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of speculation involved in its purchase. This relationship, between the speculative ranking of the common and the investment rating of the company, could be graphically expressed pretty much as a straight line descending from left to right. But nowadays I would describe the graph as U-shaped. At the left, where the company itself is speculative and its credit low, the common stock is of course highly speculative, just as it has always been in the past. At the right extremity, however, where the company has the highest credit rating because both its past record and future prospects are most impressive, we find that the stock market tends more or less continuously to introduce a highly speculative element into the common shares through the simple means of a price so high as to carry a fair degree of risk.

At this point I cannot forbear introducing a surprisingly relevant, if quite exaggerated, quotation on the subject which I found recently in one of Shakespeare’s sonnets. It reads:

Have I not seen dwellers on form and favor

Lose all and more by paying too much rent?

Returning to my imaginary graph, it would be the center area where the speculative element in common-stock purchases would tend to reach its minimum. In this area we could find many well-established and strong companies, with a record of past growth corresponding to that of the national economy and with future prospects apparently of the same character. Such common stocks could be bought at most times, except in the upper ranges of a bull market, at moderate prices in relation to their indicated intrinsic values. As a matter of fact, because of the present tendency of investors and speculators alike to concentrate on more glamorous issues, I should hazard the statement that these middle-ground stocks tend to sell on the whole rather below their independently determinable values. They thus have a margin-of-safety factor supplied by the same market preferences and prejudices which tend to destroy the margin of safety in the more promising issues. Furthermore, in this wide array of companies there is plenty of room for penetrating analysis of the past record and for discriminating choice in the area of future prospects, to which can be added the higher assurance of safety conferred by diversification.

When Phaëthon insisted on driving the chariot of the Sun, his father, the experienced operator, gave the neophyte some advice which the latter failed to follow—to his cost. Ovid summed up Phoebus Apollo’s counsel in three words:

Medius tutissimus ibis

You will go safest in the middle course

I think this principle holds good for investors and their security analyst advisers.

5. A Case History: Aetna Maintenance Co.

The first part of this history is reproduced from our 1965 edition, where it appeared under the title “A Horrible Example.” The second part summarizes the later metamorphosis of the enterprise.

We think it might have a salutary effect on our readers’ future attitude toward new common-stock offerings if we cited one “horrible example” here in some detail. It is taken from the first page of Standard & Poor’s Stock Guide, and illustrates in extreme fashion the glaring weaknesses of the 1960–1962 flotations, the extraordinary overvaluations given them in the market, and the subsequent collapse.

In November 1961, 154,000 shares of Aetna Maintenance Co. common were sold to public at $9 and the price promptly advanced to $15. Before the financing the net assets per share were about $1.20, but they were increased to slightly over $3 per share by the money received for the new shares.

The sales and earnings prior to the financing were:

The corresponding figures after the financing were:

June 1963 $4,681,000 $42,000 (def.) $0.11 (def.)

June 1962 4,234,000 149,000 0.36

In 1962 the price fell to 2 2/3, and in 1964 it sold as low as 7/8. No dividends were paid during this period.

COMMENT: This was much too small a business for public participation. The stock was sold—and bought—on the basis of one good year; the results previously