The Intelligent Investor_ The Definitive Book on Value Investing - Benjamin Graham [280]
* Recent examples hammer Graham’s point home. On September 21, 2000, Intel Corp., the maker of computer chips, announced that it expected its revenues to grow by up to 5% in the next quarter. At first blush, that sounds great; most big companies would be delighted to increase their sales by 5% in just three months. But in response, Intel’s stock dropped 22%, a one-day loss of nearly $91 billion in total value. Why? Wall Street’s analysts had expected Intel’s revenue to rise by up to 10%. Similarly, on February 21, 2001, EMC Corp., a data-storage firm, announced that it expected its revenues to grow by at least 25% in 2001—but that a new caution among customers “may lead to longer selling cycles.” On that whiff of hesitation, EMC’s shares lost 12.8% of their value in a single day.
* Today’s equivalent of investors “who have a close relationship with the particular company” are so-called control persons—senior managers or directors who help run the company and own huge blocks of stock. Executives like Bill Gates of Microsoft or Warren Buffett of Berkshire Hathaway have direct control over a company’s destiny—and outside investors want to see these chief executives maintain their large shareholdings as a vote of confidence. But less-senior managers and rank-and-file workers cannot influence the company’s share price with their individual decisions; thus they should not put more than a small percentage of their assets in their own employer’s stock. As for outside investors, no matter how well they think they know the company, the same objection applies.
* Drexel Firestone, a Philadelphia investment bank, merged in 1973 with Burnham & Co. and later became Drexel Burnham Lambert, famous for its junk-bond financing of the 1980s takeover boom.
† This strategy of buying the cheapest stocks in the Dow Jones Industrial Average is now nicknamed the “Dogs of the Dow” approach. Information on the “Dow 10” is available at www.djindexes.com/jsp/dow510Faq.jsp.
* Among the steepest of the mountains recently made out of molehills: In May 1998, Pfizer Inc. and the U.S. Food and Drug Administration announced that six men taking Pfizer’s anti-impotence drug Viagra had died of heart attacks while having sex. Pfizer’s stock immediately went flaccid, losing 3.4% in a single day on heavy trading. But Pfizer’s shares surged ahead when research later showed that there was no cause for alarm; the stock gained roughly a third over the next two years. In late 1997, shares of Warner-Lambert Co. fell by 19% in a day when sales of its new diabetes drug were temporarily halted in England; within six months, the stock had nearly doubled. In late 2002, Carnival Corp., which operates cruise ships, lost roughly 10% of its value after tourists came down with severe diarrhea and vomiting—on ships run by other companies.
* By “net working capital,” Graham means a company’s current assets (such as cash, marketable securities, and inventories) minus its total liabilities (including preferred stock and long-term debt).
* From 1975 through 1983, small (“secondary”) stocks outperformed large stocks by an amazing average of 17.6 percentage points per year. The investing public eagerly embraced small stocks, mutual fund companies rolled out hundreds of new funds specializing in them, and small stocks obliged by underperforming large stocks by five percentage points per year over the next decade. The cycle recurred in 1999, when small stocks beat big stocks by nearly nine percentage points,