My Key Takeaways From Chapter 16 Commentary 16 of the Intelligent Investor. Part 15/16. To Be Continued.

Chapter 15 Stock Selection for the Enterprising Investor

A Summary of the Graham-Newman Methods Between 1926 and 1956

  1. Arbitrages
    The purchase of a security and the simultaneous sale of one or more other securities into which it was to be exchanged under a plan of reorganization, merger, or the like.
  2. Liquidations
    Purchase of shares which were to receive one or more cash payments in liquidation of the company’s assets.
  3. Related Hedges
    The purchase of convertible bonds or convertible preferred shares, and the simultaneous sale of common stock into which they were exchangeable.
  4. Net-Current-Asset (or “Bargain”) Issues
    The idea here was to acquire as many issues as possible at a cost for each of less than their book value in terms of net-current-assets alone-i.e., giving no value to the plant account and other assets. Our purchases were made typically at two-thirds or less of such stripped-down asset value.

A Winnowing of the Stock Guide

Suppose we look for a simple prima facie indication that a stock is cheap. The first such clue that comes to mind is a low price in relation to recent earnings. This would make a goodly number of candidates for further selectivity.

So let us apply to our list some additional criteria, rather similar to those we suggested for the defensive investor, but not so severe. We suggest the following:

  1. Financial condition
    (a) Current assets at least 1.5 times current liabilities, and (b) debt not more than 110% of net current assets (for industrial companies)
  2. Earnings stability
    No deficit in the last 5 years covered in the Stock Guide.
  3. Dividend record
    Some current dividend.
  4. Earnings growth
    Last year’s earnings more than those of 1966.
  5. Price
    Less than 120% net tangible assets.

Note also that we set no lower limit on the size of the enterprise.

Single Criteria for Choosing Common Stocks

An inquiring reader might well ask whether the choice of a better than average portfolio could be made a simpler affair than we have just outlined. Could a single plausible criterion be used to good advantage-such as a low price/earnings ratio, or a high dividend return, or a large asset value? The 2 methods of this sort that we have found to give quite consistently good results in the longer past has been (a) a purchase of low-multiplier stocks of important companies (such as the DJIA list), and (b) the choice of a diversified group of stocks selling under their net-current-asset value (or working-capital value).
We have already pointed out that the low-multiplier criterion applied to the DJIA at the end of 1968 worked out badly when the results are measured to mid-1971. The record of common-stock purchases made at a price below their working-capital value has no such bad mark against it; the drawback here has been the drying up of such opportunities during most of the past decade.

Commentary on Chapter 15

“It is easy in the world to live after the world’s opinion; it is easy in solitude to live after our own; but the great man is he who in the midst of the crowd keeps with perfect sweetness the independence of solitude.” – Ralph Waldo Emerson

Practice, Practice, Practice

You can use “portfolio trackers” at websites like www.morningstar.com, http://finance.yahoo.com, http://money,cnn.com/services/portfolio/ or www.marketocracy.com (at the last site, ignore the “market beating” hype on its funds and other services.

Looking Under the Right Rocks

You can use websites like http://finance.yahoo.com and www.morningstar.com to screen stocks with the statistical filters suggested in Chapter 14.

 

Ipsam eaque sint tempora animi minima ullam laboriosam. Enim voluptates facilis ut ratione qui et vel.

Qui esse vero hic cupiditate et. Aut tempore eligendi vero et.

I'm an AI bot trained on the most helpful WSO content across 17+ years.

Career Advancement Opportunities

March 2024 Investment Banking

  • Jefferies & Company 02 99.4%
  • Goldman Sachs 19 98.8%
  • Harris Williams & Co. (++) 98.3%
  • Lazard Freres 02 97.7%
  • JPMorgan Chase 03 97.1%

Overall Employee Satisfaction

March 2024 Investment Banking

  • Harris Williams & Co. 18 99.4%
  • JPMorgan Chase 10 98.8%
  • Lazard Freres 05 98.3%
  • Morgan Stanley 07 97.7%
  • William Blair 03 97.1%

Professional Growth Opportunities

March 2024 Investment Banking

  • Lazard Freres 01 99.4%
  • Jefferies & Company 02 98.8%
  • Goldman Sachs 17 98.3%
  • Moelis & Company 07 97.7%
  • JPMorgan Chase 05 97.1%

Total Avg Compensation

March 2024 Investment Banking

  • Director/MD (5) $648
  • Vice President (19) $385
  • Associates (86) $261
  • 3rd+ Year Analyst (13) $181
  • Intern/Summer Associate (33) $170
  • 2nd Year Analyst (66) $168
  • 1st Year Analyst (202) $159
  • Intern/Summer Analyst (144) $101
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
Secyh62's picture
Secyh62
99.0
3
BankonBanking's picture
BankonBanking
99.0
4
Betsy Massar's picture
Betsy Massar
99.0
5
kanon's picture
kanon
98.9
6
dosk17's picture
dosk17
98.9
7
GameTheory's picture
GameTheory
98.9
8
CompBanker's picture
CompBanker
98.9
9
DrApeman's picture
DrApeman
98.9
10
Jamoldo's picture
Jamoldo
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”