Security Analysis

The Best Of Graham And Dodd’s Security Analysis: Part IV

The Best Of Graham And Dodd’s Security Analysis: Part IV by Total Goon Move

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This is part four of a seven part series and contains quotes from the Sixth Edition of Security Analysis.

The Best Of Graham & Dodd’s Security Analysis Part IV: Theory Of Common- Stock Investment. The Dividend Factor

Security Analysis - Chapter 27 The Theory Of Common-Stock Investment

“We must begin with three realistic premises. The ?rst is that common stocks are of basic importance in our ?nancial scheme and of fascinating interest to many people; the second is that owners and buyers of common stocks are generally anxious to arrive at an intelligent idea of their value; the third is that, even when the underlying motive of purchase is mere speculative greed, human nature desires to conceal this unlovely impulse behind a screen of apparent logic and good sense.”

 -- p.348 --

“As far as the typical common stock is concerned — an issue picked at random from the list — an analysis, however elaborate, is unlikely to yield a dependable conclusion as to its attractiveness or its real value. But in individual cases, the exhibit may be such as to permit reasonably con?dent conclusions to be drawn from the processes of analysis.”

-- p.348 --

“The impressive new concept [trend of earnings] underlying the greatest stock-market boom in history appears to be no more than a thinly disguised version of the old cynical epigram: ‘Investment is successful speculation.’”

-- p.359 --

“The man in the street, having been urged to entrust his funds to the superior skill of investment experts — for substantial compensation — was soon reassuringly told that the trusts would be careful to buy nothing except what the mani n the street was buying.”

-- p.361 --

“The accepted assumption that because earnings have moved in a certain direction for some years past they will continue to move in the that direction is fundamentally no different from the discarded assumption that because earnings averaged a certain amount in the past they will continue to average about that amount in the future.”

-- p.364 --

Security Analysis - Chapter 28 Newer Canons Of Common-Stock Investment

“Without seeking to prophesy the future, may it not suf?ce to declare that the investor cannot safely rely upon a general growth of earnings to provide both safety and pro?t over the long pull?…Our caution today would appear, at least, to be based on bitter experience and on the recognition of some newer and less promising factors in the whole business picture.”

[drizzle]-- p.368 --

“It follows that once the investor pays a substantial amount for th growth factor, he is inevitably assuming certain kinds of risk; viz., that the growth will be less than he anticipates, that over the long pull he will have paid too much for what he gets, that for a considerable period the market will value the stock less optimistically than he does.”

-- p.371 --

“Of more practical importance is the question whether or not investment can be successfully carried on in common stocks that appear cheap from the quantitative angle and that — upon study — seem to have average prospects for the future. Securities of this type can be found in reasonable abundance, as a result of the stock market’s obsession with companies considered to have uniquely good prospects of growth.”

-- p.374 --

“Because of this emphasis on the growth factor, quite a number of enterprises that are long established, well ?nanced, important in their industries and presumably destined to stay in business and make pro?ts inde?nitely in the future, but that have not speculative or growth appeal, tend to be discriminated against by the stock market — especially in years of subnormal pro?ts — and to sell for considerably less than the business would be worth to a private owner.”

-- p.374 --

“Their [Wall Street’s] emphasis is mainly on long-term growth, prospects for the next year, or the indicated trend of the stock market itself. Undoubtedly any of these three viewpoints [discussed in the chapter] may be followed successfully by those especially well equipped by experience and native ability to exploit them. But we are not so sure that any of these approaches can be developed into a system or technique that can be con?dently followed by everyone of sound intelligence who has studied it with care.”

-- p.375 --

“Trading in the market, forecasting next year’s results for various businesses, selecting the best media for long-term expansion — all these have a useful place in Wall Street. But we think that the interests of investors and of Wall Street as an institution would be better served if operation based primarily on these factors were called by some other name than investment.”

-- p.375 --

Security Analysis - Chapter 29 The Dividend Factor In Common-Stock Analysis

“The dividend rate is a simple fact and requires no analysis, but its exact signi?cant is exceedingly dif?cult to appraise. From one point of view the dividend rate is all- important, but from another and equally valid standpoint it must be considered an accidental and minor factor.”

-- p.376 --

“A basic confusion has grown up in the minds of managements and stockholders alike as to what constitutes a proper dividend policy. The result has been to create a de?nite con?ict between two aspects of common-stock ownership: one being the possession of a marketable security, and the other being the assumption of a partnership interest in a business.”

-- p.376 --

“One of the obstacles in the way of an intelligent understanding by stockholders of the dividend question is the accepted notion that the determination of dividend policies is entirely a managerial function, in the same way as the general running of the business.”

-- p.382 --

“Boards of directors usually consist largely of executive of?cers and their friends. The of?cers are naturally desirous of retaining as much cash as possible in the treasury, in order to simplify their ?nancial problems; they are also inclined to expand the business persistently for the sake of personal aggrandizement and to secure higher salaries.”

-- p.382 --

“The heavy surtaxes imposed upon large incomes frequently make it undesirable from the standpoint of the large stockholders that earnings be paid out in dividends. Hence dividend policies may be determined at times from the standpoint of the taxable status of the large stockholders who control the directorate.”

-- p.382 --

“Dividend policies are often so arbitrarily managed as to introduce an additional uncertainty in the analysis of a common stock. Besides the dif?culty of judging the earning power, there is the second dif?culty of predicting what part of the earnings the directors will see ?t to disburse in dividends.”

-- p.382 --

“Experience would con?rm the established verdict of the stock market that a dollar of earnings is worth more to the stockholder if paid him in dividends than when carried to surplus.”

-- p.384 --

“The common-stock investor should ordinarily require both an adequate earning power and an adequate dividend. If the dividend is disproportionately small, an investment purchase will be justi?ed only on an exceptionally impressive showing of earnings… On the other hand, of course, an extra-liberal dividend policy cannot compensate for inadequate earnings, since with such a showing the dividend rate must necessarily be undependable.”

-- p.384 --

“Stockholders are entitled to receive the earnings on their capital except to the extent they decide to reinvest them in the business. That management should retain or reinvest earnings only with the speci?c approval of the stockholders. Such “earnings” as must be retained to protect the company’s position are not true earnings at all. They should not be reported as pro?ts but should be deducted in the income statement as necessary reserves, with an adequate explanation thereof.”

-- p.386 --

“A compulsory surplus is an imaginary surplus.”

-- p.386 --

“Dividend and reinvestment policies should be controlled not by law but by the intelligent decision of stockholders.”

-- p.392 --

 “Individual cases may well justify retention of earnings to an extent far greater than is ordinarily desirable. The practice should vary with the circumstances; the policy should be determined and proposed in the ?rst instance by the management; but it should be subject to independent consideration and appraisal by stockholders in their own interest, as distinguished from that of the corporation as a separate entity or the management as a special group.”

-- p.392 --

This concludes part IV of VII.

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Security Analysis

Security Analysis: Sixth Edition, Foreword by Warren Buffett by Benjamin Graham
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