The Intelligent Investor Feedback

Intro

Take away examples

• If you speculate you will (most probably) lose your money in the end
  • speculators
    • anticipate stock-market movement, whether in the general list or in specific securities
  • speculative purchases, justified after an intelligent measurement of the gain and loss factors of the security itself is within discussion
• Buy when most people (including experts) are pessimistic, and sell when they are actively optimistic
• Investigate, then Invest

Who for?

• defensive
  • conserve his capital
• enterprising
  • find recurrent opportunities for purchase
    • securities under their fair value
      • from competent analysis
• important changes in industry
  • limited use

What things needed by investors?

• sense of financial history

General Approaches to Investment

What the Intelligent Investor can accomplish?

• policy for individual and non-professional investor
  • Defensive Investor
  • Aggressive Investor
    • General Trading
      • Anticipating the moves of the market as a whole
      • reflected in the familiar average
    • Selective Trading
      • picking out issues
      • do better than market than average stock
    • Buying Cheap and Selling Dear
      • meaning
        • come in when market and sentiment is depressed
        • selling out when exalted
      • Criteria
        • periodic examination of their intrinsic merits
          • determined by temperament and personal situation
    • Long-Pull Selection
      • definition
        • picking out companies lasting more than average enterprise
      • criteria
        • long-term prospects
    • Bargain Purchases
      • selecting issues selling considerably below true value
        • opposite to the growth investments
  • take away
    • if you do not like the management, sell your stocks

The Investor and Sock-Market Fluctuations

• underlying
  • US Savings Bonds
  • Common stocks

The invesror abd his advisors

• investment counsel
• financial services
• Advice from brokerage houses
• investment bankers
• other advisers

General Portfolio Policy: The Defensive Investor

• Portfolio includes

  • preferred stocks
  • security forms
  • investment merits of common stocks
  • investment company shares
  • investment in a “common trust fund”

• rules for Common-stock component

  • There should be adequate though not excessive diversification.
    • This might mean a minimum of ten different issues and maximum of 30
  • Each company selected should be large, prominent, and conservatively financed.
    • Indefinite as these adjectives must be, their general sense sense is clear
  • Each company should have a long record of continuous dividend payments
    • should also consider eco environment as well
  • The price paid for each should be reasonable in relation to its average earnings for the last five years or longer
    • recommend a price not exceed twenty times such earnings

Portfolio Policy for the Enterprising Investor: Positive Approach

Four Heads

• Buying in low market and selling in high markets
  • formula timing

• Buying carefully chosen “Growth stocks”

• Buying bargain issues of various types
  • two tests
    • method of appraisal(评价)
      • estimating future earnings and multiplying these by a factor appropriate to the particular issue
    • value to the business to a private owner
      • determined by expected future earnings
• Buying into “special situations”

Principles of Security Selection

United States Savings Bonds

• A boon(福音) to investors

Security Analysis for the Lay Investor(非专业投资者) : General Approach

• mainly earning-coverage (覆盖) test
• other factors
  • Size of enterprise
  • Stock-Equity Ratio
  • Property value
• factors affecting the capitalization rate
  • general long term prospects
  • management
  • financial strength and captical structure
  • dividend record
  • current divident rate

Stock Selection for the Defensive Investor

• Quantatitive
  • initial excursion
    • look at the Dow Jones in general
  • four rules of common-stock selection
    • diversification
      • easily met
    • company selected should be large, prominent, and conservatively financed.
      • easily met
    • Paid a continuous dividends within the past ten years
      • Calculation
    • The upper limit is 25 times average learning between 1936-1940
      • calculation for not paying a too much price

Stock Selection for the Enterprising Investor: the appraisal method

• formal valuation of a company as the key to investment in its common stock

Seven Rules for the appraisal method

• The appraised value is determined by
  • estimating the earning power
  • applying thereto (对此) a suitable multiplier
  • Adjusting, if necessary, for asset value
• The earning power should ordinarily represent an estimate of average earnings for the next five years
• The above estimate should be developed preferably from a project of the dollar volume and the profit margin.
• When figures of earlier years enter into the calculation, proper adjustment should be made for subsequent changes in capitalization (可能是要考虑时间价值)
• The multiplier should reflect prospective longer-term changes in earnings
  • A multiplier of 12 is suitable for stocks with neurtal prospectives
  • the maxiplier is within 20 and 8
• If the tangible-asset value is less than the earning-power value (earning power times multiplier)
  • the latter may be reduced by some arbitary factor to reflect this deficiency (缺乏)
  • Our suggested factor is to deduct one quarter of the amount by which the earning-power exceeds twice the asset value
  • This permits a 100 percent premium over tangible assets without penalty
• If the net-current-asset value exceeds the earning power value
  • the later may be increased by 50 percent of the excess to give the final appraised value
• Where extrordinary conditions prevail,
  • such as
    • war profits
    • war restrictions
    • Temporary royalty or rental situation
  • the amount of the total probable gain or less per share due to such conditions should be estimated and added to, or subtracted from the appraised value without the abnormal conditions
• Where the caoitalization structure is highly speculative (the total of senior securities is disproportionately large)
  • the value of the entire enterprise should first be apportioned between the senior securities and the common stock on a basis which recognizes the going-concern value of the senior claims
• The more speculative (揣测的，投机性的) the position of the common stock- for what ever reason- the less practical dependence can be accorded to the appraised value found
• Appraised value should be taken as a definite guide to current purchase or sale only if they exceed or fall below the market price by at least
  • One-third.
  • Other cases, it is a suplemental fact for analysis

Detection of Undervalued Issues by Security Analysis: Three examples

• two recurrent reasons
  • a low level of the general market
  • the carrying to an extreme of popular disfavor toward individual issues

The pattern of Change in Stock Earnings and Stock Prices

• Pattern I
  • Price changes of common stocks with highly stable earnings
  • 
• Pattern II
  • Price Fluctuations of common stocks with typical variations in earnings per share
  • 
• Pattern III
  • Extreme Vicissitutes
• Pattern IV
  • Behavior of Growth Stocks

Group Studies of Earnings and Price Developments

• Long-range variations within a corporate group
• Results of portfolio changes to improve quality
• How permanent are trends?
• Investment in giant enterprises

The Investor as Business Owner

Stockholders and Managements

• Stockholder-management relationships
  • level one
    • legal rights and legal machinery
  • level two
    • assertion of stockholders’ rights in practice
  • Level three
    • stockholders’ actual treatment by management
• Approaches for the stockholders
  • Is the Management reasonably efficient?
  • Are the interest of the average outside stockholder receiving proper recognition ?
• Indicators to consider
  • Efficiency of management
    • Clear-cut sign
      • failure to earn a satisfactory return on the stockholder’s investment during a period of several years in which the industry as a whole is prosperous
      • its failure to maintain its approximate share of the total sales volume of the industry
      • Its failure to show a profit margin on sales reasonably close to that of the indstry as a whole
    • management-stockholder relations
    • role of boards of directors
  • Fair treatment of the average stockholder
    • Following indicators
      • failure to pay dividends commensurate both with earnings and with the value of the stockholder’s equity
      • Use stockholder’s money in a relatively unprofitable manner
      • Use of stockholder’s money to buy back their stock at an inadequate price
      • Maintenance of a holding-company set-up, in face of the fact that outside stockholders would be much better off if they owned the underlying assets directly

A study of Stockholder-Management Relations in Two Industries

• closed-end investment funds (封闭式投资基金)
• the fire and casulty insurance company (火灾和保险业保险公司)

Conclusion

“Margin of Safety” as the Central Concept of Investment

• know what you are doing-know your business
• Do not try to make “business profits” out of securities
  • Return in in excess of normal interest and dividend income
• Do not let anyone else run your business, unless you can supervise his performance with adequate care and comprehension
  • you have unusually strong reasons for placing implicit confidence in his integrity and ability
• Do not enter upon an operation
  • that is manufacturing or trading in an item
    • Unless a reliable calculation shows that it has a fair chance to yield a reasonable profit
  • In particular,
    • keep away from ventures, where you have little to gain and much to lose
  • For enterprising investor
    • operations for profit should not base on optimism but on arithmetic
  • For investor
    • Limit his return to a small figure
• Have the courage of your knowledge and experience
  • if you think your judgement is sound, act it
  • even if others may hesitate
  • You are neither right nor wrong because the crowd disagrees with you
  • you are right because your data and reasoning are sight
  • courage is a supreme virtue after adequate knowledge and a tested judgenent are at hand
• safe and narrow path of standard, defensive investment
• To achieve a satisfactory investment results is easier than most people realize
• to achieve superior results is harder than it looks

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