Thursday, June 27, 2013

Whitman, Diz quotes

From the book Modern Security Analysis: Understanding Wall Street Fundamentals (which you can also view, though not download for free, HERE):
The analyst relying on earnings to evaluate a business or a common stock will be helped if he has some appreciation of the difference between the role of earnings in a static equilibrium approach and the role of earnings in a dynamic disequilibrium approach. It has been our experience that many analysts fail to distinguish between static equilibrium and dynamic disequilibrium. 
….. 
The generation of reported net income and the creation of wealth are related: the creation of reported net income is just one method of creating wealth. There are many other ways of creating wealth that are separate and distinct from the generation of net income from operations, which we group under resource conversion activities. Where businessmen not involved with OPMI [outside passive minority investor] stock markets have choices, the generation of reported earnings from operations tends to be the least desirable method for creating wealth, simply because reported earnings from operations are less tax sheltered than are other methods of wealth creation. This is one of the reasons why resource conversion activities and financing activities by corporations seem to have grown in importance at the expense of ordinary going concern operations. Publicly held corporations, however, frequently attempt to report the best earnings possible, not because businessmen think that current earnings per se are so all-important, but, rather, because the ability to report favorable current earnings may have the most favorable impact on stock prices and access to capital markets, which in turn may provide the greatest potential for wealth creation. Although difficult to generalize, in buoyant markets the main influence on the common stocks of companies that are strict going concerns seem to be the following: reported earnings, reported estimates of future earnings, sponsorship, and industry identification. These factors are used by conventional analyses to price common stock relative to others with the same characteristics (static equilibrium) or relative to forecasts of future earnings (dynamic disequilibrium). Given the varied economic definitions of earnings, it may be wise to distinguish between earnings and earning power.