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Finally we should comment on the much poorer showing made by our lists as a whole as compared with the price record of the S & P composite. The latter is weighted by the size of each enterprise, whereas our tests are based on taking one share of each company. Evidently the larger emphasis given to giant enterprises by the S & P method made a significant difference in the results, and points up once again their greater price stability as compared with “run-of-the-mine” companies.

Bargain Issues, or Net-Current-Asset Stocks

In the tests discussed above we did not include the results of buying 30 issues at a price less than their net-current-asset value. The reason was that only a handful, at most, of such issues would have been found in the Stock Guide at the end of 1968. But the picture changed in the 1970 decline, and at the low prices of that year a goodly number of common stocks could have been bought at below their working-capital value. It always seemed, and still seems, ridiculously simple to say that if one can acquire a diversified group of common stocks at a price less than the applicable net current assets alone—after deducting all prior claims, and counting as zero the fixed and other assets—the results should be quite satisfactory. They were so, in our experience, for more than 30 years—say, between 1923 and 1957—excluding a time of real trial in 1930–1932.

Has this approach any relevance at the beginning of 1971? Our answer would be a qualified “yes.” A quick runover of the Stock Guide would have uncovered some 50 or more issues that appeared to be obtainable at or below net-current-asset value. As might be expected a good many of these had been doing badly in the difficult year 1970. If we eliminated those which had reported net losses in the last 12-month period we would be still left with enough issues to make up a diversified list.

We have included in Table 15-2 some data on five issues that sold at less than their working-capital value* at their low prices of 1970. These give some food for reflection on the nature of stock-price fluctuations. How does it come about that well-established companies, whose brands are household names all over the country, could be valued at such low figures—at the same time when other concerns (with better earnings growth of course) were selling for billions of dollars in excess of what their balance sheets showed? To quote the “old days” once more, the idea of good will as an element of intangible value was usually associated with a “trade name.” Names such as Lady Pepperell in sheets, Jantzen in swim suits, and Parker in pens would be considered assets of great value indeed. But now, if the “market doesn’t like a company,” not only renowned trade names but land, buildings, machinery, and what you will, can all count for nothing in its scales. Pascal said that “the heart has its reasons that the reason doesn’t understand.”* For “heart” read “Wall Street.”

TABLE 15-2 Stocks of Prominent Companies Selling at or Below Net-Current-Asset Value in 1970

There is another contrast that comes to mind. When the going is good and new issues are readily salable, stock offerings of no quality at all make their appearance. They quickly find buyers; their prices are often bid up enthusiastically right after issuance to levels in relation to assets and earnings that would put IBM, Xerox, and Polaroid to shame. Wall Street takes this madness in its stride, with no overt efforts by anyone to call a halt before the inevitable collapse in prices. (The SEC can’t do much more than insist on disclosure of information, about which the speculative public couldn’t care less, or announce investigations and usually mild punitive actions of various sorts after the letter of the law has been clearly broken.) When many of these minuscule but grossly inflated enterprises disappear from view, or nearly so, it is all taken philosophically enough as “part of the game.” Everybody swears off such inexcusable extravagances—until next time.

Thanks for the lecture, says the gentle reader.