he made a hundred times his money. (Location 449)
It is that a worthwhile improvement in earnings is coming in the right sort of company, (Location 2073)
but that this particular increase in earnings has not yet produced an upward move in the price of that company’s shares. (Location 2073)
This is that once a stock has been properly selected and has borne the test of time, it is only occasionally that there is any reason for selling it at all. (Location 2210)
Outstanding companies, the only type which I believe the investor should buy, just don’t function this way. (Location 2259)
You would immediately start analyzing your classmates, not from the standpoint of how pleasant they might be or even how talented they might be in other ways, but solely to determine how much money they might make. (Location 2268)
common stock buying runs very close. Eventually you would pick the three classmates you felt would have the greatest future earning power. (Location 2271)
Finally, in the many cases where the stockholder benefits enormously from retained earnings the benefits accrue in quite different proportions to different types of stockholders within the same company, thereby confusing investor thinking even more. (Location 2311)
This occurs when substandard managements can get only a subnormal return on the capital already in the business, yet use the retained earnings merely to enlarge the inefficient operation rather than to make it better. (Location 2321)
The other and even more important way that retained earnings fail to produce increased profits results from an even more serious failure of our accepted accounting methods. (Location 2337)
Selecting the right common stock is not an easy or simple matter. If the company considering the dividends is a good one, the investor has already wisely done his task of selection. (Location 2390)
This is as true for the conservative investor going into the institutional type growth stock as for those willing and able to take greater risks for greater gain. (Location 2398)
stock might sink back to what (Location 3079)
there anything sacred about our figure of 20? No, because it admittedly does not take into consideration an important element of future value—the factors we know and most others don’t know which we believe will in a few years justify a price of 75. (Location 3083)
This dimension breaks down into four major subdivisions: (Location 7577)
To be a truly conservative investment a company—for a majority if not for all of its product lines—must be the lowest-cost producer or about as low a cost producer as any competitor. (Location 7579)
The second condition is that the greater than average profit margin should enable a company to earn enough to generate internally a significant part or perhaps all of the funds required for financing growth. (Location 7587)
All of the above has been written with manufacturing companies in mind; hence the term production has been used. (Location 7602)
The same principles apply, but the word operations is substituted for production and a low- or high-cost operator for a low- or high-cost producer. (Location 7604)
Again and again in this discussion of production, marketing and research, the terms profit and profit margin have been used. (Location 7651)
the first dimension of a conservative investment consists of outstanding managerial competence in the basic areas of production, marketing, research, and financial controls. (Location 7685)
The force that causes such things to happen, that creates one company in an industry that is an outstanding investment vehicle and another that is average, mediocre, or worse, is essentially people. Edward H. (Location 7688)
He said that behind every unusually successful corporation was this kind of determined entrepreneurial personality with the drive, the original ideas, and the skill to make such a company a truly worthwhile investment. (Location 7692)
a corporate chief executive dedicated to long-range growth who has surrounded himself with and delegated considerable authority to an extremely competent team in charge of the various divisions and functions of the company. (Location 7700)
outside is a damning sign of something basically wrong with the existing management—no matter how good the surface signs may have been as indicated by the most recent earnings statement. (Location 7721)
The company must recognize that the world in which it is operating is changing at an ever-increasing rate. (Location 7762)
There must always be a conscious and continuous effort, based on fact, not propaganda, to have employees at every level, from the most newly hired blue-collar or white-collar worker to the highest levels of management, feel that their company is a good place to work. (Location 7792)
Management must be willing to submit itself to the disciplines required for sound growth. (Location 7863)
The third dimension deals with something quite different: the degree to which there does or does not exist within the nature of the business itself (Location 7884)
certain inherent characteristics that make possible an above-average profitability for as long as can be foreseen into the future. (Location 7885)
growth in this connection has already been discussed. Growth costs money in many ways. (Location 7888)
Finally, except for the very few businesses that sell only for cash, there will be a corresponding drain on corporate resources to take care of the growing volume of receivables. (Location 7892)
The fundamental way, which is the yardstick used by most managements, is the return on invested assets. (Location 7899)
What percent return can the company expect on the part of its capital invested in this particular way in comparison to what the return might be if the same amount of its assets was employed in some other way? (Location 7900)
What the investor usually sees is not the return on a specific amount of present-day dollars utilized in a specific subdivision of the business but the total earnings of the business as a percentage of its total assets. (Location 7902)
comparisons of the return on total invested capital between one company and another may be so distorted by variations in the price levels at which different companies made major expenditures that the figures are highly misleading. (Location 7904)
comparing the profit margins per dollar of sales may be more helpful as long as one other point is kept in mind. (Location 7906)
For example, a company that has annual sales three times its assets can have a lower profit margin but make a lot more money than one that needs to employ a dollar of assets in order to obtain each dollar of annual sales. (Location 7908)
from the standpoint of safety of investment all the emphasis is on profit margin on sales. (Location 7910)
while, if the other had a 10 percent margin, the increased costs would wipe out only one-fifth of its profits. (Location 7913)
In today’s highly fluid and competitive business world, obtaining well-above-average profit margins or a high return on assets is so desirable that, whenever a company accomplishes this goal for any significant period of time, (Location 7915)
High profit margins may be compared to an open jar of honey owned by the prospering company. (Location 7919)
One is by monopoly, which is usually illegal, although, if the monopoly is due to patent protection, it may not be. (Location 7921)
The other way for the honey-jar company to keep the insects out is to operate so much more efficiently than others that there is no incentive for present or potential competition to take action that will upset the existing situation. (Location 7923)
the specific characteristics that enable certain well-managed companies to maintain above-average profit margins more or less indefinitely. (Location 7926)
A simple example of economy of scale: A well-run company making one million units a month will often have a lower production cost for each unit than a company producing only 100,000 units in the same period. (Location 7928)
The bigger a company is, the harder it is to manage efficiently. (Location 7932)
On the other hand, when a company clearly becomes the leader in its field, not just in dollar volume but in profitability, it seldom gets displaced from this position as long as its management remains highly competent. (Location 7935)
Neither have scores of smaller price-cutting suppliers of peripheral equipment been able to displace IBM as the main and most profitable operator in that phase of the computer industry. (Location 7944)
A trend toward the substitution of generic for trade names may or may not upset these ratios, and in any case there cannot be said to be an exact formula applicable to other industries; nevertheless, the concept behind them should be kept in mind when an investor attempts to appraise which companies have a natural advantage in regard to profitability and which do not. (Location 7958)
More important, Campbell has enough business so that it can scatter canning plants at strategic spots across the nation, which makes for a sizable double advantage: (Location 7965)
Next, and probably most important of all, because Campbell’s is a recognized product that the customer knows and wants when he enters the supermarket, the retailer automatically awards to it a prominent and fairly sizable area of his always sought-after shelf space. (Location 7969)
For reasons such as these, this particular company has strong inherent forces tending to protect profit margins. (Location 7974)
Scale is by no means the only investment factor tending to perpetuate the much greater profitability and investment appeal of some companies over others. (Location 7981)
This is because the semiconductor is becoming a larger and larger percentage of both the total content and the total technical know-how of more and more products. (Location 7994)
It should be noted that the “above-average” profit margin or “greater than normal” return on investment need not be—in fact, should not be—many times that earned by industry in general to give a company’s shares great investment appeal. (Location 8025)
In contrast, a profit margin consistently just 2 or 3 percent of sales greater than that of the next best competitor is sufficient to ensure a quite outstanding investment. (Location 8029)
they don’t have a clear understanding of what makes the price of the particular stock go up or down by a significant amount. (Location 8043)
shares they had every reason to hold and which, if held, would have become extremely profitable as long-range investments. (Location 8046)
However, the common denominator in this success has been the refusal to sell certain unusual high-quality stocks simply because each has had such a sharp fast rise that its price-earnings ratio suddenly looks high in relation to that to which the investment community had become accustomed. (Location 8052)
Every significant price move of any individual common stock in relation to stocks as a whole occurs because of a changed appraisal of that stock by the financial community. (Location 8057)
When compared with other stocks showing similar above-average business characteristics and comparable growth prospects, this ratio of 22 does not appear at all high. (Location 8066)
It should never be forgotten that an appraisal is a subjective matter. (Location 8071)
Rather, it results from what the person doing the appraising believes is going on, no matter how far from the actual facts such a judgment may be. In other words, any individual stock does not rise or fall at any particular moment in time because of what is actually happening or will happen to that company. (Location 8072)
When a stock has been selling too high because of unrealistic expectations, sooner or later a growing number of stockholders grow tired of waiting. (Location 8088)
On the lowest end of the risk scale and most suitable for wise investment is the company that measures quite high in regard to the first three dimensions but currently is appraised by the financial community as less worthy, and therefore has a lower price-earnings ratio, than these fundamental facts warrant. (Location 8103)
If the fundamentals are genuinely strong, these companies will in time increase earnings not only enough to justify present prices but to justify considerably higher prices. (Location 8112)
The conservative investor must be aware of the nature of the current financial-community appraisal of any industry in which he is interested. (Location 8239)
With an image of “no growth in earnings for the next four years,” they would now be seeing a price-earnings ratio of only ten in this second stock. (Location 8272)
The further into the future profits will continue to grow, the higher the price-earnings ratio an investor can afford to pay. (Location 8274)
will result not from what will actually happen but from what the financial community currently believes will happen. (Location 8276)
The inference is that by not paying or raising the dividend the company had been doing nothing for its stockholders. (Location 8386)
At times he is not benefited at all by such retained earnings. At others he is benefited only in a negative sense. (Location 8394)
One way is when managements pile up cash and liquid assets far beyond any present or prospective needs of the business. (Location 8400)
There is another and more serious way in which earnings are frequently retained in the business without any significant benefit to stockholders. (Location 8405)
can get only a subnormal return on the capital already in the business, yet use the retained earnings merely to enlarge the inefficient operation rather than to make it better. (Location 8406)
Since for some strange reason our accepted accounting system and the tax laws that are based on it make no differentiation between “assets” of this type and those which have actually increased the value of the business, (Location 8419)
but if a balance sheet is supposed to have any relationship to the real values of the assets described thereon, the confusion that results seems about parallel to what would happen if engineers and scientists made their calculations in our three-dimensional world by using only two-dimensional plane geometry. (Location 8425)
This is because the rate of acquiring new capital assets (as against merely replacing existing and about-to-be-retired assets) is usually so fast that more of the depreciation is on recently acquired assets installed at somewhere near today’s values. (Location 8433)
Instead it was more typical to compete by altering their own “investment” recommendations so as to try for in-and-out quick profits by attempting to outguess the short-range market. (Location 8582)
There are many sloppily run companies having managements with little understanding of what it takes to handle company affairs in ways that make that company’s stock inherently attractive. (Location 8765)
Herein is a tremendous temptation for companies to “manage” earnings—that is, to conduct their affairs not so as to attain the best over-all results for their stockholders but so as to be able to show this steady, consistent per-share increase. When this happens, investors are being paid in false coin. (Location 8832)