The Intelligent Investor_ The Definitive Book on Value Investing - Benjamin Graham [147]
TABLE 14-7 Relative Price Movements of Stocks of Various
We have no very helpful remarks to offer in this broad area of investment—other than to counsel that the same arithmetical standards for price in relation to earnings and book value be applied to the choice of companies in these groups as we have suggested for industrial and public-utility investments.
Railroad Issues
The railroad story is a far different one from that of the utilities. The carriers have suffered severely from a combination of severe competition and strict regulation. (Their labor-cost problem has of course been difficult as well, but that has not been confined to railroads.) Automobiles, buses, and airlines have drawn off most of their passenger business and left the rest highly unprofitable; the trucks have taken a good deal of their freight traffic. More than half of the railroad mileage of the country has been in bankruptcy (or “trusteeship”) at various times during the past 50 years.
But this half-century has not been all downhill for the carriers. There have been prosperous periods for the industry, especially the war years. Some of the lines have managed to maintain their earning power and their dividends despite the general difficulties.
The Standard & Poor’s index advanced sevenfold from the low of 1942 to the high of 1968, not much below the percentage gain in the public-utility index. The bankruptcy of the Penn Central Transportation Co., our most important railroad, in 1970 shocked the financial world. Only a year and two years previously the stock sold at close to the highest price level in its long history, and it had paid continuous dividends for more than 120 years! (On p. 423 below we present a brief analysis of this railroad to illustrate how a competent student could have detected the developing weaknesses in the company’s picture and counseled against ownership of its securities.) The market level of railroad shares as a whole was seriously affected by this financial disaster.
It is usually unsound to make blanket recommendations of whole classes of securities, and there are equal objections to broad condemnations. The record of railroad share prices in Table 14-6 shows that the group as a whole has often offered chances for a large profit. (But in our view the great advances were in themselves largely unwarranted.) Let us confine our suggestion to this: There is no compelling reason for the investor to own railroad shares; before he buys any he should make sure that he is getting so much value for his money that it would be unreasonable to look for something else instead.*
Selectivity for the Defensive Investor
Every investor would like his list to be better or more promising than the average. Hence the reader will ask whether, if he gets himself a competent adviser or security analyst, he should not be able to count on being supplied with an investment package of really superior merits. “After all,” he may say, “the rules you have outlined are pretty simple and easygoing. A highly trained analyst ought to be able to use all his skill and techniques to improve substantially on something as obvious as the Dow Jones list. If not, what good are all his statistics, calculations, and pontifical judgments?”
Suppose, as a practical test, we had asked a hundred security analysts to choose the “best” five stocks in the Dow Jones Average, to be bought at the end of 1970. Few would have come up with identical choices and many of the lists would have differed completely from each other.
This is not so surprising as it may at first appear. The underlying reason is that the current price of each prominent stock pretty well reflects the salient factors in its financial record plus the general opinion as to its future prospects. Hence the view of any analyst that one stock is a better buy than the rest must arise to a great extent from his personal partialities and expectations, or