The Intelligent Investor_ The Definitive Book on Value Investing - Benjamin Graham [258]
* Of Graham’s four examples, only Emerson Electric still exists in the same form. ELTRA Corp. is no longer an independent company; it merged with Bunker Ramo Corp. in the 1970s, putting it in the business of supplying stock quotes to brokerage firms across an early network of computers. What remains of ELTRA’s operations is now part of Honeywell Corp. The firm formerly known as Emery Air Freight is now a division of CNF Inc. Emhart Corp. was acquired by Black & Decker Corp. in 1989.
* This measure is captured in the line “Net per share/book value” in Table 13-2, which measures the companies’ net income as a percentage of their tangible book value.
* In each case, Graham is referring to Section C of Table 13-2 and dividing the high price during the 1936–1968 period by the low price. For example, Emery’s high price of 66 divided by its low price of 1/8 equals 528, or a ratio of 528 to 1 between the high and low.
* At the end of 1970, Emerson’s $1.6 billion in market value truly was “enormous,” given average stock sizes at the time. At year-end 2002, Emerson’s common stock had a total market value of approximately $21 billion.
* Graham was right. Of the “Nifty Fifty” stocks that were most fashionable and highly valued in 1972, Emery fared among the worst. The March 1, 1982, issue of Forbes reported that since 1972 Emery had lost 72.8% of its value after inflation. By late 1974, according to the investment researchers at the Leuthold Group in Minneapolis, Emery’s stock had already fallen 58% and its price/earnings ratio had plummeted from 64 times to just 15. The “overenthusiasm” Graham had warned against was eviscerated in short order. Can the passage of time make up for this kind of excess? Not always: Leuthold calculated that $1000 invested in Emery in 1972 would be worth only $839 as of 1999. It’s likely that the people who overpaid for Internet stocks in the late 1990s will not break even for decades—if ever (see the commentary on Chapter 20).
* Graham’s point is that, based on their prices at the time, an investor could buy shares in these two companies for little more than their book value, as shown in the third line of Section B in Table 13-2.
1 As we will see in Chapter 19, this rationale often means, in practice, “to provide funds for the continued growth of the company’s top managers’ wealth.”
2 Appearing on CNBC on December 30, 1999, EMC’s chief executive, Michael Ruettgers, was asked by host Ron Insana whether “2000 and beyond” would be as good as the 1990s had been. “It actually looks like it’s accelerating,” boasted Ruettgers. When Insana asked if EMC’s stock was overvalued, Ruettgers answered: “I think when you look at the opportunity we have in front of us, it’s almost unlimited…. So while it’s hard to predictwhether these things are overpriced, there’s such a major change taking place that if you could find the winners today—and I certainly think EMC is one of those people—you’ll be well rewarded in the future.”
3 The “Y2K bug” or the “Year 2000 Problem” was the belief that millions of computers worldwide would stop functioning at one second past midnight on the morning of January 1, 2000, because programmers in the 1960s and 1970s had not thought to allow for the possibility of any date past 12/31/1999 in their operating code. U.S. companies spent billions of dollars in 1999 to ensure that their computers would be “Y2K-compliant.” In the end, at 12:00:01 A.M. on January 1, 2000, everything worked just fine.
4 For more on the folly of stock splits, see Jason Zweig, “Splitsville,” Money, March, 2001, pp. 55–56.
5 Posting