Q&A: The Intelligent Investor – Chapter 16: Convertible Issues and Warrants

Below are my reflections and answers to the discussion questions posted at Modern Graham for chapter 16 – Convertible Issues and Warrants – of the Intelligent Investor written by Benjamin Graham.

1. What quote from this chapter do you think best summarizes the point Graham is making?

“Once more we assert that large issues of stock-option warrants serve no purpose, except to fabricate imaginary market values.”

2. How do you generally feel about convertible bonds?

Right now I haven’t looked at any convertibles, so not that exited.

3. Where do you think they could fit into an Intelligent Investor’s portfolio?

As any other investment, purchased at a good enough margin of safety.

4. What did you think of the chapter overall?

That convertibles are not something I will look into right now. So not that excited about the chapter overall.

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Q&A: The Intelligent Investor – Chapter 15: Stock Selection for the Enterprising Investor

Below are my reflections and answers to the discussion questions posted at Modern Graham for chapter 15 – Stock Selection for the Enterprising Investor – of the Intelligent Investor written by Benjamin Graham.

1. What quote from this chapter do you think best summarizes the point Graham is making?

“But to the objective observer the failure of the funds to better the performance of a broad average is a pretty conclusive indication that such an achievement, instead of being easy, is in fact extremely difficult.”

2. What do you think of Graham’s original requirements for Enterprising Investors? Do you agree with the changes I’ve made for the ModernGraham approach?

To start with, I like Graham’s original requirements for Enterprising Investors. Regarding the changes you’ve made for the ModernGraham approach, I would say I agree with them and that they seem reasonable.

3. Are there any other “modernizations” you would make to Graham’s requirements?

Maybe a shift from net tangible assets to earning power could be deemed reasonable for some companies, and thus setting a maximum earnings multiplier. I’m not really sure what this maximum should be, maybe 25 times normalized earnings per share.

4. What did you think of the chapter overall?

Great chapter.

Q&A: The Intelligent Investor – Chapter 14: Stock Selection for the Defensive Investor

Below are my reflections and answers to the discussion questions posted at Modern Graham for chapter 14 – Stock Selection for the Defensive Investor – of the Intelligent Investor written by Benjamin Graham.

1. What quote from this chapter do you think best summarizes the point Graham is making?

“His second choice would be to apply a set of standards to each purchase, to make sure that he obtains (1) a minimum of quality in the past performance and current financial position of the company, and also (2) a minimum of quantity in terms of earnings and assets per dollar of price.”

2. What do you think of Graham’s original requirements for Defensive Investors? Do you agree with the changes I’ve made for the ModernGraham approach?

I think Graham’s original requirements for the defensive investor look reasonable.

• Adequate Size of the Enterprise: I would stick to annual sales as a measure of a company’s size. Graham used $100 million back in the beginning of the 1970’s, which equals about approximately $600 million today (calculated at http://www.usinflationcalculator.com/). So, I think that it seems appropriate to use a sales range of $600 million to $2 billion. Maybe for the defensive investor a sales range of $1-1,5 billion is suitable.
• A Sufficiently Strong Financial Condition: Agree.
• Earnings Stability: Agree.
• Dividend Record: Agree.
• Earnings Growth: 1/3 growth during the last ten years is a bit low I think. Maybe increase growth in earnings to 1/2 or 2/3.
• Moderate Price/Earnings Ratio: I think an earnings multiplier of 15 is desirable, at least not above 20. An earnings multiplier between 15 to 20 times seems reasonable.
• Moderate Ratio of Price to Assets: Agree.

3. Are there any other “modernizations” you would make to Graham’s requirements?

No, not at the moment. Maybe consider raising the growth in earnings to 1/2 or 2/3.

4. What did you think of the chapter overall?

One of the best so far.

Q&A: The Intelligent Investor – Chapter 13: A Comparison of Four Listed Companies

Below are my reflections and answers to the discussion questions posted at Modern Graham for chapter 13 – A Comparison of Four Listed Companies – of the Intelligent Investor written by Benjamin Graham.

1. What quote from this chapter do you think best summarizes the point Graham is making?

 “High valuations entail high risks.”

2. When considering potential investments against one another, what factors do you utilize in analysis?

Some of the factors are:

• Long-term economic characteristics of the business.
• Management and capital allocation.
• Industry characteristics.
• Purchase price of the business compared to the calculation of intrinsic business value.

3. What do you think of Amazon, Intel, Netflix, and/or Wells Fargo?

Amazon, I would say, is a very interesting business. Have been thinking for some time that I should start reading more about Amazon, to improve my understanding of the business. Seems like a great business, the question is if it also will prove to be a great investment going forward? How much of the expenses today are growth expenditures or not? I guess that is one of the big questions when it comes to being able to have an opinion about whether the current stock price is way too high or not.

Intel looks like a great business. Haven’t read a lot about it, so I cannot say that much. The big question here, I guess, is how they will get into the growth available in the smartphone and tablet markets? But as I said, haven’t read a lot about it, so I cannot say at this moment.

Subscribed to Netflix a year back or so, but the supply was not that good back then. That’s the main reason I don’t use it today. Maybe that has changed, I don’t know. Maybe a good business, but does not feel like a great one.

Wells Fargo is a company that I truly like and admire and that I would be interested to invest in. Read the most recent shareholder letter a few months ago, written by John G. Stumpf (Chairman, President and Chief Executive Officer, Wells Fargo & Company) and I really liked it.

4. What four companies would you compare today?

Linear Technology, Verizon, Abbott Laboratories and Oracle.

5. What did you think of the chapter overall?

A good one. Comparing different companies to each other is an interesting way to learn more about companies, and also to see the big differences between different businesses and industries.

Also liked this quote: “Thus, to a substantial extent, common-stock investment policy must depend on the attitude of the individual investor.”

The chief elements of performance from which the comparison of the four listed companies was done is something I will kept at hand when trying to do any comparisons of companies on my own in the future:

1. Profitability
2. Stability
3. Growth
4. Financial position
5. Dividends
6. Price History

Also, the seven statistical requirements, summarized as follows (to be developed in the next chapter):

1. Adequate size.
2. A sufficiently strong financial condition.
3. Continued dividends for at least the past 20 years.
4. No earnings deficit in the past ten years.
5. Ten-year growth of at least one-third in per-share earnings.
6. Price of stock no more than 1.5 times net asset value.
7. Price no more than 15 times average earnings of the past three years.

Q&A: The Intelligent Investor – Chapter 12: Things to Consider About Per-Share Earnings

Below are my reflections and answers to the discussion questions posted at Modern Graham for chapter 12 – Things to Consider About Per-Share Earnings – of the Intelligent Investor written by Benjamin Graham.

1. What quote from this chapter do you think best summarizes the point Graham is making?

“In former times analysts and investors paid considerable attention to the average earnings over a fairly long period in the past—usually from seven to ten years. This “mean figure” was useful for ironing out the frequent ups and downs of the business cycle, and it was thought to give a better idea of the company’s earning power than the results of the latest year alone. One important advantage of such an averaging process is that it will solve the problem of what to do about nearly all the special charges and credits. They should be included in the average earnings. For certainly most of these losses and gains represent a part of the company’s operating history.”

2. How often do you read a company’s annual report to get a more realistic picture?

Pretty often, almost always at least for companies I deem as potential future investments.

3. What resources do you find helpful with analyzing how companies calculate their own earnings?

Annual reports and accounting principles in the notes to the financial statements. Also use to take a look at how different non-GAAP key ratios are calculated to make sure I understand and to be able to make a judgement about whether it makes sense or not.

4. What did you think of the chapter overall?

Except for the walkthrough of the Alcoa earnings for fiscal years 1970 and 1969 in search for the “true earnings”, I especially appreciated Graham’s discussion about the use of average earnings and calculation of the past growth rates.

Also like Graham’s skepticism when puts up a red flag by stating the first rule “Don’t take a single year’s earnings seriously.”

• Use of Average Earnings

“In former times analysts and investors paid considerable attention to the average earnings over a fairly long period in the past—usually from seven to ten years. This “mean figure”* was useful for ironing out the frequent ups and downs of the business cycle, and it was thought to give a better idea of the company’s earning power than the results of the latest year alone. One important advantage of such an averaging process is that it will solve the problem of what to do about nearly all the special charges and credits. They should be included in the average earnings. For certainly most of these losses and gains represent a part of the company’s operating history. […] If such figures are used in conjunction with ratings for growth and stability of earnings during the same period, they could give a really informing picture of the company’s past performance.”

• Calculation of the Past Growth Rate

“It is of prime importance that the growth factor in a company’s record be taken adequately into account. Where the growth has been large the recent earnings will be well above the seven- or ten year average, and analysts may deem these long-term figures irrelevant. This need not be the case. The earnings can be given in terms both of the average and the latest figure. We suggest that the growth rate itself be calculated by comparing the average of the last three years with corresponding figures ten years earlier. (Where there is a problem of “special charges or credits” it may be dealt with on some compromise basis.)”

Q&A: The Intelligent Investor – Chapter 11: Security Analysis for the Lay Investor – General Approach

Below are my reflections and answers to the discussion questions posted at Modern Graham for chapter 11 – Security Analysis for the Lay Investor: General Approach – of the Intelligent Investor written by Benjamin Graham.

1. What quote from this chapter do you think best summarizes the point Graham is making?

“The security analyst deals with the past, the present, and the future of any given security issue. He describes the business; he summarizes its operating results and financial position; he sets forth its strong and weak points, its possibilities and risks; he estimates its future earning power under various assumptions, or as a “best guess.” He makes elaborate comparisons of various companies, or of the same company at various times. Finally, he expresses an opinion as to the safety of the issue, if it is a bond or investment grade preferred stock, or as to its attractiveness as a purchase, if it is a common stock.” 

2. If you invest directly in bonds, which factors provided by Graham in this chapter do you currently use?

Do not currently invest in bonds.

3. Graham provides some commentary on analyzing management performance (though he puts more depth into the topic in a later chapter).  How do you think this compares to how investors view management today?

I think Graham’s analysis of management still holds up as pretty reasonable and today there still seems like “…a great deal is constantly said on this subject, but little that is really helpful.”

4. What did you think of the chapter overall?

I enjoyed the chapter, especially the part about factors affecting the capitalization rate:

• General long-term prospects
• Management
• Financial strength and capital structure
• Dividend record
• Current dividend rate

Also, the part about capitalization rates for growth stocks and the formula for valuing growth stocks, is as Graham writes “… a foreshortened and quite simple formula for the valuation of growth stocks.”

Value = Current (Normal) Earnings × (8.5 plus twice the expected annual growth rate)

“The growth figure should be that expected over the next seven to ten years.”

Q&A: The Intelligent Investor – Chapter 9: Investing in Investment Funds

Below are my reflections and answers to the discussion questions posted at Modern Graham for chapter 9 – Investing in Investment Funds – of the Intelligent Investor written by Benjamin Graham. 

1. What quote from this chapter do you think best summarizes the point Graham is making?

“The foregoing account contains the implicit conclusion that there may be special risks involved in looking for superior performance by investment-fund managers. All financial experience up to now indicates that large funds, soundly managed, can produce at best only slightly better than average results over the years. If they are unsoundly managed they can produce spectacular, but largely illusory, profits for a while, followed inevitably by calamitous losses. There have been instances of funds that have consistently outperformed the market averages for, say, ten years or more. But these have been scarce exceptions, having most of their operations in specialized fields, with self-imposed limits on the capital employed—and not actively sold to the public.”

“We have presented this picture in order to point a moral, which perhaps can best be expressed by the old French proverb: Plus ça change, plus c’est la même chose. Bright, energetic people—usually quite young—have promised to perform miracles with “other people’s money” since time immemorial. They have usually been able to do it for a while—or at least to appear to have done it—and they have inevitably brought losses to their public in the end.”

2. Do you invest in any funds?

Not in addition to some money from work that is currently invested in pension funds.

3. What is your general sentiment about the value of funds?

Since most funds perform worse than index at the same time as they take out high fees, I think that most people would do best in investing regularly in a low-cost index fond. By doing this you won’t do any better than the market, but you won’t do worse either. But compared to the probability of investing in funds that mostly perform below average, this seems pretty acceptable I guess.

The following words from Graham about the actual performance still holds up pretty good even today. “…the actual performance of the funds seems to have been no better than that of common stocks as a whole, and even though the cost of investing in mutual funds may have been greater than that of direct purchases.”

In his most recent shareholder letter Warren Buffett provided some guidelines for how he prefers his capital to be managed by his trustee in the future.

“My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. (I have to use cash for individual bequests, because all of my Berkshire shares will be fully distributed to certain philanthropic organizations over the ten years following the closing of my estate.) My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.”

4. What did you think of the chapter overall?

Okeydokey.

Q&A: The Intelligent Investor – Chapter 8: The Investor and Market Fluctuations

Below are my reflections and answers to the discussion questions posted at Modern Graham for chapter 8 – The Investor and Market Fluctuations – of the Intelligent Investor written by Benjamin Graham. 

But first a short note, before I go on to discuss the questions.

So, here it comes, the infamous chapter eight about Mr. Market that Buffett has been mentioned so many times over the years. In his most recent letter to shareholders Warren wrote “In contrast, Ben’s ideas were explained logically in elegant, easy-to-understand prose (without Greek letters or complicated formulas). For me, the key points were laid out in what later editions labeled Chapters 8 and 20. (The original 1949 edition numbered its chapters differently.) These points guide my investing decisions today.”

Another quote I picked from Warren is “If you understand chapters 8 and 20 of The Intelligent Investor (Benjamin Graham, 1949) and chapter 12 of the General Theory (John Maynard Keynes, 1936), you don’t need to read anything else and you can turn off your TV.”

In the preface to the fourth edition of the Intelligent Investor Warren writes “If you follow the behavioral and business principles that Graham advocates—and if you pay special attention to the invaluable advice in Chapters 8 and 20 you will not get a poor result from your investments. (That represents more of an accomplishment than you might think.) Whether you achieve outstanding results will depend on the effort and intellect you apply to your investments, as well as on the amplitudes of stock-market folly that prevail during your investing career. The sillier the market’s behavior, the greater the opportunity for the business-like investor. Follow Graham and you will profit from folly rather than participate in it.”

So here it is, the much talked about “Chapter 8”. Read it, learn from it, and get back to it every now and then.

1. What quote from this chapter do you think best summarizes the point Graham is making?

“Let us close this section with something in the nature of a parable. Imagine that in some private business you own a small share that cost you $1,000. One of your partners, named Mr. Market, is very obliging indeed. Every day he tells you what he thinks your interest is worth and furthermore offers either to buy you out or to sell you an additional interest on that basis. Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. Often, on the other hand, Mr. Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you a little short of silly. 

If you are a prudent investor or a sensible businessman, will you let Mr. Market’s daily communication determine your view of the value of a $1,000 interest in the enterprise? Only in case you agree with him, or in case you want to trade with him. You may be happy to sell out to him when he quotes you a ridiculously high price, and equally happy to buy from him when his price is low. But the rest of the time you will be wiser to form your own ideas of the value of your holdings, based on full reports from the company about its operations and financial position.

The true investor is in that very position when he owns a listed common stock. He can take advantage of the daily market price or leave it alone, as dictated by his own judgment and inclination. He must take cognizance of important price movements, for otherwise his judgment will have nothing to work on. Conceivably they may give him a warning signal which he will do well to heed—this in plain English means that he is to sell his shares because the price has gone down, foreboding worse things to come. In our view such signals are misleading at least as often as they are helpful. Basically,
price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.”

2. How have you seen the parable of Mr. Market play out in your experience?  Any examples of a company that has been grossly mispriced at some point?

One example that comes to mind at the moment is American Express (AXP) back in the financial crisis in 2008-09. Looking at the fundamentals of the business in the years before the financial crisis hit, it’s pretty clear that what we have here is a great business that faced some difficulties due to the financial crisis. The question was the severity of these problems.

See financials below. Source: Morningstar

The AXP price per share, see below (Source: Morningstar), took a dive from $65 in April 2007 to $9.71 in June 2009, a fall of 85%. Having reached this low the share price started to climb up to where it’s trading today, at a price per share of $86, a gain of 686%. If I had had a better understanding of the business I might have had the courage to buy.

3. On page 192 Graham notes that as investing formulas have gained popularity their reliability dwindles due to new market conditions and the widespread use of the formula undermining its previously held advantage. In what ways has Graham’s formula lost reliability? How has it managed to stay useful?

Graham’s formula is still of value. The formula focuses on businesses that has demonstrated an ability to grow earnings without taking on too much risk to do this. In the end, this is what counts, the value creation in a certain business. Then it’s all about paying a fair price for this value creation based on a reasonable and conservative assumption about the intrinsic business value.

4. Graham mentions that one issue with the formula plans is that they leave the potential for the market to “run away” from investors. What steps do you take to ensure that the market doesn’t run away from you, while also protecting yourself from a steep drop in prices such as the bear market of the early 2000s?

Always be on the look out for great businesses selling at fair prices. The most important thing is to never pay too much for a business.

5. Graham seems to advocate that the Intelligent Investor find a way to have “something to do” as an outlet of pent-up energy as the market advances, rather than allowing oneself to become entangled with the market movements.  Do you have any example of what you could do in that regard?

Read about as many businesses as possible to prepare for less good times and for Mr. Market to offer some of them at a good price.

6. What did you think of the chapter overall?

The highlight of the chapter is the parable of Mr. Market. The final section “Fluctuations in bond prices” I read only briefly. Overall a great chapter.

Q&A: The Intelligent Investor – Chapter 7: Portfolio Policy for the Enterprising Investor: The Positive Side

Below are my reflections and answers to the discussion questions posted at Modern Graham for chapter 7 – Portfolio Policy for the Enterprising Investor: The Positive Side – of the Intelligent Investor written by Benjamin Graham. 

1. What quote from this chapter do you think best summarizes the point Graham is making?

“There is no reason at all for thinking that the average intelligent investor, even with much devoted effort, can derive better results over the years from the purchase of growth stocks than the investment companies specializing in this area. Surely these organizations have more brains and better research facilities at their disposal than you do. Consequently we should advise against the usual type of growth-stock commitment for the enterprising investor. This is one in which the excellent prospects are fully recognized in the market and already reflected in a current price-earnings ratio of, say, higher than 20. (For the defensive investor we suggested an upper limit of purchase price at 25 times average earnings of the past seven years. The two criteria would be about equivalent in most cases.)”

2. What do you think of Graham’s suggestions of activities for Enterprising Investors?

I think that Graham’s recommendation here for the enterprising investor sounds reasonable. Of the three different investment approaches Graham suggests I have spent most, if not all, my time in the first two categories, i.e. the relatively unpopular large company and in purchasing bargain issues. Up until this day I have not engaged in any special situations, or as Graham calls them “Workouts”. Maybe that time will come. The main reason is that I have kept myself pretty busy doing the first two categories. So for me personally, this is more a question of time than anything else.

Graham states that “To obtain better than average investment results over a long pull requires a policy of selection or operation possessing a twofold merit: (1) It must meet objective or rational tests of underlying soundness; and (2) it must be different from the policy followed by most investors or speculators. Our experience and study leads us to recommend three investment approaches that meet these criteria. They differ rather widely from one another, and each may require a different type of knowledge and temperament on the part of those who assay it.”

Graham recommends the three investment approaches as follows:

• The relatively unpopular large company: This is according to Graham “…an investment approach that should prove both conservative and promising.” This approaches implies that “…the enterprising investor concentrate on the larger companies that are going through a period of unpopularity.” A warning is also made regarding small companies that could “…also be undervalued for similar reasons, and in many cases may later increase their earnings and share price, they entail the risk of a definitive loss of profitability and also of protracted neglect by the market in spite of better earnings. The large companies thus have a double advantage over the others. First, they have the resources in capital and brain power to carry them through adversity and back to a satisfactory earnings base. Second, the market is likely to respond with reasonable speed to any improvement shown.”
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• Purchase of bargain issues: Graham’s definition of a bargain issue is that “…an issue is not a true “bargain” unless the indicated value is at least 50% more than the price.” Graham then goes on and talks about how the investor can find these bargain issues.  “There are two tests by which a bargain common stock is detected. The first is by the method of appraisal. This relies largely on estimating future earnings and then multiplying these by a factor appropriate to the particular issue. If the resultant value is sufficiently above the market price—and if the investor has confidence in the technique employed—he can tag the stock as a bargain. The second test is the value of the business to a private owner. This value also is often determined chiefly by expected future earnings—in which case the result may be identical with the first. But in the second test more attention is likely to be paid to the realizable value of the assets, with particular emphasis on the net current assets or working capital.
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• Special situations, or “Workouts”: “The typical “special situation” has grown out of the increasing number of acquisitions of smaller firms by large ones, as the gospel of diversification of products has been adopted by more and more managements. It often appears good business for such an enterprise to acquire an existing company in the field it wishes to enter rather than to start a new venture from scratch. In order to make such acquisition possible, and to obtain acceptance of the deal by the required large majority of shareholders of the smaller company, it is almost always necessary to offer a price considerably above the current level. Such corporate moves have been producing interesting profit-making opportunities for those who have made a study of this field, and have good judgment fortified by ample experience.”

3. Have you limited yourself to these activities in your investments?

Guess I already answered this question above. But anyways, up until today I have limited myself to the first two of the investment approaches.

4. Do you think it is ever possible to time the market or profit from arbitrages?

I think that it’s possible, but also that the probability of succeeding is rather low, implicating that total returns from such market timing activities should not be expected to be satisfactory in the end.
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An investor putting his time to such endeavors has stopped being an investor and become a speculator. So being an investor time is best spent in focusing the effort on finding great companies at fair prices for the long run. In doing so enterprising investors get the best odds out there when it comes to succeeding, that is to enjoy a satisfactory return and thus avoiding a permanent loss of capital.

5. How do you decide which growth companies will continue to perform well?

When talking about investing the question regarding future growth is the most difficult one, but also one of utmost importance due to the part it plays in the calculation of the underlying intrinsic value of a business. First, an investor will do best in trying to purchase stocks without paying up for the growth component inherent in the future prospects of the business. Second, if an investor pays up for growth this must be done on a conservative basis due to the speculative part always present through the uncertainties in future growth.

In his 1992 letter to shareholders Warren Buffett talked about value and growth as follows.
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“…most analysts feel they must choose between two approaches customarily thought to be in opposition: “value” and “growth.” Indeed, many investment professionals see any mixing of the two terms as a form of intellectual cross-dressing.
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We view that as fuzzy thinking (in which, it must be confessed, I myself engaged some years ago). In our opinion, the two approaches are joined at the hip: Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive.
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In addition, we think the very term “value investing” is redundant. What is “investing” if it is not the act of seeking value at least sufficient to justify the amount paid? Consciously paying more for a stock than its calculated value – in the hope that it can soon be sold for a still-higher price – should be labeled speculation (which is neither illegal, immoral nor – in our view – financially fattening).
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Whether appropriate or not, the term “value investing” is widely used. Typically, it connotes the purchase of stocks having attributes such as a low ratio of price to book value, a low price-earnings ratio, or a high dividend yield. Unfortunately, such characteristics, even if they appear in combination, are far from determinative as to whether an investor is indeed buying something for what it is worth and is therefore truly operating on the principle of obtaining value in his investments. Correspondingly, opposite characteristics – a high ratio of price to book value, a high price-earnings ratio, and a low dividend yield – are in no way inconsistent with a “value” purchase.
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Similarly, business growth, per se, tells us little about value. It’s true that growth often has a positive impact on value, sometimes one of spectacular proportions. But such an effect is far from certain. For example, investors have regularly poured money into the domestic airline business to finance profitless (or worse) growth. For these investors, it would have been far better if Orville had failed to get off the ground at Kitty Hawk: The more the industry has grown, the worse the disaster for owners.
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Growth benefits investors only when the business in point can invest at incremental returns that are enticing – in other words, only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts the investor.”

To make decisions about growth I try to follow the fundamentals of the business and the industry that it’s in. Doing this I try to observe any signs and changes in major factors impacting the value of the business.
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But as stated above, be careful when it comes to growth and remember the old adage “If something sounds too good to be true, it probably is.”

6. What did you think of the chapter overall?

A great one. I especially like Graham’s discussion about the three different investment approaches.

A Quote: Earning Power

“As far as the use of earning power or earning prospects in Wall Street is concerned, let me point out that in most of the current thinking earning power is not considered along the lines of an average over a period of time of medium duration. It is either considered as the earnings that are being realized just now, or those right around the corner, such as the next twelve months; or else the earnings are considered in terms of the long and almost endless future. A company with good prospects, for example, is supposed to be a company which will go on and on, more or less indefinitely increasing its earnings; and therefore it is not necessary to be too precise about what earnings you are talking about when you are considering the company’s future. Actually that idea of the long-term future of companies with good prospects shows itself, not in the use of any particular earnings, but in the use of the multiplier which is applied to the recent earnings or to the average earnings of the past.”

This quotation is not as of today, even though it could have been. These are Ben Grahams words back in 1946 from lecture number four of his class at Columbia University.

Some things change, some things don’t.

Check out the ten lectures here. They are all great. Read, learn and apply the things you like the most to your own investment process.