From Security Analysis,
1940 edition.
“If the analyst is convinced that a stock is worth more than he pays for it, and if
he is reasonably optimistic as to the
company’s future, he would regard the issue as a suitable component of a group
investment in common stocks. This attack on the problem lends itself to two
possible techniques. One is to buy at
times when the general market is low, measured by quantitative standards of
value. Presumably the purchases would then be confined to representative and
fairly active issues. The other technique would be employed to discover
undervalued individual common stocks,
which presumably are available even when the general market is not particularly
low. In either case the “margin of safety” resides in the discount at which the
stock is selling below its minimum intrinsic value, as measured by the analyst.
But with respect to the hazards and the psychological factors involved, the two
approaches differ considerably.”
…..
“We incline strongly to the belief that this last criterion—a
price far less than value to a private owner—will constitute a sound touchstone
for the discovery of true investment opportunities in common stocks. This view runs
counter to the convictions and practice of most people seeking to invest in
equities, including practically all the investment trusts. Their emphasis is
mainly on long-term growth, prospects for the next year, or the indicated trend
of the stock market itself. Undoubtedly any of these three viewpoints may be
followed successfully by those especially well equipped by experience and
native ability to exploit them. But we are not so sure that any of these
approaches can be developed into a system or technique that can be confidently
followed by everyone of sound intelligence who has studied it with care. Hence
we must raise our solitary voice against the use of the term investment to characterize these methods
of operating in common stocks, however profitable they may be to the truly skillful.
Trading in the market, forecasting next year’s results for various businesses,
selecting the best media for long-term expansion—all these have a useful place
in Wall Street. But we think that the interests of investors and of Wall Street
as an institution would be better served if operations based primarily on these
factors were called by some other name than investment.”