Benjamin Graham, The Intelligent Investor
Revised Edition 1973
Commentary by Jason Zweig
Preface by Warren E. Buffett
Available at amazon.com
The now-standard procedure for estimating future earning power starts with average past data for physical volume, prices received, and operating margin. Future sales in dollars are them projected on the basis of assumptions as to the amount of change in volume and price level over the previous base. These estimates, in turn, are grounded first on general economic forecasts of gross national product, and then on special calculations applicable to the industry and company in question.
No intelligent investor, no matter how starved for yield, would ever buy a stock for its dividend income alone; the company and its businesses must be solid, its stock price must be reasonable.
Buying a bond only for its yield is like getting married only for the sex. If the thing that attracted you in the first place dries up, you'll find yourself asking, “What else is there?” When the answers is “Nothing,” spouses and bondholders alike end up with broken hearts.
Jason Zweig, page 146
Flattening earning cycles
The investor should impose some limit on the price he will pay for an issue in relation to its average earnings over, say, the past seven years. We suggest that this limit be set at 25 times such average earnings, and no more than 20 times those of the last twelve-month period.
News you could use
(…T)he anchorman announces brightly, «Stocks became more attractive yet again today, as the Dow dropped another 2.5% on heavy volume — the fourth day in a row that stocks have gotten cheaper. Tech investors fared even better, as leading companies like Microsoft lost early 5% on the day, making them even more affordable. That comes on top of the good news of the past year, in which stocks have already lost 50%, putting them at bargain levels not seen in years. And some prominent analysts are optimistic that prices may drop still further in the weeks and months to come. (…)»
Falling stock prices would be fabulous news for any investor with very long horizon
Jazon Zweig, page 222
Value = Current (Normal) Earnings X ( 8.5 + twice the expected annual growth rate )
The growth figure should be that expected over the next seven to ten years. For example:
|Expected growth rate||0.0%||2.5%||5.0%||7.2%||10.0%||14.3%||20.0%|
|Growth in 10 years||0.00||28.0%||63.0%||100.0%||159.0%||280.0%||319.0%|
|Multiplier in current earnings||8.5||13.5||18.5||22.9||28.5||37.1||48.5|
Minimum Coverage for Bonds
The chief criterion used for corporate bonds is the number of times that total interest charges have been covered by available earnings for some years in the past
- For investment-grade bonds:
|Type of enterprise||Average of past 7 years||Alternative measured by «Poorest Year»||Average of past 7 years after income taxes||Alternative measured by «Poorest Year» after income taxes|
|Public-utility||4 times||3 times||2.65 times||2.10 times|
|Railroad||5 times||4 times||3.20 times||2.65 times|
|Industrial||7 times||5 times||4.30 times||3.20 times|
|Retail concern||5 times||4 times||3.20 times||2.65 times|