The Intelligent Investor_ The Definitive Book on Value Investing - Benjamin Graham [153]
Why should this be so? We can think of two different explanations, each of which may be partially applicable. The first is the possibility that the stock market does in fact reflect in the current prices not only all the important facts about the companies’ past and current performance, but also whatever expectations can be reasonably formed as to their future. If this is so, then the diverse market movements which subsequently take place—and these are often extreme—must be the result of new developments and probabilities that could not be reliably foreseen. This would make the price movements essentially fortuitous and random. To the extent that the foregoing is true, the work of the security analyst—however intelligent and thorough—must be largely ineffective, because in essence he is trying to predict the unpredictable.
The very multiplication of the number of security analysts may have played an important part in bringing about this result. With hundreds, even thousands, of experts studying the value factors behind an important common stock, it would be natural to expect that its current price would reflect pretty well the consensus of informed opinion on its value. Those who would prefer it to other issues would do so for reasons of personal partiality or optimism that could just as well be wrong as right.
We have often thought of the analogy between the work of the host of security analysts on Wall Street and the performance of master bridge players at a duplicate-bridge tournament. The former try to pick the stocks “most likely to succeed”; the latter to get top score for each hand played. Only a limited few can accomplish either aim. To the extent that all the bridge players have about the same level of expertness, the winners are likely to be determined by “breaks” of various sorts rather than superior skill. On Wall Street the leveling process is helped along by the freemasonry that exists in the profession, under which ideas and discoveries are quite freely shared at the numerous get-togethers of various sorts. It is almost as if, at the analogous bridge tournament, the various experts were looking over each other’s shoulders and arguing out each hand as it was played.
The second possibility is of a quite different sort. Perhaps many of the security analysts are handicapped by a flaw in their basic approach to the problem of stock selection. They seek the industries with the best prospects of growth, and the companies in these industries with the best management and other advantages. The implication is that they will buy into such industries and such companies at any price, however high, and they will avoid less promising industries and companies no matter how low the price of their shares. This would be the only correct procedure if the earnings of the good companies were sure to grow at a rapid rate indefinitely in the future, for then in theory their value would be infinite. And if the less promising companies were headed for extinction, with no salvage, the analysts would be right to consider them unattractive at any price.
The truth about our corporate ventures is quite otherwise. Extremely few companies have been able to show a high rate of uninterrupted growth for long periods of time. Remarkably few, also, of the larger companies suffer ultimate extinction. For most, their history is one of vicissitudes, of ups and downs, of change in their relative standing. In some the variations “from rags to riches and back” have been repeated on almost a cyclical basis—the phrase used to be a standard one applied to the steel industry—for others spectacular