fst column on the next tothe last page of the Wall Street Journal, is eeported the pricecaring ratio forthe Dow Jones Industal Average (Gee latest pice for your rock from any newspaper Divide that price by the per sre earoigx ofthe stock forthe atest twelve months you are a stoekeldet you can get the er Ings igre from te latest anal report. 3 are only think ing of becoming a siektoer you may ind the latest twelve ‘month earings a share reported in Barrons Stock Market at 1 Glance It you Have aooas to Standard & Poor's oF Moody's Shana, yn aa find the earings figures there. Your broker aye wiling 0 Tonk thems wp foe you Let us suppose your stock eel for $60 a share, and hat iu atest year's ehrnings are 32 8 share. ‘The peccearines ‘hough, tht an igformed pues Has a100 tin the Stock Markt 104 tai then is (0 shed by 2= 20) Let pp tat the {Ein trearaipe to fred forte Dow 3 Die Sethe icenmings to for por sc, ty 15 he mee ceria for the Dow. The amet of couse 2 Tis eater ping ee mh forsale SPE fet eal ere tr ee cae of Steins he uy Seat compare th Dow Joes Ina “ike inference that the market (hat the consensus of wine be cay ecpee g oul el pnt ok cre hivch move sail for decline much more slow) than the ‘ngs a ihe Dovronor Indu Avery Ung his tel you ait hive ones nit te futebol fr your SIS argon sr on facta bse of who he make Seehof e Nod for yor Host sav taker stint ou aes tan ee a Specs you Wek spun operetta a th fuer expects, you sl, Bat oal i the difrence between Tine ou petted tran ket epee et en Wei jou dwelt ser lowing your a wise mang oo Wiring thas made ace othe ie f prea ton 1h mo sme te hans in dg Tee oe The Quality of Earnings Is Strained very age has its mass delusions. So, suppos, does every ace, nation, an ocupation. While m dctsion pervs Iti ionesome, someumes dangerous, and sways unpeait Ak to say thatthe emperor hae no lathes on Neverthcess shall put my head tough the set and sy that to my mind ‘one of the worst delusions of the investment busines i the ‘wcrc wae of prccearings ration, oF mone specially the Iisse of piceetraings ratios, 0 arive a fea evaluations ‘of various stock and stock grows AF Bastaly the fallacy of using prcoarlngs ratios for com- parative purposes the inpied assumption thatthe eienings reas compatable as the pies, We know thi he prices are ‘Comparables longs the quotations ae crpresed a he sae ‘currencies. But the earings of diferent companies vary 39 fc ia quality and hence in valoe Tate mg a Well Bo omparing cows and Rove of The ass Of How Tat they ca fun Wher Tac bsstion of socks anced scoorang ‘owen of thee pies divided by thei latest years reported Samings, am reminded ofthe World War ¥ veteran who lot his job and tuned to begging under a placard reaig ‘Three ears in the trenches Teo wounds ‘One wife Four children Seren months out of «fob Total seventeen ‘Mea hel, volse Finemre aay Aceon iQ te Cnluserd Soe 10000 Tn the Stock Meret es w Lot me make plain tat {am nge implying citer oily cocmovel forth ea that picearnings ratio, ke martini am to very deceptive. Noe do mean 10 supe that pres: Sonal sccoty nmupets ignore the dangers in tnceiteal a0 of pricing rts. Far tom i All Tam questioning It ‘beter a Investors we ty ard enought allow forthe TCrenes inte qualy ef curing: Do we perbaps sometimes to lip serice to these diferences whie wing statseal Procedure which ignore then Docs ou presng need to reach tore investment deisons fate tempt us to sss over dit ferences te quily of earings because, feral hs trsinest one mus be fpeetica? Let's se. “There ore fv npprosches to the prodiem, One might be calle the accounting approach. ‘The other is perhaps best ‘esrb an concept “Fhe accouning approche the biter known but my ind te coneepnlapprosch seven more mp. syn tat ‘ao no ean t belie the sigiteance of accountng vai tions and omissions, Ifthe sock market clock ever ster ‘mnight spun od on September 3,129, Leonard Space, totrman of Arhut Anderen & Compan. wl bo one whose Psa. couch ould not cara imo'a pumpkin, No one bat done more than be to deflte the "accepted practice” bal loon which for so many year ha ited sharp practice to speci. Tack the accountng expertise to gd Mr. Space’ is, tot Uo want to cay a erecta loud “Ament to Bs ealy ‘inicio corporate reporting of lease financing. 1 nya sree needed wo pont up ibe gif between the owner ad the Tiumagers of sone busncacs, it could te supplied by the Thue of some managers ttl the owners the amount ad {crm of ae financing the sume dol a they mater fhety dciow the amount and terms of oer longterm blgtoe. The accountng profeadon weaseed ut ofthis fr decades ty saying that wa nt accepted accounting race to show ‘acerued rents a a bi Accordingly when # corporation fold is headgear bullng, or factory, oF tanker, 1 an The Quality of Burning le Strained wor Insurance company, the leased it back for period of years ft rae sficent to repay the entre purchase prio plat Interest, the tanseton became offblance set financing jetermvof which all (often were iowa only t the ana ts ofthe bases "Those ae atria facts whose absence Im dploning. Take {or example three companies with S100 rlion cui each, {All wis 0 expand, Because each i earning 20 percent before taxes om te fvested capa. Forth Huston it assume thatthe elfetve tax rate 0 percent. “The fst ofthe thee companies lsee additional stock 19 Increase its invested capital to $200 milion. The secood sell 8 percent fonpacen bonds to being it invested capital to $20 lon. In each ease, wheter we appears oF not we Lest [now what's going on. The first company, wit all common stock eapitalistion, eonuinues vo eara 20 percent before taxes, TO pereet after taxes, om it invested capa and on ie eau. “The second company continues to earn 2) percent om is {nested capital Btore taxes, Dut cart 16 percent em ety fer taxes asa aut ofthe capita leverage. That percentass {sarived ata follow! 20 percent of $00 railion exe 0 rion es $8 min iaterext on $100 milion of funded det leaves S12 mln es 80 percent corporate income toe leaves 16 milion whichis equa to 16 percent om $100 milion ei “The third company aegaires $100 millon “of aditons focltes by lene financing om ferme which amon to 1 por ‘cent interest. Sinee nether the arount nor the forms of tie lease financing are dcese to the investing pi, an since te fase obigations aro not shown onthe balance shoe, the Investing public f cncouaged to conclade that this ihind ‘company ow seaming 13 percent on fest capital and on ‘equity. The 1S pereent is calculated as follows: Eamings of Dt percent here wndscloned leave rental ad tates om $20) nilfon of asses amount to $40 milion les $10 milion of Tease rentals teaver $30 millon less 50 percent corporate income tax Teaves $15 mllion ‘eich equals 1S porcent on S100 raion equity: Thus we have thee companies exh, ‘employing. $200" alion of sat, each caring 20 percent100101 the Stok Ment 108 before taxes and undisclosed lease rentals on each dolar of sew employed iis busines, but one epparenty earning percent ater ter on eguty and on ihested capital another Wid sched leverage caring 16 potent on equity and 10 pereent om vested exp, and the third with undisclosed [Rvcrage apparcttyeaing 1S prceat both On equty and on ‘Suppose business turns bad, s0 ac that each of our three companies earn only perett before taxes on each lat of ‘Sct employed in ie busines. The fst company wih the all ‘ommaon sock capitalization eurs $ percent before taxes and S12 porcen alter axon both invested eopital and on eats ‘The second company wit te $100 milion of 8 percen bonds {Earns 3 percent before taxes on iavested capital and I percent ter eacr om equity, The tures ae arved at as follows: Preta earing of §pereent on S200 milion equal S10 milion Jens 38 milion bone interest eaves $2 min toss £0 percent corporate ingome tax leaves 31 millon which i 1 percent on 10D lion equity, Seoury analyte could foresee te impact Sth deetine in business on the second company of cows, tfecause they had the pertinent facts about te capital leverage ‘But how about the te company? Stl assuming precisely the ‘Sime conditions that we applied tothe fst and second comm ris tha iy 8 dotine nt pretax earnings on invested capa From 20 percent to'S percent the afta return on equ of the tied company would plummet mysteriously from 15 per ent tozero We ave at that gar thi way Pretax earings oF 5 percent on $200 mln of ase (before of blace Shoe financing lane rentals) amount 0 $10 milion, When we ‘Seduc_ S10 millon of lease femal rom pretax carvings of $10 ution, nothings fet. and wien we mansgs 10 foret out the details of lease ficaning, which the wlan the east, we dscover thatthe fede onthe capital employed i the busines f 8 percent but "at he ref onthe equity bet ben wipe ut by the neces: iy of paying 10 percent on the lease rents ‘Management, of couse, i fll sear of all these lease fining deta, but nelthee Management, the company ‘The Quality of Earnings Us Strained 19 autos, no the SEC. thos for has seen fi to rege sch ‘ial saa sia co lnveror, T means coming under the head of iformaion which the owners of American Bi Dessare ented to hive i he sae dal deb in times of tongontinued promi. wit prices. profs, and basnes woe al trending wp, Seems dma rp omsuch mars, Yet we nore there pie charges, we Img aswel ignore ll oer too, and henesloth consider nly te equity ea py forthe burns financial come monty to fone undone hore things which ougt to be dove. Scones o ner some ere rt ook gras the ball sc fun with st peeing the final communis appecat st goat Ws ott tact hm reuse we nw ie only ng Abate shoald have de long ago. Many other examples ould bs led but they he len in the noms Td there ace two proaches otis mater of he avait cleaning, one accounting, the otber conceptual. Lat 100k toe concep Part of te companis earings i pid out i dividend “There dvdendcare egal to each ober. dia or della, Your ‘ocer never asa wheter the mony 3ou pa him eame fom ‘Snidends or interes He ould cate But how about the eruings not pi ou in ividends? Sup. pore shone retain earnings were ale, wit wuld they {Son be worth? Mowe relay: mppone they ae insta in'prjets which o not pay oi, with the ros they ad Suing to he companys earuag power. What then tthe Proper prises is wc ch eal sould My fcling that sich plows ack corigs ae ented to aout he sme mult iven to the po share deprcie "inas nomense* you may be thinking “We don't apoly aay miipion whaidovr to depecition im figuring the salu of tock "Tat eel the pin am ying to make As ives, locus say wo uy company cacnng 91.00 por shar, nd Pang uh each yer in dividends 30 cons ashe Wa the end10201 the Stok Manet 10 of five or tem years the company ig il earning $1.00 share fn sll paying we 50 cents share iden, what has happened tothe caning retained each year? The answer may berthat they have heen requted to manila what we bought Inthe fit place. But that comes close to beng a definition fol a charge for depreciation. Ip unrealisi therefore to di ‘epntd plot back cami which fal to pesiuce any provement Inthe caring power of the busines? Tete aot answer that question to hastily. Suppose we have two companies each earing S10) share, each paying 50 {cones sare i dividends, and exch fing fo show any got in'camings ata reat of the plowed back profit Betore we ‘Conclude that one ist bad Investment athe other, ta ote that the sales ofthe int company have been increasing ithe rate of 10 percent compounded ammally wie the Seume of busines done by the accond compaay has Bees ‘eclnin 10 percent a yea, et pone that the ist company ths teen buying” adonal busines out of its peta cating ‘> elfoctivly that i we capitalized the additional busines Feinythe aise earings would Have shown a ce increase? By the sume tenis nat pouiblethat the second company fi conly managed mst ts ecpored earnings at the tating level by select guidacng Is business onthe install ‘ent pan, thereby aking othe income account some money ‘hich in ceononve theory should have eon tur of eaptal? Few would angus against the proposition that» dalla of cxtnings of the frst company is worth more than dollar of ‘hvnings ef de second company. How mach move is another ‘Question, The amower to that question depends primarily en ow long ome i prepared to saute the futore wil be ke the ps. The evidence overwhelming thot the fate wl Be ke fhe pst for 4 te wile. Whom the head of the Weather Bureau in New York City redred some years apo he was quoted fs saying tht # man could make 4 prcly good fecord a a Sreather forecaster by. predicting that tomorrow's wealber Toul be like toy’ Since we fond to have peeiods of flr Seater followed by rainy spells, weber forecasting, based om Iothing more than a look owt ofthe oie window would be Fiaktmivch more often than no eter Bee eee The Quaty of Earnings le Strinea m1 Since forall men the visit ofthe fture 2x0 beyon this mtn, snsumpdone 3 to how long observed ten wl ontive must be based on probabilities which in turn have {been devived from the pst nd hence may not apply to he future. This is Tongovinded way of saying tha ll exnater of the fue ae to some degree subjective. The usinss ofthe stock marke 1 cash i om tho furs rom According ely a ions! hence a o know what other investors are pom 1 Tha they Wil be. In general te lonser 4 tend continues the more Pople cane found wing to risk their avings onthe poops tion that wl contiowe longer al Ava practical maser then ‘we probaly shold assume that old tends il erst foger than new ends imply becuse, tether they do or not, more Javestors wll be iene tose tae they il Tet us etur for a moment to the two companies cach caring S100 m share and each ying 50 cent share in ‘ividende, wlth no provement ta ether over the lat fire Yeats: Let w farther awe that there ae con mo change {he relate sales of eter company. Surly now we have the bass fora meaningelcomperiaon of prie-aenngs rato. I fe of those two companies sels atten ties earnings hile the other seat twenty tines earnings, ovr course fe clear Orie ‘Let us assume that one of the to companies has bees spending SLOD a share a year on basic tesareh which ths fa Is been touly unprodueuwe. The second company hae been spending nothing on research. The fet companys earnings ahi are worth ore ha he eco omy amines 1. The fist company has a chance of striking trick i 1: search a any moment, The second company. doing moe 2. The ist company can discontinue the research program, fn which ease, eter factors remaining eal the money Row being spent oa research would be added 0 pret camings. The secon company, dong ho research, has ab operant ‘eu expenses by eliminating research program, Ro10 40 Hate Sick Meet te Sate on Sx OMS instead of research you sutatiae prospect fr mineral deposits oe widcatting foro the companions between the ‘80 companies would be affected in muctibe same way. ‘Some readers my thik Tm reciting things they ave Long. known, Otier may be feline tht the theoretical istatons have used are extreme and unrealistic. In prctce” the ater may he saying to theres, “uch askmton do mot amount 10 enough (0 alter my investent T stl not arpue gaint anyone who contends that in mast caver sch vanations as Thave ted would not atr an vest tout devhion reached white ignering such vatiatons. Nether ‘hall Target ia most eases when you get nto your auto Tobie does not mater whether you fasion your set bl ‘mot Bt jae fastening your Sat ele may at some tine ‘Sve your life, so serpalous attention tothe wide potential Savlaons in the quay of earnings may romelay save your Let ime cite two or three more way ia which $1 of reported carmings of one company may be found fo be worth substantia Iymore orlem thn $1 of reported eamnings of another company [two companies each reporting the same earnings and ying the sme dividends per share, cach showing the eae ‘tue of sles prowth, eich spending the seme emount on Fe Scurch or mideatig, show sharply diferent tends in Yowtories and receivables. The fiat company has held Is Inventories and geceables In roughly the same relationship to ier volune of Dornesr at previous yeas. The second ‘Company hte Bed down Hs nit ost of production by usning Se pants at rate 10 percent bighor than warranod by 1s {ate with the reel hate ventory bie increased shar ‘Aethe same tine, as. sales pick, the second company has ‘een sling ponds nm extremely heal ret forms lh the rose thi i rocelvables have risen sharply sa elaon to the volume of borne bing Jone. Who would argue that {he camingy of the second company are equivalent, dolla for olan, to those of the Ws? ‘pve companies of equ size, with the sme caraings and ty Fie Quail? of Earning Ws Surainod 43 ividends per share. cach spending the sume amount on Sareh or wideating, exc showing the sme sles growth, ‘och ainiaining receivables and inventories at the sam ato {othe woe of busines being doe, ar stely near enough ake to make meaning compare thee price craigs But the it ofthe two companies eon a good cic. $e ts wate water has bean pred before bing etumed 10 the her on which fe factory sated. Obwosius fmes have been removed fom the ics billowing out oft chimney. Soil urn overt hs sripmining operations has bee lad Seaped and planted to tes and pas, ‘The vevond of these two companies has ew corners all, tmese matters, The day fer the dencal erings reports are Fue the second omtpany trbit by cout orders resuring the ‘emedyng ofthe steam and ai olution, Is made defendant in damage mits trove by siete neigors i the name of colony. Before the bate f over is earnings ae al those of {heft company, which ook is ceoopel stitch in tne. “Two companies report the same earnings One does 20 iter paying competitive wazss and up adie is hey person fe The otbeP aoe by syacerng TF ERTS oe pat ter the best men eave andthe who emai te ie for ke ‘How can you as an indivi investor adjust oF co reported cuming for sh diferenccs im quay? In foading Sn reports jou can tok fr such variables a The Jt hed. 1 no Job for an amatesr, though. partslary mot ster ig dinner Close teaing ofthe financial prs wl give ou some profesional hep at low cost. Detaled erica of orporate accounting hve been int inthe mows recent Seats. The New York Tomes natal pages. Baron andthe ‘Wall Spee Sourna ll have ented such ates i the ast eer. Exposing accounting pinky fos become a asopied Fatt of the financial porters job. Ics an inpotan prt of Sat scerty anal paid for "The best soepuard agaist lelghtof Rand bookkeeping is to have nothing to Jo with tor wth the men who proce See the chapter ened Profs i Ethics. Drehe Com pens \-CHAPTER x1 t Manipulation Despite the SEC vent yearsagoina Wol Sit fourna eitral Chas T'buow wre: "A method employed by some operators of lange periance iv that of respons The theory Meise this The merket us afvays under more or tse Imumiplatone,-” Wim Potcr Hamiton, who flowed oma eitor ofthe Wal Sven Joumal wt nt denying he Aheory, evlreds“Mnipiation In the stock makes i re ported 3D mes for once os ete etic epoters Tuthod of accountng for stock market movement wich be fos not ten the tole to ondeatan.” ror thon then asp, at bce grins te law. The Securter Exchange Commision both ‘onions he market a prowoates manipulators fap tion thing af te past Teanmor sy. “Sotme of my bes frends are manipulators” 1 dour Know any, Bunt sors vaca Where there re opportmtics for profate maipuaton in ly incr Shona naket Taste tore re manipltor, some of hem beyond reach of ou autorides and aus. My reasoning the Sane at hat which fends me to expect t ind eoshroates in ing kitchen, What they foed on chee. “What reson the moe obvious opportunites for mania tation inthe sock market? ‘SA Melanie hook, The ABC of Stock Speculation tat deve (0 qnine Dow's aioe he bse ‘portunity for manipulation in these words: “The great tae madety che ph paying tention to rice send ‘ho valve” Monipuiation Despite the SEC us “That is ws true today a twas at the turn of the century ated the stock markt inthe late 194s was Base on paying ‘Bat what do we mean by paying attention to peices eater than values! 1 quote The ABC of Stock Specuaton ain ‘tnply wo emphatoe ha homan store ome ofthe ow tow ‘anton ever-changing word: Ie oly fait ay thatthe Dublicrately sec vale tlt eon markedly demoted Ee an he denosaon comer sna et igh rice It emer fr them, m experienc shows, to hve {sock Is cheap when it eaiey dear than to Bere heap when te more than che 'Shoodng whore the rab wat one ofthe most common investment crore 1 hve sid blor and sal ay aga, ‘Time alter tine. year afer year, men who wosld hou were crazy if you fred your gun atthe ape fom which 4 Tabbicjomped a moment ieforer buy stocks tat have advanced fa sll aos ha have Sehned. Even tcury soap ae Mlecing the aides of te Investors they ae’ opposed to tiie, tend to ik tacks bor tether ey po nfo be ome increasingly dseachanted with them ae tel pre al The stock markt simon unique I ha the way 1 act buyers to markup the pce ofthe merchandise you want fo sil Comers, fs lange operator wanted to accunuate Ditdoa ins dock wil pent longer potntial the Tet "ective thing he cold would be to tilep for ie Om the ontary, i he coud supply stock on each embryonic advance soi stes year or me specltrs ged tha twa Sine ‘dy. they would sc Bm ll hey had at successively tower "The money tha has Bee fost by Mave sales of stocks in is rent and growing ountry probity many times exces the money lan by ume parcates Yt the SEC so fr ab ow hasnevr ured is eal eyes om cae manipulation {0 drive or bol pices down pets bocowe It would be Amos impose to prove.10010 Tin the Stock Market 16 Dow wroie once that the eller Rothschilds ais sid o have acted onthe principle that i as wel to buy up property of inowo valve when ees wanted #0 se, nd to sell ben shor ranted to buy. There ha great deal of sound wisdom in thi” Dow si he pea a whole, ge tthe rong ae and ell he ‘wrong tint: The reason is that makes are made in party Imanipulation andthe pbc us on maspolsted vances and ‘Ktcr they ave well along. Hence H bays athe time when Ioniplators wish wo ell and Sls when manipulstors wish t Sue area of possible manipulation and abuse of inside informatton to which 0 far a | ksow oo olf atention ie ten pl is via corperte acquisitions or merger. Most man agements srupsleunly wil avoid any personal Tnvestients stocks of companies they might someday hope to acquire ‘or itall men wee honest there mould be les crowding our "Tie apvortiy forthe dishonest to play with marked cards in engorate acgubios is grea as.a perusal of Tales {and Till show. To cash in on ach opportunities, top managers Would not even have to buy ap stocks in companies they Planned Yo take over. They cul mate weadised personal Purchancs of soaks thie fonds companies were to aur, Ud ice vrs Bid of feather lock together. ‘Many peopl innocently anume that sock price are mani tated simply by conspiracies to buy them 0s 10 mark Up} their pices Actaly tht probably never has bec the pring {ool of manipulator, Ii muck move effective to manipulate nthe ad old days of the 19205, raload reporters on the | Walt Stoo dour wed 0 tke i Yor granted that atoods ‘would go though exsee Of heasy malotenance expeniies {Ind ow earings followed by light maintenance expenditures fd high earnings, Koes all dope witha staght foe. A new tanagement would go over rallowd and "aacover™ that is adbed was in oor condition. Years of expensive betterment ‘Mont follow, Sometimes dividends had t be eut or omited Lo Manipulaion Dest the SEC a say for puting te tack t pod condos, Not rpcgy “Then wold come say whon ce propery wat ch good shape tnt maintenance expedie end be reduces Bae inp roe and wih them te pee of te sok, Inveson wo “Vesrstod the prgram Soup when comings wee de rowed tnd od EN baagh ves beneling Cen 0 Honma nanensnes raor ies arto sy tha so companies il manip thie cating, the SEE nd the eon ie asouning prt Noting harder for scurty anasto fee than harp changes corporate earings reling Irom changes athe iniineys pric poles ean of cuuhroat competion suddenly pe we (ns snemanhy which oh on ive beck oreo! by minitater ‘The’ comes i oie ‘ater ostpme teens follows overexpnson Inde bya prog! pero! of proses. “tne mor of a th take os back to Mr. Haron, “The ‘act without tbe thi Tae, Alvnys comoct" Whee pou ted a ten sry on impny oe sock ho Sette tb hed ot wie kas wo rece yc ag ook your tot ony wher he ory Hg et is hy was pe ‘Shs ate date may ft ot Sl hy eg ims ea a geo re tow ve eis see ut for is pli teré weed be mo maples. ta ‘Altea where eve ato tnclope tee av koto,Tedereak anal ancl Wh) epremrg fn monde (AMP we ine CHAPTER x . Keep Your Eyes Open on Those Random Walks tele expee wo hone by thir scions. Neither tnt todo the other a favor: When a buyer and seller tke the ‘pros action onthe sme stock a the tame moment. as they imustdo fo cect a trade, + pood guess tha they do mot ‘hink alike, Without such ferences of opinion the stock market awe Know it sould ot Bo Tina barnes thos fase on ominous ow of eametrca ty opposite opinions would note surasing I there were Aictences of option shout how vo decide whether to bay oF GH There grees ferences of opinion abou Investnent Pilosphies. methods, wchnigucs, and procedures are many Evan Among them I hnew of none more highly charged vith emotion than the dillerence et opinion between the Treated famlamentlts and the salle techicians Thave been in both camps. Ny eoueluson after forsfour yeas of stwcrention al tly that fecal work aot an tcrative to fundamental scunty analy. Rather 1s a ‘ean of proving ational information of sipicaa value tn reachig profitable invesiment decisions It seems to ne import for the professonal investor (0 now a al tnes mot ony who ought foe happening in the Iock market ae determi by fanagtetal security aay tht also what pening int stock marker, 8 determined by technical work, Good chars merely. porttsy information ty fll informed investor should ver Whether he get his inriom inca loro mo res tipo S tocksare bought and sod because hor he buyer ad the ‘Keay Your Eyes Open om Those Random Walks 9 0 Jong a be gets. To me a picture worth thowsind ‘word Hence chart ave tin. analyst nods technical assitanes. ‘The fit reason Is that 0 tater how good anys ae there always chance that they do not knove the whole say. When a sock persistently {ais to aet the way sould on the basis of the Information Tinve Peonciade tht Tam misng someting and redoute ty efforts to find out what Is Te other reason tbe fundamental secaiy analyst needs techoical asitanee io help him recogize when bei tong thetint to get the gla ings and when he fe mong the se ‘What ference docs it make? Simply the ference between foreteing «pce advance ad expliing why one took place ‘The price pot secs is always with ws. "The fs the buyer ‘hse go om the sr the evidence, the lower the pie: ‘The sore sd the prot the higher the pie ‘Wy do price movements sometimes revel what investsn: tion ses ma Simply brea mo one except manipulator test his broker. A'man may mica his cmmpetitors, old futon his fellow ecto, cheat his scold, a two" fine is wit. Bat wen he psks up the telephone a tells ie broker (0 buy or ell he express the vet of all he knows, ‘opes and tems: Even manipulators Know better then to ry tomaie water fan up hi The compote of al is nate aise tls sor tal o busiocman of investor can aiford to lnore Neihercan he afford ory on matket analysis alone: When the experenced hunter fds elephant fount gins up the Side of « bur, he stops tacking and looks Tor a practical ote ting the meaning out of almost infinitely varied price fMuctuations snot cay. Sometimes I think Ht as complex and ditt as any refining proces 1 know of. Hundreds of individuals, sores of fis, have perfected methods of cor relating market daa which they regard as rade secrets. shall. hot ty even fo suggest what they might be though T suspect ‘amounts of dupiate efor age ivelved.100401 inthe Stock Merket 10 For the individual Investor ts enowsh to iow two things 1. Most prise charts fall to one of to elses, 2 Actua prices and B Reteaes pes, ‘2. Bron he moot state chart reader can only tll what the market seem about to dos Whsthor the market invigh in what it does is another ston Who cafes whether the market fight ia what K does, if ‘only he knows fet? My acaver Is hat anyone tying vo make 100 on an invest ment of Smit care very sels Only by snoring many un (rare market movements can be achieve his goal even i Te has bough gh inthe bight Ig of bindsgh, the general stock market decline fom May 1946 to June 149 was mised, and could find should have been ignored by lavestors Seeking to take thei fortunes Inthe sock marke. ‘A rcative pce esp am abscate peice expressed is 2 percent of another absolute price. [earned the logic of doing fustrom France. du ont, one of ho Uoo oe four Waly great mua [have been prileged wo work with rhe toute with economies sad finance.” Mr. du Pont ssid “that we are alayn working with diy test tabs” Me {fe Pont new something sbovt fet tubes Because he Founded {he research department of. 1. duPont de Nemours re ave of relative prices enables oto fake some of the dct out of ur economic and financial et tubes. That isso trecause when we divide the rive (or earaings of ainda ‘ompany’s tock bythe pice or earings) of any good average ‘Stocks, we tke duro the record of hat stock those ps and tlowns which are common tothe whole ecosomy, What we bave 4 lets peculiar 4 the abject under sty. "Nov only prices bt earings and moles or price-crnins ration, we analyned in this way, reveal much tha is hidden ‘on we examine only the ata igure. ’As pow might expect when ope removes extraneous factors from the pre isory ofa stock by ding is pice by the Doweloner lndustial Average, the flao pice ine thus 510010 Hin the Stock Market red ‘obtained shows much more posistet tends than the absou.e Pic line This shoul surprise mi one. Companies, Ike indivi {as end to run ere t form Heee is relative pce chart of ‘United Frit chose stock no longer traded because I wanted {o provide an stration without even an pled tip “This chart covers the pera from the end of Word Wart to the ent of 1968 when United Prat was nerged into AMK, ‘ow United Brands The heavy black ine ite pric of United Trait expresed at a percent of the price of the Dowlones Indral Average a the cod of each month. Ifthe price of United Prat had moved up a down proportionscly tthe ‘changes in the Dosrones Indus Averaps, the Black Kine ‘would be stright and oriaontl "Nate the awesome perssteney of the downirend in United Frat once got under way in 1950, 1 wish T could sy that 1 hand conssteatly avoided the stock unt ts eave price low fifeen years ater, Unfortunatly, at tes shared some of the Hopero the United Fruit management tht this deteriora Ing situation could be turned around. ‘Note wat happened once the eave price downtsend was broken Have superinposed wo straight lines (And B) 10 fmphasize how clear tha downtvend was, and how unis: {aluble the change when the tend tured upeard lative price stodcs can bo ted ot only to detect long term trons but also ata gauge of what the stock market I "spscting To show what ian tw po bask in our memories to Monday, June 13, 1988. Union Carbide had jst eosed tio, which sequal to 80 forthe present stock which wis pili ford In 1955. The Dowsoner ndstial Average had loved at 10, Now itu spose that or earnings foreasing ‘eae perfect In other words let us assume that we Krew that Jn isoo Union Carbs earnings woul reach a record high YG percent aove shat they were tn T9S4 end that we Aa thot camningsof the Dow-ones Indus Average would Bo ‘op 102 porent. Or, puting i another way, suppose we Knew in 1955 that Union Carb earings would prow 78 percent ‘mmpouned annually forthe next twelve years. ‘Would you Have bowshe Union Carbide? oo UNION CARBIDE10010 Fi the Stock Maret t {A great many people id. Yet bythe end of 1966, despite an increne of 146 percent a its enrsiogs Union Carbide setualy seas sling 5-1/2 poreent teow the rica which sold that Monday the 13th of Juno, 1955. ‘Mesnwhil the DowJonst Indust Average wasup more tha 78 percent "ow eam such thing be? On the face of sich market scion would soem to bo una fandarental sou analyst Thore ‘ugh co bea law against such earyingseon inthe stock moet Bat wai. Whon ws look a the vetave muluplie wo se that {he market in 1983 wax paying neatly twice ax much fr each ‘dollar of Union Carido¥ earings a fr each dolar af Dow Sones Industral Average earrings ‘On the bass of eltive prices prevaling in mi1955 the market war expecting Union Carbide ermine Io tine 20 ‘ch faster than the earnings of the Dow Jones Todusteal ‘Average that the bayer of Union Carbide would be beter of ‘over the forezeable future than the buyer ef the DowJones |[ndiiris "Average, even though the Union Carbide buyer tre gelling rch ens o tart with. As ou Know now, Union Cabice's eaninge tid rise Tater thar the earning of the DowJones Industral Average, but not enough faster. "The market reaction reals he story of the happy boy and the sad boy st Christmas, Both rected identea byes ‘One boy wis happy Bocaire be had expected oth but cundy ane, The oer boy was i fers Because he had thought ho wes point to get a Muwang, Relative mulupis measure expectations: What happens subsequenly is bulish or Dearsh ‘only tis better or wore than what was expected. ‘What do iia of Union Carbide now? Now” as Lie and now” ax you reed may be moths or even years apart. AL your eureat investment advisor Ica say however thatthe ‘market no longer expecting the socks earnings to ouain the Dow's Agaist that background of expectations, i Union CCarbide's earnings sould show relative improvement over the ‘newt ten years te markers response could be que favorable, [X dren years ago the market wos expecting great tings of Union Carbide sn found merely good things to bo Uiely ‘Saappoining, Now the markt is expecting ile fom Union ‘Keep Your Eyas Open on Those Random Walks 15, Crh. This means hat goed el could prove dig Soulovenenaraig aur "tt emphasize gan th elave mules ace some: tines more important than anyother invent conidration, tore ira chat—What Makes Socks Racal the slatve prise of Standard & Poors omic average sompared ith Standard & Poor's clccrosies average forthe twee years 1954 to 196. You wil note ow prafitable would have een ‘osvlch fom ehemcasoeectoncs a 19S How could we fave Keown this tht tin? A mater! goes that we und own wat he earings would be we cou Rave lavexed in ‘Actually earings of the two soups stared tsetir and ‘ended together Most of the tne the chemicals were dang Sater han te lc Perhaps you are tinting that if we tad boon, watching relative ste we might have gotten a clue ws (0 what too Hore again thee was no matte party. ‘What dd mate the sillcence? At the tart of th period, the piceearuings rato ofthe chemise wae tice that of ine Dwr. while the pie sarin rato ofthe electronics was bal that ofthe Dow. By the end of the twelve year tho pce faring rao ofthe chemicals was about the sume a the Bow, while the prceearaings rai of the cleetonies Wak twice that othe Bowe “Turing How Wo abolute rie chars they ere studied for sign of accumulation oe dbution, and for mariesations ‘of tho great aw of ston and reaction. To show you wharf tnean by end, ook atti ify-year chart of the Dowones Trower Average, Note how he market advanced for a Sarat a comary above deine drawn tought 92 ad IBidlows Since sina chart drown to scl hat given equal mpd to equal perentage rice movements the aby of the stock markt to say above this ine means tat for more than thie years the price tend was epard atthe com: Pind anu ate of nearly 9 percent year ‘Thus a peners ton of men eae to matured Heer inthe inact Sommusity without ever expensing anyother rend bat i‘Keap Your Byes Open on Those Random Walk 1 Some came t0 take it for granted. the summer and winter. Probably the oldest and simples form of Keeping price secords on the stockmarket i what i called the poratand- figure char Ths motiod wecous peice flucuatons only, ‘thou any epard othe passage of tie. sock shoul sl Tor the same pice everyday for year no now mark Would be ‘made on ite gointandigure cha Whon tho market act, 25 many marks may be made on pointandtgure chat i a ‘month as were made Is fve yous back i the 1405. “Traders find pointandigure chats especially helpfl for signs of accumulation or istibaion, or for indiatons of ‘ction and rection. Realang that poinandigure chats ate probably te most controversial of te tonic too now in general se, and quite posily the most abused, Tam giving {fet one tusraion, Aud to avoid the supicion that T am {eying to prove something rater tan simply 10 be & good ‘porter, the example have chowen i a pomntandigure chat ‘on United Froit—the sume Borion-bsed company we ave Slkeady seen in our relative price ste. It now pat of United Brande Poin igre balls say that casi sgn of distribution fn the sock marke ir wha they call « ead shoulders Cop. ‘Ths formation appears in the Chart before yo. Noe the eft shoulder st 384/4 on Tuy 25, 1947, the lett collar bone at {HF1/4 on June 7, 199, then the head 3¢ 75/8 on February 21, 1981. You wil note that the sgt shoulder at «® on May 5, 1985, i enaty 25 cents higher than the left shoulder wile the right collar bone precsly 25 cons lower thas the let collarbone, ‘ead and shoulder tops ore not always as symmotical as that but such a nice tle betecn the lef ad the ght ‘yo means unprecedented. Fundamental analyte “know” tis jne coincidence: But wher charts ae ach 4 tp how ruc of decline does tnaeate to them? They take the de face from the fet collar bone to the head and subtract From the figure atthe lett collar bone. Im tht instance the Hock advanced 29/8 points from the Tet collar bone at 48118 0 the Head a 733/8. Subtracting 9978 from 44/4100101 inthe Stock Market 10 thy a 4.7/8 That Happen she pei ow races The stock in Decemerstfn eas nar At hat tie ines hac to fin anyone o sy. good word for the {Se Ver amone flag the method had at eas 0 Su fos at a wan pst he sk vs rh ome ia sere atenon: Aste swt val the ease at ‘Meso, bok enews andthe took were ba ‘even one sot st cart ime, the fact they ae being sovwey woe by peste funds and even Danks 8 ior peing some anenion to them. At tines thy provide the ‘nly chart the stock mare's aberrations ‘Charvinduoed exceses inthe market shoul be welcomed asjnoidng nvestnen opps for those wh untstand ihe fundamen of te Suton Iti a Bt esr to keep fre fin tmpornlydisepdadfondamenias whet one howe techn dovclopnents Bind aware buying ot seling Miimciprctaion of charts posiby is no more common andi mre sony nor an ction ch fespectedfondementelintomat a prt mare rats {eat and promt of ues. The preset danger in chris to tm) mins the tmpaton to us hen ata ged Co Wading Tiere losing sight of the pear opportnies Ia buying i ad holding on. ‘EAC Usd Fruit Supgore you ta bad he g008 foram to buy ts sock ts IHS Hw of 1-1/4 Fr 310000 would hve acqued 973 shoes ter spit Mor. Let ws ‘Grome that you bel the sock unl the bead and shoulders {op mos cone by tsle a 41/4 31 Below the Jane 7 1920 ow of A017. Had yu sold a that pce you woskd have felled 8126506. Afr Soros a capt ans tes Searegating 30 poser your nt proceeds wuld have been S5rSE Then Kt es sstome sou roinvesed Jour money in Unita Fut che fow of 12% om December 8.1980. You soul then havea 658 shes ‘Supow fare tbat by some map 3ou sd the ete ocr the 1968 hgh of 6 You MIEN ave ied that Tigre by sbueting the date Deere (128) a he pe ‘Keep Your Eyes Open on Those Random Walks br cain ow from the date February 13 (2-19) a the preceding high” 213 minus 12588. Your gros proceeds would have then S511 8? and your net proceeds after commissions and capital ais ates SH06 S83 ‘By perfect timing on those major swings you would have inreated your starting capital foryfold. Meantine hundreds ‘of socks had risen more than one hundred. Were you "Wait minute” you may be thinking. “How fanciful cam you be gtting preg objective by subracting starting Aate fom amending date Wht nonsense!” Tid not dreum up the Wea. Lobserved thatthe advance ftom 44174 10 73/8 began on June 7 (6-7) and ented on February 13 (2-1), Subacting 67 fom 213 gave me 146 compre wih 17/8, the seta low on the next dese. "if subtracting the date atthe start of an advance im price from the dite atthe end ofthat advance goal the pee a the botom ofthe nest decine.” I though, "maybe subtracting the date at the end of that deine (12) tres the date at is Start 2-13) wil signal the pice atthe top of the next ad Trai, exactly. < Ramo nals ie Wed als are more ton Hf you keeHAPTER xa Experience Sometimes a Poor Teacher used 1 Rane boner dog mined Pine. He was ‘amb bur not sup nso weather he flown msc tmore Sonforals 10s on the ving oom sos that ie fcr, Tis war no god forthe al, To courage rine we act movers tere, When he ly down om them they would po pinching whet Sie Winston Churchill would fn Pances ol underbalye Yelping pin Prince would off th sa and nay of unl he memory faded Sometimes Ea woull be» wok or wa ‘ow i Prince bad ven more ineligen he would have accel te pin wih the mowetaps ator ith te ofc ‘Wher mowssvepe ware thee he wow fave aajed way. When th sla mas lear be would have wads mt som {orate oni Noting that ena, Prine conse emory wih reson ingrtnd eed on more inthe tock maria san people rem do that 00 They do'now what hindi shows wos ave boon prota i they had done tok dayton monte or ten years ent Ue qi difrem coro "y sb whore tho a srs {have doe it myst Having ome to Wall Suet shan esac youn man in 190), my fast great epee stmt long pd sage dete tn sock pices rom September | To to daly 192, "To sw how deeply that decline as branded om my sub= constowt Ie me ete One specie ntance Mot ay months ‘efoe the 199 bull marke reachedits peak, I Bought Southern Raley coon sack $e) aus ow wea Experience Sometimes Poor Teacher ry oid my stock at $160 share, having doubled my money on the SAD margins thon permits. 1 Bepan to havea fated Feoing for J. P. Morgan. You know the Gowhiskered story. ‘Whe ake how anc it coat to run bis yooh, the "Core MrMorea replied, If mater, Sou eat aor.” eed ‘ha said that and fated tow ston a got my och ‘Some of on the Wal Sret Journal saw a desine coming, and was shor of several stock at the sa of thereat abo fan. Aw the decline became more severe, and poliians in ‘Wathingtoa bee to spe Wall Suoct, our publaber banned ‘Mahon sling by members ofthe news staf. Uda that edict T coveod Curtis Pubisting (Qougbt back the stock I had sold sor) at $90 «shire By 1952it was sling at $7 a aha TE newsmen on te Wel Srer Journal cout bot salt short. we coullat eat say outot the market di nd the Southern Rie stock tad ld 60 go down to 8. That wate ‘anal uividend Southera Railay bad ben paying a the tne Told the stock in 1929 "Wsverd ria Lo buy back she stock for jst the dividend Icha ben paying whic Tdi 1 Bought all could at 8 a ‘hare on 80 percent mursn. Wiha & fe months Soudoes Railway common had declined to $250 a share and Twas wiped did ot one much then because I did not have much to loge Hat the "eso" Tear coat me milons All The rest St my le T have sted too lite and sol too soon. Even though in 1985 T heard President Roosevelt nse expound his doctrine of planned relation, even tough T was covering the United States Supreme Court the day the gol cause was invalidated, my memory mas stronger than my reson. T con tinge to set as though the old rules wete stil i effect. So Aid milions of other peop ‘One cllege endowment fund with which T did busines as «broker was managed for years on alan of sling stocks on a {cate up 1 200 inthe Dowctones Industrial Average and buying ‘them an a-acle down to 100, Dy hindsight great deal of ‘money sould ave Been made va that pan Hetoon 1934 and 186, But forthe peri fom 1546 fo 1965, m which the Bowe100 0 1m the Stock Market m rose fom 1010 1.000, he plan was diastous. Once aga ts poms pa the pce of "lng ow” what hindight showed ey ae dine en ara fn Apa Ht when T bought 100 Aluminium Ltd. D wa ants nod ot at pices ranging fron 3/4 to 1/8 By the tine te warns expired Alito (now Alen) was sting hove $0 a share. Without puting Up any ore money T had iny oker exercise my warrant at 300m share. In March of 7 sls my lst en ahaes at a prot of more than $10 a thar, Eight months later the sock x sling below SA. {teary it seemed as though had been wise or fucky to fake tny pat Yet i I ha held the stock ami row the ten sates Tota would be 200 snes with 1971 market bl nearly “a0 times my oil investen. Ha Tl on, C would hae pal nocapital gains tates or broker commons, But would Eve been paying intrest on my $300 mari, "D trade tke that, following my etre experience with seme Ray crm since me th ad to wealth war marked by signs Teading "buy "em low” and ell em high” I sould not ve Been more wrons. Catching ‘ings the market, even when one is rensonably sbeceufa tte mates pennies compared withthe dollars Garnered by {those who bay sgt and Hold on cHarten x Why Computers Won't Run the World Taher survived milions of years without language lpi oF mathemati Some of we ace here coy besase one of ou more recent ancewors stared running when the ia Stopped singing, instead of wang wil he could count the Indes. Cold be that we moderne are pong overboard fo ‘ur reliance on juggling ligures 1 tad the anaes to al pro Try those three basi economle principles on your computer Aft marke value th me. Nodhing is worth anythin solar someone want. No matter ow bard itso finds no ‘matter how meh it costs to make, enyhing is worth what Fomeone wil ge forse not more "There are many way to eeimate the market for any item or service. They are all bac on how badly someone wants ad hw hard it Tor hi to got i Economists call this em snd spy. ‘Most of us want to lve. Hence demand for what we must have olive i fly constant. The market fr air to breathe, water to dia, and food to enti assed The aly uncertain onthe soply side I there were jas enoveh ar to go around say iv a plaiodomed! colony on the moon everyone there ‘who wanted ogo on lve woul ive hia fort I he had 9 Whe supiy of ai became so plenifl that everyone could ‘have all he wanted for nothing. a om eth, i ould ease {0 have marke vluo because no-one woul give anything fori tnles it was compressed enough 0 inflate tre or elles J have beard and read aot i recent years about co puters running the world. Yer our prehistoric fore100101 inthe Stock Market 136 ‘enous to sool a room or make dey ice, And even then what fealy would be marketed would be note ai but de eDery ‘Caprttod in te compressed, chiled, solid sir. ie ppl of water Became so penal that noone wanted any more, ati bleved fo have been the case at the tne of Nous Aik too would ease to have vale a: uc, hood fee steamy and fling water might stil find buyers for thet fnersy content Ifthe soply of water even thoogh abundant, {became so polled that fas unpleasant or ume 10 di pore mater would doqolre market vue as i already has too many plus tis Romble thought but i the world omtinges on ite present tends some of us ay live to se the Say wncn the move fortunate members of oct Wey pure al for less in thir homes and offices, he way they now buy pare ter The ame principles spply wo food except that as food in ‘gene bosomes mre plenfl we ean have larger potions of {he foods we tke and perhaps sop eating some oer kinds of foods altogether, At that point those ciber kinds of foods (Guasave market vale-ror would if we could et find ways {turn them ito something lve we di sill want. Feeding fmslge to eae ivan example. A man would have 40 be very Hmgty to cat corttocks, even fresh ones, Dut seers fed om thay ¢an be auite good to eat. “The point to Keepin mind that how much it costs 0 pro ice ansthing meats life o sone wes you know what fople il py Tow i now and the ate. Kn business. acto ei people what they should want stad of tying opive dem what hey do want. Tats what we mean when we Sy the customer fs kng There has never en suceesil Fevelution agai Bim Allows made by men cone changed by men, and will ‘bc uss as enough people doce ha hay woud be betor off the laws were changed. This goes fr the Consitien, ‘he Magna Carta the United Nations, an he zoning ordinance In Pesan. 2. No one te oF righ to any property is worth any more than tabi and wilingness ofr Jollowcretars to defend Why Computers Won't Run the Workd 1 4 have ited hist bofors butt cannot be veremphanzes. “Taomcther tuman Binge maybe hi fellow ese or hey tiny th chums of hos caled Great Powers saying Hands fff to herent the world wie sll ations determine tings {or themecten Sst a publi opinion snd law are wo each eter as water and iceaiferent forms of the sme things are pics [property rigs Thos igs are not part of nara a Hk Sng. Rather they ar derived from our social contact wi ‘acheter More tan lf th human ace ody has He F 0 ropory is The superior develoenet of thse pts the Souls that do fave property hts sms to agus that they Jrovide an Important cmv. Bu they ae noe mutable ‘ia hs thd law means that no one Basa ell good ti o any propery being ued tothe derinent cf the people Inning thls on uc tha te depends Even th nung itor the common pood, 8 man may have ie 10 mc ropery th propel ake may ar swe doi he cunts” through progresve income od inbetnce wes ‘Whether ti srt or wrong fas immaterial to one who ‘ron sndertnd the psyeboloy of inesment a i @ moral Fen on men eing yt logit ano han Tirebd ihe way from no-one owning anstingeven ou Pirin foresters ted. that—o one owning, eventing (état cet mei and back again, t many times and in many faces Bot exremes have been found wnsomtoratie. Tae ach forthe tappy dium al goes cm, and says il $ceanc um fenatane eye hrbe wiereak exp mone ofthe martin canna goon ithe winner them afl Tha te becae Yor no ott foun, tho lowes ar understandably ow to rally tthe defense of ich {satus quo ad the sole winner cannot defend alone "You dot need to bes mathemacian wo understand ay sf thee thee base Tava of seonomicx The figuring comes ther, But when you se a company operating ignorance of efinne of thse thre principe, don stop t fires Ruts ‘io nr walk os your soc, and don't he toned to By irk a any pie‘CHAPTER Xv . Profits in Ethics uli, Lid there were two approaches to investing. one, the poschological and, two, the satsial. Actually there fr three. Aaa the longum the third the mos Expo is what migh be called the ethical or even spltual approach, is profits most who serves best. kn the long run tha is ust sc trt of corporations as of Indlidvals. Beware of eynie igh paces: Avoid the fast back arta, the something fore ‘nothing syste. Retember that a man who wil teal for you willstea from ou. Ask yourll whether the company in which You contemplate investing i contributing to. making his a bette world Ifthe ansmer no, avoid ike the papa “The quest for expt gains pts anyone who engages In agaist the distilled erence ofthe best bras in the wold. ‘Only foot this hes lever enough fo outsmaet al eters by leading in phony merchandise "Never do husinese witha man you do ot trust” 8 rule ‘hat would have saved man a fortune aod many a heartache. No matter how tempting the prospect, how alluring the ence fora gick prot stay avay fom men, companies, nd ventures Ise on defrauding rother than Helping thei customers Ifyou have ever looked down the talroad tacks in tat Tong view, thete flit to choose between whats sight and ‘whales prolate, Hall century of veporting of ene Kind ‘and another has convinced me beyond all arpurient that srcedy ts sup. ; Profs in Eaics oa hiesound ke impractical ideale look athe $35 milion he ram hs business by the Golden Rule: Look at she fortune mectcovie careers of some of the conglomerate manipulator, ‘who sought by financial skighothind to mike $2 oor “Thirytve years ag os the editor of Barron’ I called on a {rom the Impresive research facies at General Motors, L twa this cae “When beter cars ace bit, well copy them." (Buick them was advertising “When better cas are bull Buick wil bull em) Doubtless he was joking. Perhaps I should have taighed and fogoten ke Bu In the yeas since then, measured from ‘Motors stock has risen more than three times as much as the Fr no laughing mace. Bernard Kigore. under whose presidency the Dow Jones ‘reiniation achieve lis greatest growth, was fond of 33g. is ery hard to cheat 3m bosext man.” His pot of cours, [5 that when ne approaches any problem with Larceny i hit Soul he becomer wulserble 10 even sharper thieves. The Incivdual who operates @ business or makes his personal Investments with a view to benefing his fllow men Ts much less suseptiie to tckery. The auckerait im many of the ‘oldest and most soccesfl frauds is "something for nothing” Integrity im news was the solid foundation om which the area inal success of the Well SiectJournat was bal Kenneth C. (Cavey) Hoyate wat in sige when both Barney Kilgore and I were hired. team thik of no higher tribute Casey and the DoweJones organization he ead than that fn ‘love years inthe couse of which Iwas tet of the polly Score Washington bureau and later editor of Barron T ‘war never once tld how to angle sory. “There ate of course, many ways of fering mankind. Man100 10 Tin the Stock Market 10 oes not tiv hy bread lone See ow many ofthe companies thot have appreciated ce hundred im he last forty years ray peoples deep urge to ake fay stories come toe "Tne grea success leaersin the contin industry Spins from eur hopes for eternal youth, What i television but & ‘mapic miror enabling ws f0 ee and Bear what is going on Tre or towsands of mes away? The almost universal Tonting for pl fo cure al ls ondertes the succes of the tug companies. Mankind’: yearning Tor a magic carpet his Cinderwrtion every fortune made fem inpeoved wethods of {cumporttion from the Model T to the Dosing 747. The ‘computer provides severeagve boots for mans iin Te ean ‘do mothing thatthe oman train cannot 6, But ican dot most immeasurably fase. "There are thee primary seasons for stesing the ethical oF spinal spect of faesting. The fist is that corporations are Malogovs toma bods in aight important Way. ‘Suppose go moot tay ald frend wHom you have not sean for titon yours. Biologie that theres probably ‘sgl ell m elterof ow that a ther when you lst tices Yet you have no trouble ecopniing cach other and feciling mater which nterested you both when you Ise met This is oie only boca each dying cell s 50 Tilly replaced by ike cell ‘So ris wth corporations, No matter bow broudminded we re, how dedicated to eq opportunity, we tend ite stad promote “our kindof people ‘When morally Jeet men gt tothe top of gest comport fons andsiay therfore period of years the ei they 0 does ‘ndoed live ater them. Inevitably they being into the organiza tion and promote to highor levels men like terete. The ‘moral calcer thus introduced cannot be extipated simply by Tenoving the evil ges atthe top Tema take @ generation deta good taagement to purge the organization of the ttprincipled sharpshooter: brat in by a bad management Homce tisunwitet loo fora quick traround in any rank Zaton whose management has Uemonstated a lack of moral principe Profs in Ethics ua “The converse x equily te. I. Hrewster Jennings was chit executive of what i now Mobil Ol Corporation during most ‘ol the leven yeas that Twas thee. At atime wen the public fetaoos department feprted to ms, the company became Involved ina trig dapate- All Tremcrber about it ow teas hat prepared a pul stacoment demolishing the opps ‘on. When I submitted ito Mr Jennings, 10 be assed over Is ane he tea it earful, then pt i down ying, “This ‘etectically correct. Think i would stad up in court. Dut the most knowledgeable people nthe ol industry would know {ae that not ite the way thing re dom ever wan sy Snything that those who Know the most can question. Lett {ty llerentapproce.” He did moe say Ro ones nyo Noonechaewsstn te room with ws. And uni mow U have never {old the story publicly. Dut it sot xandand of Steg fa tik places at has long outlived him. 'A secon reason why i is viable 10 avoid vests in ‘ny organization whose management Is even suspected of orl obsess ith there ae 0 ay way of making the ‘worse appear the batter reson, of puting false ace 0 ‘Corporate ations and results. The counting proesin itn the dios of scltexamisation becuse of widely vying ‘methods of reporting earings from the same operations Ie roferinal accountants find it hard to aprec on what fight, ow can the ivestor, lacking the quuicaions of a ert public accountant, hops to penetrate the devios maze that can Deccreated by 4 morally bankrupe though legally circumspect corporate management? Man isthe erontre moat ificul to Keepin il cause man makes tho jal What one min ean make smother man cx an Dake, No mater what lays are pasa, no mutter how bi the SEC, there wil always be men ble to hoodwinked defraud ‘ther Thebes defense gaa them i rm aay fromm the [faut as posable tthe frst hint of sharp practice. With more than S000 diferent stocks available to fvetor inthis coun try, it snot only unnecessary but dowaright stupid v0 bay 'Gompany ram by men of doubiul tery. ‘A ted ened of ethical iovesing that when we do ie we10010 Fin the Stock Marker “a avoid the trap of buying stocks withthe hope and intention of ling dem to someone ee ot quite as bint as we are (at. {substantially higher price, of eourse)- Baily Mss the {ager foo theory of fvesting. Anyone wo adopt it runs the Tek of not Belg ae to id bigaee fol By stocks asf ou Krew all markets would be closed for the new ten jens] sed wo urge my sal. Back fa the Iw performance wae the ae ofthe gate such a comment Tuy hove comicted me of sci. Isl tink the dea bas inert If ne buy stocks becuse me Bllove ke them, expecting {ool them forthe ret of ou ve, the chances are gos that ‘thors mill come to apprects thom Yo. Then sore day we ‘Go deci osell therm they will appeal tothe west buyers foavket that always qd Please reanember that i all these comments Iam talking bout investing to make money. Trading fun. Like plying trnge or poker for high stakes, eam tke your mid ef your ‘ore intensgent troubles But for most people is Bind ‘ly leading if the way to wealth ‘Since ost of want the material good things of He, it scons vio tht to et seat deal ote than the average ‘Share of them we ons somehow pat ourselves beyond con Pein of those who wil see forthe average, Tis a eve For comoraions for individuals As ia racing, the dilerence tetween fit prize and socond or tied pace wie. Knowhow fa commpeutionreduect. The longer it takes 10 tearm how todo what peur company doi. the fewer com pattors wil be around to do Kfor ls. Diligence ir aot Sompetiton reducer So ie integrity, nd im fact most of the ‘Comsbook virtues, provided alway that what we have Tearbed so"tntuouy to dno well something other people really Want us to do for the "Wall your invexinent be a success? Atk yourself ow the supply af rms wh ean do what yours can Jo compares wih the demand. It imany want your company's proets OF Ser ‘ces and only your company ean suply them, you ae made "The only unopulted monopoly which ha the public itrest ‘nthe poten of uncoated Knowledge, talent, of Skil. To Profits in Eis 19 become tat king of a monopoit cam be everyone's goal The ‘ety of that one docs not have to reach the goal {0 ‘vi. Marked progress toward it wl be counted suceess in mest. "To make the biggest gain, to find your 00t.one inves: ‘ment, don't bay companies whose role goa! 19 make money points For whosoever wil save he ie shal ore: bot who Bet on men and organizations fied by eal to meet human ia’ prebems Good imntons are not enovgh, but when Combined with exergy tod ineligence the resis rake it trmecesary Io seek pris. They come as a serendipity dive ‘end ona ermanaged quest for» etter wordThe Almighty Ego vs. the Almighty Dollar gonomles Is the art of judgng every ise, making eacn Seton, onthe ba cf wht wl do for your eg. Sure, ite human nature to Bese, but the tre eponomist Irnecr unselfish Even when he appara tobe, be has cle fated the pati lations or advertising value of his seeming fencconty and seed a bargin. To him objectty x beresy Ail hat mater place athe basmess and social pecking ‘order his en “The story af the schoo! boy ilustates how an egonomis's sind work ‘What's two plas two” his teacher asked. “Am baying o eng te pupil replied ‘What has egosemies to do wit investing? A very 1 dot like Sead wich were nor so Batu ay realac former partner, Hardwick Stes, put it “This 6 the way things af. I you ean abide it you ca shoot yours.” Let sat the top, with the men who mariage the corpora ios in whieh we Invest. Do they put eeonomics aed of (coment How can we tlt “The lst thing (0 dos Co ask them. Ie might be your last chance o ask them anything. Ang. wha ey do spas so Toualy we ean hear what they say-not if we Bf though bearers "The corporate ezonomist thinks more of making. his com pany bigger than of making profitable. He spends the stock bolder money to make himself low larger ithe industry. rather than to increase the coapany’s earning powee. When yousee a company seat after year caning low ate of ete The Almighty Ego the Almighty Dollar Ms. ‘0m is avested pial and stil ocreasing ts capita expen fares “to improve is competive poston.” the chanees are {rev an ogo high inthe conporate woodple. Whes ou fe n company paying more attention 10 is eoeporale head: quarters ha to sales and pti mars, hller or sll ou Tgonomst termites are at work ‘Already eam hear souls Irom those who believe corpora tions mac assume a lager sil responsibil” So do. Bat 1 Irant my companis todo it in addition o making money, not Tata of Tn free ancietythowe who cet the investment of the peoples money ino ventures showing far below average rates ‘St rtucn othe espa required are sabotaging Our ceonOm Wher ty know Ie or not. Under ovr economic systeat Prolit marge and rates of rtura cm invested capil should ce ay thermastats callg for more tnvestment when profit target are high ond lnc or roe at ally when they ae lor ‘To persist n plowing nev” money so. an Industry wih a Hong term record of low profit margins and subaoroal tes of eturn on ives capital & to misdieet the use of materials fd manpower. Some companies ought to quit, aod sme ‘managements oupit tet them qui. Few eve hae quit before ‘hey fad to. Soong se the executive nite ix warm, why 0 at ito the cold? the stockholder i sated et him get ‘And get out you should then you sce your company = snvestig its rtanedcamings year ater sexe les protiably 1 ou could we the money youre. You want an exanigle? or good hunting ty the tect indy, “Here are the figures on US. Seay the Sadar Header, for Retwn on Rete ot nytt Gaal ‘iy wn 47% 4% 190) Sa rat 98 6 1 187 46 32100 0 1m the Stock Market M6 ove Copa eget 1966 ot 76 16s es 1964 Ss 63 1982 2 a3 et a 53 1960 80 ° Ret on tvested capital in 1970 would have been twice ‘ar high if dhe money cou have een invested in bode Tam no expert onthe stot induty. Aes layan 13 not ‘unsympathetic with the problems arising out of high bor eto, sons unions, an import of set made abroad. Bot hope deferred maketh the ean sek." challenge to mansae- ‘meni to improve thoe Rgucespromply or t0 op avexing ‘ore of the shareholders money inthe Pesnes More than thinytve yeas ago Scudet, Stevens Clk ‘asd 8 trochureentid "Monuments Rarely Pay Dvidends "When business besas to get satel.” He sai "wise vestors quietly pet out fom under For monuments aly py Giidend most every great riod as erected a last one vast ‘and rieloos mausoleum to the meevory of departed ernias. {Gloomy bank directors brood over past sloves in ati ‘of noble achitectre and kingly appointments st before ‘ollaed, an empire in textes war completing x milionsollat fol course and a mode ilps of baby palaces for executives. Splendid administration buldngs of india plants com> memorate the posing of dividends "A young buries always ark, Nine out often disappear in leas than si yous Te offers mo atsrance tht is product ‘can make headway against competition and win for ise 3 Iisting popular acceptance: that iy inci stewctre ll ‘sand te shocks of dull years and unforeseen difieltes: oF that iis management will develop qualies of leadership. To Invest money i such a concern pure speculation. "Bot tow Sd toon a enacss monghsis that i has Tho Atnighty So vs. the Atmighiy Doar ra power wo ve. 1 teor to compotion, not a prey. eas Ioncred i market. Tex production fs guided hy one Of those ‘are geniuses ale and determined to stay ont front a Tike Kettering. Tei headed hy a fighting man of courage, imagination aid decison, A east handles the tone. Th great orzanization of spied youngsters Who have ated ‘sd ited i ssn 9 mo fel uneshaused and promt ing many years of opporcnity To invent money im busmess ike that at the ght time ann righ prise is the way to accurate wealth Sais bung por oa business th prio of aude fay, big devs, swf atacand reat rewards too ten fetlowed by complacent letharty ‘The fighting leader becomes ‘ol, deed and arrogant. The inventive gens ak hs vom Sule prow intolerant of nem eas. ‘The realist becomes tcc or mean and chokes further progres: The organization ‘becomes soflened by succes and torn by the inigues of Image ren ambitions for personal prestige and rewards “the lst ham emotion tdci pide. Aman who bat ‘made something of is hfe, and whose ereative days are past, coms to develop a urze to bul something tae, lasing find fine which wil be evidence of his achievements: And & noble wig ti ‘So it fnatral that an organization which has hel together for yeas. dominated an industry and made money, should in time prow proud in the same wa. ard ry to express ts Tender ship and might in some phys thing that will endure, “that jst what 3 sens camo fr todo, Business fs not an sablahed things & a movement a progres. Is Past mean nothing—tomorrow fe all that count Ie st not pd, "The ingest problem in busines not o grow old Avconcern tht is uiek on is feet and resource can wave whip one with stiff knee, no mater how powerful the Tater ay be “am od Business i inlined to rely om precedent an ear tion tis impatient of change and often fnores ever shine ‘Popular tastes prestige Bosoie tarnished. The fine podet4100 01 inthe Stock Market us ‘becomes old fashioned, Dealer are es loyal ad are attracted {oliver concerns New generations come along to whom the ‘institution means nothing. Movement fy slowed down 4 {he sate dani of « monument and omurentsearely pay dlvidends. “ete fnvextment of wealth can never rise above the level of ques work and hunches intl tre fam ndentanding of those haldon values of tasinas. Tho tvestor should be ine gonced by only one factor-asurance that the company fh the power to arm pris for good many sear: ancl Statement give lit Infication of earsing” power. Plcs of trick and sone mesh notin. Pris ate te eward of human ‘Sphit an bighendeuvor=of pent leadershi Dut tere more Investor ager in eguomics than jst prfidens pomposty. once worked with two high executives in 2 pret corporis sion, oh were able, But their weatment of asacates and fhiedinaten could acd have diflered more Bing a lea 40 te ft mam and he would improve on whatever ood he sain and credit you for Big a idea tothe sceond man sp he would enlarge on whatever adhesin tad belie you Tor ‘Nari the fet man received anymore susestions than the sevond mam one primary concen ws demonstrating his oellectual yperoiy over his stintes an subordinates {e would be bard to overestinate the costo the sevond man to the company's epee de corps Investinent men have their special problems with eyonomic. ‘One is unvilingness Yo accept Kens other than thei ov ‘Another so salve hee wn gg by reiterating te erors of ‘ther ‘One ofthe sserets of the suceas of Hamilton M. Chase, for many peat ciel encotive ofthe Seu Special Fund with fone of the Bvt Longtrm records ine Business was ik Kindness. Never inthe tiny years T hve knows i ave T ‘cen bi remind an format af & previous efor i invest ent judgment I incgity the investor's fst nom-tatticl prenequs ‘The Almighty Ego vs the Almighty Dollar w {or management see Pris is Fthics.Chapter XV), nominate piybologieal equanimity asthe second How can an inventor apprase managements psychological equanimity? ‘Wat have in mind doesnot reguice dhe help of psychiar tsi and conch There are many ways fora los reader ofthe Finalal press to detect managements moUvated more by ‘roomicr ham by ecsomien. One latest deh of manage: ‘mont etre more than one able man nthe exscutve sua? ‘Gr dows the heal mam hog the corporate spolight? It 20 Be Imoy be srisng not only to hosp ahead ovals Out 10 1: {ure himself at he ae great ashi sicfigure salary soy {stshe shoul be, Hewareof the onemn company. It aly {Ceartbeat say from deep trouble. The corporate spotlight hog hurts his company in another insidious was. His Bes hen leave him because they hnow they wil never Set recogaition for any achievements rf a he around. He may have no ‘Ect tig thee shoes with more servile types but some ‘tthe spark goer out of the organization ‘Years soo called on the chit exceutive of company lng singe sbnorbed by another. ln his Hoge bat diy Tighe office heat with is back toa window facing south With he est thathe vould see me a though {were ina police Hneup while [could make out only the outline ofthe figure before me. Te ‘Gd not matter Ie Gi! noe take te they socom to decide ‘gn inventing mney te a busines whose chit excet Fa he mcoded that hand of an advantage fo. cope wilh bis flow men, be they employes or outst. My judgment was righ. The sock never proved cheap at any price. “An example ofthe opposite sort ix that of Joba W. Hi now eighyne. founder and pineal sharebolder of Hi and ‘Knowlton Te the wort largest public tlations frm. Ta Sferely competitive busiest which rains are ney the fale ast. Mle Til foe yeas is put his asocates forward ‘ith corporate tiles, client relationships, and public appear fines, Hie aim, ar he. pte, has boon to sufround itself ‘th amen nore able tha ean aim that shows nach manager ‘Sel ast eat doubt om is abity to active Ke100 to inthe Stock Market 10 Some of my comments om egonomics may seem petty. But tothe alert. vhf of snoke can be louder tha fre alan ‘lacence W. Hatton, who owaed the Wall Steet Journal when mont work ure in 1927, relied Healy om his only Tevot a nuns actions. Sometimes, when interviewing & job Spolicant: Me, Maron would ask the yosng mun to

fener ne oe ene [fi esa 1 ey of Pl ph fe BE ofa i Pt Fo prs dvi bl ys fo STA a Decor 4 SEAS pan sack dol pd fev of Ht ‘comfort sus {o keep out of debt Ona quiet evening inthe county in wid immer lean hea them chanting, “Oran words of tongs o pen, "The saddest are these tight ave been” ‘When any rule, formula, or progam becomes & subttute [No Inflation Control Pt 18, for thought rather than am dt thinking, i dangerous ana shoul be aearded. Too many of ws have been raised on the ‘ches Teall depends on whether we am make mote on he ‘orrowed money tha the lender charges for suse. “Going into debt because one lacks the willpower to lve within is income has rained een abd wowen for centre, {in Jute wil continue fo dos for centres to come The temptation 4 indulge now. pay late, samosas insious as tape The bas fallacy of people who make “buy now. py later” way of foi tat by 50 doing they actualy camo Indulge heels as mach the sat who pay astey 20 er show works “Two couples each have $50 a year to spend om vacations ‘The Smit pay they go. The Joneses do too, excep that they took the fi tp year bere they had the money. Te second yearn they dk have the $00 4 get aay ren Sn, pong forthe ist years tip tok not only the 500 but S100 more for Minance charges” Since the Joneses had only $500 for 8 vacaton al of which had been spent on the fst Sears vecaton, 10 po away the second yer thy ha 40 BOHN ot oaly the $800 cost ofthe second vacation but sls $100 tite finance charges om tee fit tp. "The thin year, when the siraitced Smiths weee taking ‘only sic stn $500 vacation the Joneses went om thelr hed ‘SS outing. To do 30 they had to borow the $800 again plus ‘220 to cover ubadgeted finance charges om thei ist wo ras "The fourth yeu the Joneses took thei out $800 vacation, again boroming the $500. In aition they owed $364 for france ears on the fst thee tp. the end the fourth year wien the Joneses were ready for thee fith $810 vacation, they found they owed not ony S20) for tv fourth wip but abo $53680 france chars ot {hei fist fou eps. ae Sos a ha thee S800 vacations tnd oved acting. "At this pot the Joneses got out of debt hy staying home1000 1 inthe Stock Market tot Udwoush the next Ano years stile the parsimonious Siihs ‘continued fo travel at al The selfinduigent Joneses this fled wp the sth year with one let vacation tip than the ‘slfdenyng Smiths, hough born the Smiths and the Joneses td spent the sme amouct of money on thet vacton, 'By starting a year earlier than they em afford to, the Joneses of his world ge four of evrything forthe price of live What each borrower shovld fs ask hil whether the time he buying Ys worth the money. Por young pesca 10 bowrow, il necesary, to get an education Is usally very good tse. So purchase of node tots by tained workmen, Coan make it Fens for each generation to sar where it rodacesor leave by booting needed eauipment instead St wating the years required wo sve enough to Buy te Ihfaton inioduces some important addional factors into te mater of inmerest and debe ‘Manufacurers who expect or fear that prices of needed ‘guipment wil be 30 percent higher a year fom now wil ot state to bay today sven i they have to borrow money UO perseat ta Uo ie At the same tine lenders demi cone Pension for aneipated decins Inthe purchasing power of {heir money. Ifyou lend quarts and ae paid back pint 90 tat hve 10 percent ines jot to say oven, In genera, the higher the rate of faflation the preater the cost of buying nein other words, the haber the interest fate. One of the most pathetic delsions of our day isthe Pclly popular Sea dat the government can make intrest Fate fow fra tee society while continuing to nat the money supply: Neither tenders nor bocrowert sce tp enovgh 12 Tet that happen. Lenders would sense a los Dorowers bangin, Lenders would charge more. Borrowers would sadly pay As Lincoln sd, you can foo all the people all the ‘Cori to ts wise extreme, 98 twas in Germany in the {9x0 nflaion rakes everyone ty to become a Borrower in felflfense. Only by buying wow and paying Tater ean the individual protect himself against the Swit erosion of the Pafetising power of toney. The resulting rash of woul be No Inflation Control Pit 165 borrowers aggravates the demand for money atthe sme time lenders are ring thee rates to protect themcves against the epecte further decline nis si. Undcr such conitions ‘ore & no thcorucal mi wo bow high interest rates can 9. Governmental elfors t0 hold down the cost af borrowed ‘money by pinta more of areas ful as uyng wo down 9 fie wid gosctne "The lesion of history i leat: nterest rates mitror inflaton Solomg as there i any value lel in rong currency, terest ‘ates wil elle! he expectations of oth borowers and Lenders {tot further all. Nothing a set ane the Dlondess verdict. ‘St the maker, Not until money has become worthless do we see debiors pursuing their creditors and paying them off without mercy. fs they did in Gevrany im the 1930. Thon comes anew cut reney. otially there no more reason to think that interest ater acon permanently high plateau ow than here was reason in the T94Ge to believe that sterost tas thon ore om a por- ‘manendy Tow platcat. (Actually many” people aid believe tentfire yous ago that inert ates wadld bs permaenly tows Why ele would they have Bought Tongs bons 1 ‘eld 21/2 percent o 1s) "As the accompanying chart show, silis on ealkproected, longer, high-grade corporate bonds destined fr twenty ve years from a 1921 hgh of meaty 6 percent toa 1946 low of es than 2472 perent After sucha pofonge dectine people who onfave memory with reaoning, as most Of as do. Are Sure Interest rater never wil rise nga, Bt, a fou can fue, torent rates ld se fom that pola {or more than twenty yeas (0 their lay 1970 high when ‘rime corporate bonds yet about 81/2 porcett. After such {prolonged he people who confuse merry with feasone ing, at most Of wa doy aro sxe intra rales Never wl fll "Actualy the cost of boring money desines when interest rates lative (othe assumed advantage of buying now rthee‘No Ifaion-Comtot Pi 167 lterest rates cam come down for ether of 19 reasons: (1) Because they have reached 3 level which overdeounts the sumed advantage of buying now eather than ater, oF (2) Because the advantage of buying now rather tha ster hat been Feduced by a redetom nthe rate of fnfladon, or by dete "an inthe outlook for profit, or bath "Fo ay hat Snort fates ae om permanently high placa mounts saying that the advantage of buying now ater than Tater is going 10 bo high permanently. Such «statement a imc (1)'A continued igh rate of iflstion, oF 0A per ‘nent higher ate of atu of iavested capil than Amer a industry has had nthe pas, of) Both ‘Obviouly the ato nation can bestowed, tbe advantage of baying now rather than ater reduced, and ene the ‘deci to poxipone spending made easier Likewise obvious Iyy Hf the euloak for profits deteriorates, whether because ff foreign competion overcpaciy. taxes, or cost price queer, the incentive to borrow to enter new businesses anand existing ones wil be retuced, and with the demand Tor money. ‘Our meas for capital are great. But nee are not the sme thing a effective demand If we attempt to supply ther wich nts pros money hare danger the cave of ation wil {cselerate And already has ested level hat loads rather than brigans prospect for corporate pots Levying testo ‘eet these needs wl simply taser purchasing power from ome poople and some indseres to ether poopie and other Indeatien It rovider so bass for assuming increase prof ably for capa investment taken asa whole. ‘One of the worst eccupadinal hears ofthe lestnent business arses out of ur extraordinary ability fo rationalize ‘eaters and our common Inability to Frese wht wl be ‘Mere modesty should make ws cautions about accepting a po ‘mancat a level of intrest rates few sere ie enough 10 soo ‘Soming. It eany to make assumptions that suppor expecta tons of permanently high imeest rates. It not 80 easy 10 support noe sears.100 0 1 inthe Stock Market 168 BONDS VERSUS STOCKS I you omn sock in a company, you are a partner inthe sins I you own a companys bonds, you sre one of is cretors ‘As sharebolder you ov a pece of the business AS am ‘owner you are ented ta your share of whatever it mokes Sthenever the dteetoes vote to ditibate i You ae promised ooking "As creditor you are ented tobe paid whether the eon pat inher any money or nat Nove as yet has found away 10 et blood out Of ast, however co & prudent bond buyer ‘Xamines not only hie ight bat the suing company’s ay {olive up to ts bargin Parapting Kipling "East ix East, and Wests West, and never the twa shal ee" sod tobe aid tore the pres {pression of 1929-2 that a bond man wae bond an, ad a ‘Hock man sas a stock min, and nelthr could operate sic ‘etflly i the others fil. Actaly about st unsound For ‘Tbond man otto know stocks a is for an eye doctor to be totally enorant ofthe ext of the uma body. Tea sense stocks fre the blfers which protect bonds fren the dings and arrows ‘toutrageou forte. A Bond mah who is sense t anemia in those bes eeldor cag Holling an ee tat etal He sees trouble coming lng before ialfcts payments on the ‘Senior avurtis, (nds are senor Because her cans mast. ttemet before the stockholders can pot anyting) ‘No matter how mucha company prosper, ll ha i bond- here secsne Is the agreed interest and repayment of thei Principal when due Singe the bondboler thus i baeed (orn hing prosperity he would be fot indeed 10 rum the sk ‘of sharing adversity, Weak componieroftimes entice the nwary bond bayer by fering a higher terest rate ham 3 ‘Siainable on th beat bonds My own experience argues for buying nothing byt the bes boods or the worst bonds and svoing al that hes in between, That may sound paadoxial, T'knowr But lt me explain. The best bonds have such stone ‘overage of earings and such substan Backing Of assets a5 [No Inflation Control Pit @ tomake nde amos out ofthe question. As scl sere twere tres bonds rated AAA tn 192) that were in dts By 190, But there wore the exceptions that tow he rte. They ‘probably amownted to tiny fraction of one per cet of all of fhe tripe A bonds outstanding io 1929. Anwer depression ke 1990-32 i highly protein any cae. The word changed since the, "The worst bonds ar those in dsfal, of course, Very often, as'was te one with the Richfield Oi and Pan, American Potoleas bonds mentioned ear, defaulted top are given lor ment of the company in the eventual reorpanzation ‘Ths when I uy bonds in dtast Cam buying what t hope and xpect wil be the equity in the eorganiaed company. Tam fealy busing a “soo” called a bond at what Ink i bate fn pice for the stock.” "A worm, i hs been sik, ithe only restre than cannot fall down, Detaled bonds have tht eharacerstc in common sith worms. The worst has happened. Tey may stay beds {or yeas pending reorganization or the lng company may tbe liquidated bot the holder of dsfulted ons rarely eed ‘ear than is toraiog newspapot will bing Mm bad this: Since the news about hs olings can arly get worse he as ‘thor has sown dee and egain to bea ales rises ‘Speculation wih subatantia chance for eventual appreciation ow about converte bonds? Thea ae bonds tat may be ‘exchanged for stock ofthe suing company, ually ata plce Shove the market tthe tine the bonds were sed It the ‘tock is a prolonged an substantial advance in pric, the ‘onvertibe Bonde profs by it On the other and i the ‘Sompany gee int trovble anditsock dosins the conseble ttondbelir ally continues to collec his intrest an enjoy ‘somewhat protected poston. The fact remsin. however, that ifthe stock advances, the ackbolder makes more money than the owner ofthe convertible bonds: And al 00 often. the stock goes info a severe decline, the converte bond ‘loclnes sutrantlly more than do the highest grade "salt bonds and sometimes i defale, ‘Converble bonds are eel for institutions rested as 10100 to 4 inthe Stock Marker 10 ‘common stock purchases, and especially £9 wnen those turns ace vite ly experts at spoting “owt of ine” pices For the indivieal converse bonds sometimes permit avok nce of «decision to whetcr to buy stocks or onde Such ‘rcapiam often irexpensive wm comparnon with what could have been achieved by correct decision ‘Why should anyone buy Bons wien the Country s suffering from inflaton? The amewer fe hat oterent rates are the feat ‘a demond Lenders charge, and bOrtonee Pa sh reflet not only the Ton value of mosey bul fiko antipated eater of decline in ily purchasing. power. ‘Theoretically ifthe rena value of money fet percent and if Inflation w expected to continue tthe ate o 4 percent a yar, Interest rates wll be around 8 percent. When bonds of the highest quality flrd yield hat cover both the rental valve of ‘money and the faticpated rate of inflaton the buyer stands {o prot fe actual rate of faflation proves to be Tes tha expected fhe iat two 0 three year, rome bon! buyers have been motivated hy a belie that'a'5 percent of 6 persnt annual ‘cline tn the purchasing power ef the dole fr about a high ‘hate of ofation as America's sin structure cam and Will tolerate. Heneo wien he best fully axable bons were selling {o yield 9 percent and more, and the Best wscexempt bonds ‘were sling Yo yield 7 percent and moe, those people bout Inthe expectation thatsomething they boew not wht would te done t check infltion Belore got much worse. Whete the Non srcas” prover succes or not ia lest astiied ‘owe fond buyers expectation that Ameriea would not tke ‘continued 6 percent Inflation Tying down Bond price forthe highest ged ases Simpy elect chan ing interes rates Por example, 16 pereene Bond due inter ‘years wil slat par (31.00) when the genet Level of intrest hes m6 percem. Should the general Ietel of fterest rates rive to 8 porgent that same boot! wil all at about 80 (30) a thond), atch price the buyer gets a eurtent yield of 71/2 peroent and ld to maturty of fast over 8 percent. Yield ‘Omatwity ithe yok calculated by allowing year by yea foe No Inflation Cont Pit m the presen value of the $200 “extra” t0 be received ents Seors fence. Remember we are taking about the shes grade EGnes, With ther the buyer aanmes that at maturity he il Feceive nous the 380 he has paid but the 1,00 face amount ofthe bond I oteren rates should drop t0 4 percent in the next five soar that sme top grade 6 percent bond which okt a $90 nf perecot money markt could be expected Yo sll a $122 {Si.2%0a bond a price avanee of moce than 80 percent. From 1911 evel depenting onthe sumptions you make 10 tho Ainksowable Tatars, bonds could show afeter capa alns thin the average stock. ‘One thing to watch Ow fr, of course, i ell protedon. CConipaties ising bonds naturally and propery seek to have their cake and eat too. Hence they fer bonds with high Jeet testo attract buyers when everyone ese paying high icerest rates, yet they reserve the AM 10 pay olf the bonds and sue now ones in ease Interest rater decline. You zy cn. ond paying 9 percent and dein 1980. but 08 ‘alae i three year, don't count on tay Tonger than hat. inert rates generally should drop to 6 perent by 1973 ‘She oul beta fois, take anotherook atthe stock market. Fe bape tere al te tine ‘Yanai Look at thr way: When you han the grocer ‘dollar he does not ak where ou got ILA dll fom one ‘Stock o onde wonth exactly ae macht him a a dllae om Another. Why thon do we py mre fo dlls fom one source fan for dollar fom another? The only reason that makes ene that we expect the ow of dlls frm the fst source tocatch pith rd surpas the low of dallas from he second. “Tne may be easier to understand if we tlk about hens and cag: One flock of 100 hes lay eighty cfg day Anoer A Sense of Vlues 20 Ack ofthe same size as fry egg dy Hf we are interest nl inating the most eas forthe east mony and hese allowance for thot caro, he hens hing the lager numer of Stu mish seom fob worth wie at mocha the ang he ‘uy sas many cee om oe Hock som te ether. Bat et ws pps the fora lock once aid eighty ess 4 ay. We misit be fea tat the cate would drop some thore To peotect oursiesapeat that pouty, we might ‘fer wo pop only a quater auch fr be rom ie ony ee {ck a for ee ron the ehtreg fk. Atta pce me shoud i be ting a many eb fF our Maney from the teapot hein a from the dere ones, even i tc cheaper ‘ner ate of eying dropped from for egs to twenty dy we could buy tose org hem at fourth of the ceo thceiphiyeg hm the slr effect wollte gvng i se sie epithey ad over men) a day. would conus nothing ihe foriyeg hen rte of lying fll yal instead of fang hr ete of tayngstayeu where mas, wo shoal have {ce the cpg we pail for. And the fortrees flock shoot increase irate of lying say or even eiahiy eng dy. we ‘Bouidhave tes or four ies sr any eget we pi or Toher words if the rate of laying remsined unchanged, oot ee profit woul be 10 perent Because we would be seing {org eggs day when we had pa for only twenty. we hah the chances of he flock’ nvingeiaby ens a dy were ata {o he chances of ts stopping ying llogetie out operat ‘ik rato won be 40 Since rome can fv he ature with certain, makes sense to try to ey when the seller bears the bron Of possible Sven developments and to sal when the bayer i ing to itamumee our hopex forthe fie in preset cash Tha re sce ie sa seis of radon Each of Gs con ‘nual exchanging whatever we neo ca fer for what we am et fom others This st whether me ae diteeprs ‘Sc apmphonyorchesa eonductrn, miners tthe gospel of cas1001 1 inthe Stock Market a Inauch an exchange how do afew people gt so much more than othen? You have heard of the man who rode to the ‘ounty fair bareback on a spasincdolsberse, aod by eading Trakly all day war able to deve homie that night in anew arape drawn by a spanking team of dapple grays? Life i Tike that. The boys who ped Tom Sawyer to et thew whiter swash the fence Tom bad boon ordered to paint made volun {ny exchange of their lor an thir money for sasactions that had not occured to them ual Tos polnied them ow ‘That salesmanship. Few of we cin sy tathully we bave never made a bad trades Almost al of us have pail forthe prego of site ‘wang someone ek’ fncon Why do we do i ‘Montyct suspect ic because we donot top oink. One of the mont common aye of taking 2 bud Gargano bay Something because iis ea, Buta John Ruskinsaid, “There's ianlly anything that cannot be made a sle wese a sold & Title cheaper and thous who buy on rie lone are thal ran’ tamful ey Nothing cheap or dear excep in cation to what eget for our money “rhe who buy om price atone may also be mis by high ices, Someone wrote & pope pay Yeats ago about young han who bweatbed new Me ia an aiing 0p business by ‘ting the cakes nha and doubling he price Enough people Interred thatthe higherpaced soap must be teter for theit ‘nsw ouke thm avid time of his techy ‘Some of are mised by moving pices We buy sus socks, or Flos tote boca today’s price is higher than Yestouioys and Renee tomertow’s prise ust be higher than Todays. When we do this we are showing a lower order of Intligencetham the poor Sah I entioned wallet The fish is ‘Cat because aeikes at something moving, without stop fing to cxmine tft Buta sh mast play percentage. If Ee stopped to appraise every litle thing tat moved his ange of vison, he would start to death. No 30 with ws. We donot have to tie on everything that ove, (0 say out af the rede-qute the conta. “Other reasons wy we make bad bargains i He eect the ‘rath thou man docs not ve by bread sone. We buy things We A Senso of Vales 21s do not want became ofthe ofimes mistaken belief hat doing So maits uss people of dacerment. nother words We ely fv tying to bole our tottering egox when we ape spening pater those whom we sould ike tobe. Its almost impose Sibisto make a good wae when we do not kaow-—or ada to ‘Sulver=tt we want or wy we Wan Tite of cours, infinitely comple. A trade made to be i style or to get aed ofthe crowd, may be a good bargain in foto even thug the pons or meres ought may be Worth tes pr than we pay for then ‘My a sccmingly bad bargain i made for the spistuat satisfaction ot atonement, The sock market bs ts masochist bs mall sie epoists and egonomate The stock market mas ‘Seti seems to enjy the pun of repeated lowes, the more Sihage the beter, His theme song Townley the most walueky man Bora on Faiay afternoon, om the thitcenth day ‘thine. the Sky wer ralnng soup, Td surely have & tok “The stock markot egotise, much more wumerovs, would rather lone money om cir own dens than make i o8 anyone ‘hes ave deit withthe eoomiss i the chapter on "The ‘Athy Ego ve The Almighty Dll. Th thew, min so many other ways stock tang Is more study im psychology than in finance or economy We some Ties seems to appeal most o thos Teast qualified by tmp: rent to succeed at I “Rue soy iltates what makes a good trader. At tun cheon some yea ago when Brumswick=a manufaciorer of ‘owing lanes and automate pnstters~was a market dating, Peter Falke invesment manager for a big nsuanee group. evarked that be bad jst sold his Brunswick stock at 870 4 Shace “Why” Fasked, All the news was god Too many bowling sles catching fe.” was bi ey Four yeas lator Bronswich sold a $6 shareWhat Makes a Stock Grow W: makes a sock grow? Look for these posits. Jot feturn on ivested capil, above We average of round 9 percent curently. Se chart below. 3 inyeting borrowed ehoney to earn moce than the cost of borrowing. 1: Aeguicing otter companies by exchange of 8ock at lower priceearings ratios forthe companies acquted than for the company serine them. “4 Incvensng sles without having 10 inceste invested capital The greatest opportnitis to do ths are found in ompanies operating far below capacity. New methods, ine rensing efficeney, may have the ste elfet 5. Discoveries of natral resources, sich a © eret new oi fel, gold mine, or nickel deposit. (New inventions. proceses, oF formulas for filing human faster, and/or cheaper. 7 Contract wo operate faites for others, usally govern: 1 Rising price-eaenings rato. Tes simple aidhmetic tht company with book vale of 510 ashore earning 15 percent on as invested capital wll have book value of 311.0 a share athe end of one year It pays to dividends. AL th cad of the second year is took ete will tbe 513.22 and atthe end ofthe hia year $15.0. five years {he company’s book value wil fave doubled In fen years it100 0 Fin the Stock Marker 28 it have quadeupled. In thicytrce years it wt be up one Trude ifthe same company pays ost a hit of ts enrnings in sividens senvetingearnips a the rate of 10 peroent of is took valve each yng it book value sill quaaple in titoen ears nso on 5 ears be up 23.2 nes instead oF 100 Obvionly divktends are an expensive fury forthe investor seching maximum provih. If you must have income, don't hpect your fnanial doctor to match the capil gains that ‘ight ve boen obtainable without dividends. When you buy {Tow to mil dont plan fo ace Ber against your neighbors "Tote invertor, borrowed money has theefldsigiicance sn gauging 3 company’s prow aa prospect. is ot ws seme tat a company hes $100 ition Book salue on which iis earning 10 percent, no debt and only one {hs of stock Suppose the eormpany borrows $80 milion at 5 percent and teste the money oear 10 perent of 38 milion ent, Since only $25 milion i eguled for interest om the tne eter $2.5 millon is ade Yo earnings om the stock poroent, though the company stl cron At the same rate This the fist significance of the sdton of borrowed money to 1 company's captalzation. Eamings may stem 10 Improve without any inprovement io dhe eavoing power of the suet enplayed inthe business ‘ihe sceond sgnfieance i tat ibe improvement in carr ings resulting from the ain of borrowed money {0 Eom piny’s capitizaon may be non-recurring-ihere Is «Tit To how much any company cam borrow at favorable rates. ‘Once tht much hasbeen Borowed; ao Further Help to acnings fun be expected from borrowing. “The third ignficace it that all borrowing increases the risk ina busines. One ski hat when the debe comes due reat rates may have ite #9 thot the Toa ist made at Sipercent must Be fefinanced at 10 perce. Another risk i What Moker a Sick Grow 20 that he earing pomer of the assts may decline Belo the fat of the borrowed money so thatthe Toan i eared at a Tose A third riskthe wort of lls thatthe loan may come ‘ive ats tine whet the company is unable to reliance i Rest: Bankruptey snd reorsanizaton, often tuning. the ‘company oer to creditors ‘Cleary sng earings derived from rising debt are worth tess tan ting ening Srived fro sing book vale “The pune of suring companies tf ties thot earings byensianging stock priced at 20 tines earings accounted for ‘Some of the gamout surrounding conglomerates 8 few ears go. To lust, suppose Company A with S00 000 shares $eling2imes Ste share earings on is reputation asa growth ‘ompuny exahanges is stock forall the 2.000000 shares of Company B sein ten times $2 sare earnines. Assuming the merger effected om the tunis of equivalent mneket valves {Company A fas 40 percent ore stock oustanding than beere Swile the earnings of the new combimation at 8D percent [reaer than before. Assning beh parts ofthe merged com pny contin toesth at unchanged rates Company A report I'L percent tne per sha arming. Fnvetors who rach earnings alone ths ore mid io thinking that dei rowth stock has conned its growth whem i a matter of fet Tie euining power of the conritoemt companies has town no gain at al “The concept of earings gromth resating from puting lle pants to work ieone ofthe casts to understand. Is as simple ‘Bie statement tat otek nike more money when they re filly occupied than they do won half hole rows re vacant ‘Opportunities to make money hy that kind of growth usually fre tound only when an indus the ecomomy a a whole inva depresion Agecatdealof Mek enters into making money on discoveries ‘of mata sources, but need wot be all ack Ax U haved before, companies actively prospecting ae better bets than those which afe not looking. And just ss some hunters and tome Ishermen consistently do beter than others, x0 tome ‘Sompanice’ exploration effort sem to succeed often than10010 1 in the Stock Marker Ee other: Here at in so many other specs of ie 2008 bus fm buck 2 winner, Tete t be sid in Soeons-Vacaum (now Mobil Oi) chat we knee i avance tha a research projet was goin to pay ‘Ou, was not rexearch but only product development I ‘ompanis themsciver dont know where their rerearsh il {Ge them, how eat the investor? Obviowly he cans. Here, ‘swith licoveres of natural resources making money depends fm iMentfying in advance those organizations wh the best ‘cons of ingesant innovation, tn the expectation that they Inventions, proces, an formulas that ree sooty com Samy producing the only way U know for a vestoe to the ‘nivantape of thm it evaluat thei potential se promply at the can as som a he hears of thom, Few indivi ae qual Ting price carnings raion often double and may triple cox quodtuple the stock mrt impact of ring enmings based fn Points to 7. To benett by ths faetor the Investor must have the good Ivek or od judgment to buy when socks Price‘arings ratios relatively tow. A simple gle forthe fvorage Investor Ie to watch the prise-arnngs ratio of the Dowrloner Indasral Averate, publsbed in the all Siret Journal an Baron’ cvery Mody. I tats 15 andthe stock ihe is contemplating baying sling around the same gure or lower he eam assume safely that his emthsism for the stock 5 ‘ot widely shared. IC his hopes for the sock 10 ineeste ii carmings ae ated, he ean eect those earnings command ‘progressively higher muller as years go by. ACIS times aemings of Stare stock wil sell S15, AUAS ties car Ings of $3 share the same rock wil soll ot 135, Earnings triple bt the market pce ss ito. Real Growth—How to Spot It and Evaluate It to do vi changes in thei earning power. Even thet eninge may go up oF down for many reasons ving ‘othing a doit heiearing power, Anyone hoping to make 100 for one inthe sock market by way of eaenings Browth ‘ust focus on caring power ‘Wnt iste dlorents batrocn eartingt and earning power? Earning ar spy reported profits no matter how stained ‘Aswe have already seen, earnings may ise because of sudden, honrecuring surge in demand, because ofa pice advanee ‘cause of a change in sesounting practices, hecause of f= ‘provement in business generally which permite wtiizaton of Snhat previous as excess productive capacity. None of those eons reflects eating power any more than the movement of {cork downstream stots ts tative power Eaming power is competitive strength Tt is reflected in above average rates of return on invested capital. above aver fue prtit margins on sales, aboveaverage rates of sales growth Tess to best advantage in new or expanding markets FFallte to distinguish between ephemeral earings Nuctox tions and fase changes in caring power accounts for much ‘over trading, many Tost opportunites to make TOO for one it the sock market Too much research in Wall Street is wot even directed raking this distinction. Why should ic be? ‘The customers all too ote would not understand oe appreciates and, even i they did sich research would geerate much ess Busnes than S tocks s0 up and down for many reasons having nothing100 0 1 in the Stock Market 2a focusing on probable eamingsMactuations: Making, money by investing in earming power fakes tine. How eat the individual investor make this dtnction. be- ween earings an earning power? This nota textbook on ‘Sccurty analyain Thove who want one tbouid read Secuy “Analy by Grabam and Dodd. The vest should Watch 1 Sales growth. 2. Prosi marin 4 Rate of retars on Book value (equity. 4 Rte of retum on ivewed capt 5 Rito of sls to invested apa 6. Buildup of book yal By recotlog thee dae year ty year the uadirtanding instr can sot sel o significant tend changes, ‘Many wit preter and should pete, to ask ther financial saviors to fotus on earning power for ten. A le earning {ns dangeroos thing” Like a passenger ina taxicab the cliente tole to say where be want fo g and leave Ht the driver {orget there, But be should know when he i being taken the Tong way around. Tfyou doube that your financial advisors emphasizing eom- pele strength a mech ae you wis, you can ether sk im To prove itor ek another doctor The data are teaiy aai- le from satisical services. Aay”welleglpped broker, bunker, or invesinent counselor can supply them to answer a ‘Specie ingury f your business warrants the costo dona $9. ‘Nove look at tho ta for jst one yea, Trends ae inp tans A temyeat record is desirable, both aan absolute and ‘elaive basi relative to any good stock make average sich $s DowJones or Slandatd & Poor's Real growth ia simple and eran a ated dhe book le of 2 stock is teased by retained earings while the ‘ae of return oo Invested capital remains constant. To. Th Isat, fet es sume our company has a book valve of S10 ‘hare, with po senior secures, andi earning 15 percent on ts invested capital. In this example, book value and invested Calta per share ae the same, Lotus ase frtber hat out ‘ompany pay no didends, eal Growth-How to Spot lt end Evaluate It 2s A the ena of te fit year pe sare book vale wil be $10 pita IS pegent of $10, or S110. At the end ofthe lth year took value wl be $2, and atthe en of he tenth year $40.1 ‘our company can comtinve to earn atthe sme fate on is Tnvested capt i earnings im Ten yeas wll be four Unes the tara ae our company pay out a thie of is carnngs in dividends, 2 amount plowed back each year wil be 10 perent of pet thre book values At that eat wil eke nearly een Jems, Instead of on for book value ahd ears to quadeupe TExming at 18 percent and paying o dividends, our sock would prow one hundredold im thinyihres years Earing 1S percent and paying thd of earings in dividend, our Hock would take more than forty-eight Sears to mulupy is shot ta earnings hy 10. “Tampax an exceptionally good example of the arihmetie cof prom tecause ie fgres are not completed by debt oF Drsferred socks Mere they ae, forthe last teen year. fon Value Paraings Dividends Relavested Ingested per per por Earnings ‘Capital Share Share Share per Share 1m 367% SITY S658 SIO 8 1 Me ise “san 35s hay ws Se 4k 196381180 20 156 19663881084 29 Bt tes 37688 20 18 Wot 360763 15 0 Waa Mk 13s, 3 Wa aA 482 rs a Wet 79429 rg ss 1d 8367 si ” 199 Ma 335 80 as ie Ms 2a) » s 19) Bo 282 ‘a a 1956 38728 Se 0100401 in the Stock Market 2 Any such sock will grow a8 fast ats, ook value grows Wate of return on inves capital bods steady ‘eter thee of 186 and the ed of 1990 Tapas book valve foceased (wom $218 2 share to SITS) share, oF 82 ies the sartng gre. Tn the sme period earings rose 7.6 tines. The dterence was due toa docin the rate of return from 392 peoent atthe wrt lo 36.7 percent in the lat year al the sae of return stayed at 9.7 peoent, Tampa's 1970 ccarrings would fe been 87-10 a shar, instead of $58, amings of 3710 would Rave been 8.2 tes 1956 earnings of ‘8 conta the some as the lncreae in book value of ours {Share eusings figures have Been adjusted for the ort spit 982), Almost lof the $15.71 inerease in book valve—314.46 10 be ‘exact came from fetaned earnings, the Siferenee between ‘ening a share and dividende share. Obviously if Tampax ind relvced ie dividends each year by enough to increase Fetained earings hy 50 petcent, Tampx’s earings would fave grown 30 percent fauer than they did—assuming that "Tampa Coult have invested the additonal money atthe se ‘ates of rear, “Tampos i also a good example ofthe arithmetic of investor paylclgy. tn 1986 Tanpax stock sold at low of 1/2 and a Figh of fe. ‘Thos pees were IL and 11/2 times 1956 fernings, AU IL times 1970 earnings Tampax’s price would fave been 7 intend of is astal 170 low of 148. At 21/2 mex, 1970 earings, Tampax price would have toon 69 ftuead of fo seta 1970 high of 228.'TRe diffrence was fntrely dae to investor willingness to pay for anticipated ‘Tampa growth further no the fate a Delo. “atts 171 high of 329 Taapax Was sling 1 50 tes its 197 earings. Tn foking for stocks that might someday purchase price, the price-carags ratio at Flay important. M you can foresce the pricecarhings rato ‘ng foun 10 fo 40, your stocks earings teed ise only £0 25 limes your startog evel to ve you 5100 for SI on your pur ‘chose Hon the or hand ou buy a0 times easing’ and ‘encounter a decline to 20 times earings, your starting level of eal Growit—How to Spot leg Evaluae I 28 ‘stn mast be malkipied by 200 to give you $100 for $1 on your ivestmen. Tides not denigrate Tampa's uses prospect to sy that further advancein the price ofthe sock soem fly Wo depend on further gens tn sles and carings with comparaively ite i any help fom trter sso tn Hs price-aenngs rai. “Two of the most important question buying for great wom ae ees 1 How high and stong isthe company’s “gate” against ‘competion? others can ener the business asi. the ane {vctage nt of return bound to be wed dow 2. How sood are the prospects for sales growth? No mater te Bh te te of ci, the Conny cans by ‘lowing back eaeninge i it aeady hat enough capac 10 piv al oresceabe markets See any ae doe ya, rom 1964 170 ‘One fast tess frm Tampax that the way to by Nk piney mowing cde Taper 185 igh yl 1US porcene on dividonds pak that year. But the buyer Who Achton adel of 38 percent 170. ae ‘ow ean you evaluate uch stock? ‘The mathematically Tnclied ve developed tables which help to: quan assimtions out the nknown fate assump rexaring intrest rte and the earings nds try generally, assumptions about tes. Een what they 40 10 aii estimates by guccs and cary the anes ut to the fourth decimal place = Stock trades sometimes proceed of a simpler bass. The predict that socks eating wil grow another year a 1S Percent. They pedit tht with a coatinusnee of tat growth the ceeareimy ratio wil bold up or reuse. Having mide {hose two trumpiions, hey come tothe ievable conlason thatthe price of the stock a year hence wil up TS percent or isan cay step from making such astmptions for another year to making them for another two pear the Seas, ve Yeas een en yar The gi eae yo ace That reminds me of «picture showing a Chinese wise man100 0 in the Stock Marker 236 in his study ooking up from his fires to exci, “I hang proved it: The Mongols cannot gst through the Great Wall Behind him stands ht lipped Mongol wari, sword up Feled eal to et of bis hea ‘Wit mathematics cannot do, common sense often cam, tn many intancer Dione nocks have bee svalable before “tr great advance ato higher prise earings ratios than the {genera market In more ete peices of these incipient sper: SEs have discounted go, more han the camogs gan that Int have ben foresen inthe next year or two. To the buyer ition such opportuni are #09 goat to require mathe Thatcl analy. The spread between what the buyer expects Sind wat the lock ort Ie disounting Is large enough 10 Cover any probube eror inthe buyers expectations, "Mach can ever be foreseen or even iinod. The one way torbenelt by iis 1 buy the best tock oF stocks you can with to latoton of selling them until they urn bad. HE history Is ay {vie some wllend wp in your bigh bracket estat ‘By'a long, cteuliows route we have come around 10 our Tn the Tat forty years the stock market has harbored bum reds of apport to tee $10,000 nto a milion "Many ether sacks are growing trates which if continucd ‘would produce the sume One hupdredfold appreciation inthe eat tvo three, orfour decades nace and everch-rented. Siclety much cportuntics seem bound to recur again aad "Tc two reasons so few of ws profit by 100t00ne stocks are fit that we do not yo do s0 and second that even when We Ie wie or lacy enough to uy one we donot bok on “To bay right regures vison amd. courage —foth that is evidence of things mbt Sec, things not suscepuble of mathe matical proot| "To teaze 10) for one requires patience, extaorinary tenacitythe wil to hold on Th Alice On Wonderland one bad orm stn order to stand sult nthe tok markt, te evidence suggests, one who buys Fiche mut stan il order wo eu Tas Appendix [BREEDER REACTORS IN THE STOCK MARKET ig 26 foe ocartn where one hare bocame inane tc 31.00 oo 1.0000 Dring 1971 each ofthe following securities sol for more than 100 ries the peice at which H could have been bong the year indicated. The tale Is arranged alphabetically Stconng to present aes which are shown it CAPLTAL LETTERS, i ie 1B con 0.1971 we stone hh com pate Ai Ponce & Paper Co. Same oe Caan IS aso Brew semi it vate ABTA a oan Abita tower € Peper th $1250.71 al SRE raps common SUL Po AKL Power & Pope Cu Asi Ramer & Paps Co fae atest ano an Stripe common ‘init Pare. ‘rAoumer Sense pene N= strer eh Au ae {50 con 92.157 i sep Soa a ah oe