A

. November 15-1963

504 per COpy

threl3.. I have no p:r~8criptioll'Jl. rather explosive kind of inflation~-"the consumer price index. I .t from atomic war.ibility of' atomic v.. the effect of inflation IOn investmGntpolicy.i.gat p:reIII ent "Oll. (that is. A good example We have had a small inflation in recent year~ accompanied by a very large increlll.1I don 'tthillkar.ncial tor g]lee~ity or torportfol10 that coukd de. I hope that.SECURITIES IN INSECUREWORLDjl because securities are my field.ver~ely~ during the years 1945-1949 we did have Ill.ou probably know there hailbeen no increase in the wholeeisle-price Y aveI"ag~ ali.U to be geared not to 'the illflation experienced but rather to the~xpectation ot greater inflation in the futuI'<I!!.. we got so many the:n ~ eB"lIen subscriptio:nll! from we ~rere forced in ~~lt-deten~e change the name to the pl~e!ifil1:Jnt Financhal Journa.~On il!ll that I don ~t contilider mylJelf an in would rather talk to you about things I hope I know more about This remuds me of the fact that when thE! New York el.k about security in generaL I am going to ta]~ only about financial ~ect~ity.. There he. I am going to sddres~ mysel~ only to investment policy in stock~and ~Jhe title of thillll talk m:l.yiQn~ el~1!:i b. The~eeond danger mentioned wa$ inf'latlon. chief' re.ghtbfrtter have beell!._.. II " In the field of financial security.nee 1958. straight-line matter."ad the by indices • .lltabli~hed a journal :in 19Lj.cialllIelcurity con.dvanced over per cent--but during that period stock prices actually had a small decline.Non yhy mOllitntelligent i 1ilv~storiJ now recognize must be i:ncluded in their portf'olio* However.l that Wflll can deal with more effectively.. The :r'tHjl.y» life insurance 1 hOIUii$ O'lIfnel"'ship. 00:0.1..y s or other typell. Not many people realize that we had more inflstion:1nthef1rilt thirty years of'this century then in the 8eC()nd thirty years. Even ail'ifar as finar. alii limited to the problemil ot inve~tm~nt J! I would say there are thl~ile kinds of or dangers !fl\hould recognize a!lii possibly exilit1i.l -the.lllllll in I\tock-~ket pricee. The fact is ..g in th~ lMt five years.L.JI".c SECURITY _Itf A:N :fNSECUP. thst 18 only .6 we gave :it the ~imple title !'The . which of COUI'8el ill not negligible but it could ~carcely in itself be $ sound basis tor a 100 per cent rise in Itock prices..vinglil1 and budget polic..iII. the~eeond wOUd be the thr~at third lmuld be the thr~at from i1iH!!Yl'Jre market up down. primarily down. iIlf'lationand the investor's reaction to it have varied It iii by no means Ill. and that il the that soae commonstocks part of the question of that both thel extent of greatly over the years. mental ~ecurity.far. j future. Inflation has been a big factor in tinecial exp*rh1\!ce going back all al'i\ 1900. not about phy~ical ~ecurity.'ff!!J) s:•• B'U..n. The continuation of some degree of inflation i~ certainly probable in the . cerned.EWORLD A LECTURE BY BENJAMIN GRAHAM press ron ths·t I am going to tal. the "COilt of living") !!I.J which IIfJeI.al>\J) preter we swe~p that problem ~er rt18 and tOrWud th~ng&. a2\ meslBW'.s indelrld been a rise of ~ per cent in the cost of Ihrin.al with th~ posa.l3. fill'Jl. :not many of you came Ullder the mistaken 1m.pension plans and other m~:tters kind. I am not going to about iUl. {~ policy Dc!ctor Rappaport has eaosen a very intriguing title for tslk~ t!SECUlU'l'Y IN AN IIQ"SECUREWORLD. i~ the most recent one. matrimonial all 0:: CUl'"it.

p to thil!!inv~:.will be pqinti!d out later that i d1~tin©tion ha~ almo8t VMi~h@d from Wall Street.ent3ll donUt have to worry about what the stockrmllrket dOEll!l1 you a~ a whol®~ a~ IIIhown the average~)tor by at all times the good stocks will going up and the bad one~ will be going dow:oand all you need to do iI!I pick the good IIItock!ll and forget about the filltook .lingtene't of Wall Street that it you practice the proper kind of ilelectivity in inv@l!!ltm..investol"~ i.".rellt g r61.tthe fll!l.!'l¥t year..~ ad a very ~oQd record h over the PIl!I.. which in mo~rtcaaes ou.oh :!lJpectffil.ctthat the iill!l. The fir~t ~the general conviction that the market can be count~d on to advllno~ ~o @mphatically through th® y@llr~ that what~ver d@eline~ t&k~ plac~ ~e comparati v®ly '!m:l.d ~n i~&nl@Md th.rding more thel re§lltUt of the :stock-mllrket ac:i..ctuationsp b a very rel!!l.> iiUthough there has been a t~flaency in Wall Street to deny that for a numb~r of y@~~ in th® pa~t curr~ntlyo J~.~t ecord at the 8tock r / mark4I!Jt ~ ~uch the more certain it i~ that commonstocks ~e ~ound inve~tment~ for a the futur~.ion h~l"e i~ that I ~:rhepl'oblem of price tlu<ctuation~» or flllJ.rth~ oppod t~» that ill to find soae good work&ble dilStinction th~ and thl'fj !!lpec1.ark~t av~rages do ill of no real importance to the 1ntelllgentj well~&dvi~@d·inve8tQr Qr ~peculatorG It lleelU to be a r1. They ilre to the idea that tor the IIlmaI't the l:!_'Iuultion of !i!ltockmarket tluotuation~ dO<!i!&il haV4I!J b<l'il not to conmidered to any great extent. when the J'Mrket d~clin®&lo Thi~ hll/BIl1ctually th~ hiatory inflation and Itock market behavior ~ver ~ince 1900~ . Thi~ i~ the idea that the better tU4I!J Pll!l..~c..9 nenee it you have the tru~ invefJtor I~ attitude you don! t have to concern yo·v.Jf q in_thilZlpa!l'Jtand will cause a gJI:"(Utt d@ltl troubli(1l Ln future. Af/. a whichhai C1AUIlIeda..aue But you CIl!I.the argument that common ..ll.~"y.lone for inveltorill'.. y~t l~ty~ar? altho~./stockiJ are and alway~ will be attractive~ including the present timElJ.portil!l.. empha~1!!1l here J! which !l1llwrl!!l OV@I' the real:i:ty 01. that ill a fair iruUoation (but no gI.i1l(iBl in Mlfly 1962.!'.m. W~ all know that @ Q .. it~ wlfelll:. feelingliand r~actionll l"egl'll.r~~t hag rilen oontinuously (or ~lightly irregulsrly) over a long period in the pa~~ b Il!I. tbe concept a on~~wtJPl.h~ b not wl:ullth@r ric@ :f'lu(c:tuationlillar(!.£' Ijtock market fluctuation~.c. corporation hll!l.h~r the ~tock mll!l. ill two-told.nt.re i~~greatdang~r il'C. now the majority ~d tin~c1lll &uthoritie~ ~e~m to be ~lipp1ng back to the conc*pt~ 1960 and 1961.ll. 0 . Nowwe all know that it Il!I.h~ l1Jeeond~lllim illl a denial thlAt the with ~ill$tockIDJU'ket"eJXiiltll at all" m~aning thereby that what th~ m..aran:tee)that its record iilil lik®ly to be good in the tutur~i' beca"W!l@ hall certain bul!!in@1Ilil it lJ.market averllges / Howvalid are th~~e two argumentlll? The tirillt one-...rante@ that it will continue to act in the IJIlQle ay in th~ w futur®. pElr or mor® of the n®ll'lI@Mcuri~tie~thilt hil.lator n eommon$tockl!.""Vi.d:vantage"..!tit! ~p~o1liJ. There il1l.l@I!i!!ltor~ glyixtg inf'lation too tBluch vfJight when the market M. '~or the hig..J. A.toI' $ it b r@rthe.y mllrk~t" 'tfhich go upward~ ~with very ~mall reactions~ lee~d to be for goodo Howev~r$ Wall Str~e·t h&~ a very ~hort ill@Millory._ because of' ' th(!!jir <!llxc~ll®ntr®ool'd !\1dnce1949-~ involvet\l in thot\lfJ tfJ~ a verytDdumental and.ot thll!l..e pl"~ceding two y4I!JIlt·~ hmd played !ll\u.~al.l!:Jt'I<!iIlf' themo T. it ~@e~ a long tim@ ..lator".rld~t advances the more rea~on there iii to mhrtr'lllillt i tiil futurE'J Mtion if you ar~ going to conlider only the m~k~t'$ int@rnal behavior. fluctU&tion~p allll evid<tlnc~d a d@cline in th~ Dow"Jon~~Average from 735 -to 535$ loom ai'$ lmporta:nt in:v~lI'i3tor~ and ~p~culator~ al:tk<1!!i ifhilil taU Of about 27~ in the Do\lf'Jml@1il A\o/'~ragl! $l. .~tto contn.ll.. gUll!I.y ~tock mll!l.ion that they have recently than th~ ~9f it~ Con!il@quentlythe..DX!... important fallacy.1\il W by d4I!Jcl~ Gf betw""tlD50 ~.. I ~l!llt! it!' the I'~al truth i~ exactly the oppo~it$.e1l1l1$)t'ptrt the &itock m&rketactlv1ty IlUld il in of that periodo Ji:t ti.van©es end ignoring it ent1relYJl a~ th~y dlid in 1945~9.g.

.fi can mue lienge cril1'l. a starting one for thb m~k~t<> DlUllfing1949-50 thilj m&l:"kethad the lowest peacl!1J".ai!JIifl placed ill that.1 ~hCNn in our reeori. YflJar by yearp f'JJubj~rc. Which WilliI'll iaeorporated in the Cowles and the Stmdard md PoOlrf~ rec@:!r'dj" It may well be that we lihall It111 have the ~ all-too-familiar I.evel then the inl V/!Ulitormight pOl!j~ibly Il\ more or lell!!il I!ltandard 4".out to be ab«.'~UCIO..1"'f~r Itb. 1.t.Ueltil f!lIince 1949. but··. l!olM)t~inglike 14%.thefutlil.:rl:.st u IItockill wl!llr\tevid~ntly UDdervalued at ~ev~n tim~~ th~ir earning~ th~y might ~ery well be ov~rvi11lued at twenty timl\.ll(rtoiY sta"tement that milculation ClJll"ri~U8 no wurantly tiJr th~ :.cea l~ge a6l:iTQce in the market iss badcaL11y a !l!Iign <I:'or Calli.'Wfeha*ll~:i!I the lut ~JY@:r 14 yelilr&illiill lill.ck!At lealit to the South Sea~ Bubbl~ in pratically 200 . proper on some n~ of valuation~ It that i1lJO $ a goOld part the 1949.et us the marlli. justment from an level in 1949 ill!.&ila:me rat~ in the futl<.weJ could have a 8ati@llfacto.. from ~bout 163 in the Dow Jone$lAverag~.the nature of economic reality to permit net gainlil i!lt th~ ililho'#'n rate1E :from ~'to~53-.\Imeri"tOl inve!!iltor!i. Ail ~ ~. It 150 il!!l about th8 right pretlien"1. WEh.d havl!'!! work for a living" to I remember Vlfl.t· think very mudl ~mph.lt :ri:'iglrxt fcdir trOlday.continu@ ind~itily to ""4.. qUaUificIIJ:!.ll..t th~ time== r@:f1@ct~ a n@!. It:lh~ :r:toirin..:l"e". thil!ll of cl.1&iJdone bY'f~l~!. her~ i~ that ju."itioJ1ll nOlt ill!. at the 1 presen'!.antial fall".ipl'1er that willb~ e estabITihed later in this mark~t and will lh'iljjp:re~ent:a l\ty@l of \txc-e'!i\\$iveoptimism." UPI2lWt1lilllPI$ f the pal}t have alwaym ca.~ that gob1l..rearm. inllvH..! and econonde ~Ylltem that op€ira:te on that baliilil. re.""ollowiIlld. fM1Y !]o~ ~I' :from whatevl!Ilr level '~atrn!l.Jb\elr pr~jj!. 1& V1.or on th® aV(i!1rag®"... .)."J1llIlli-. to 750 Ill.1.uiil arnings or at some higher muJJ.ry well the 0 ~.'\111 a m~vlllll(')uIl1y impro~j'ed ch~ractei' of Md liiitocktl$)al1ldthell"eti(Jl:R"e be expected to contin:ue more or fJ c~ tilt' . wh:tc~ would jUllItify . (conf1Dl. per am:mm Lneluding th~ di'1Yid<1!nd r@tWl.~ tirilt l theoreti~al re~~Olning and th~n in termll:1$f some practical o condderat1011~o :t wmud 11k(\':!t© ..er nati:Q)nrl of eXCflJliliivlll ptimigm and excllIllillflive o pessimism..CIlll from thilillevel. undoubtably theril!'l lire Il great more.e nobody wow.l~ Ctlll!ti01Cl. If that wer!!l tn!J.il'"Juo The pOl~~ i~ that a good the ri!!ilf!J I ~. \ :r.'ting gllain:f!J eotud }.a~Oln for conI'idenc®. !he SEC requirell'i it to aecompllmied ap~rf'U.~nt Mvan@~d pY(i~tIli~.l'ii:. 963 rill" could not be expected 1 to be :repeat®d trQ\M Il lev<!'ll which h nOlwa cornctEilld Olne" l!iQlWlijv<er. My osm Ol:pinion the3!l@three choicell that thetirilt pOii!fillbility is really out the que~tion.timeprice= earningOli l"i11'ti{?n it:1Ehi~ton" i Stock@) ~old at only about 7 times their earnings. tm"ee pOI$&!Iibi1iti~hI..i~tory of the ~took ma. &11 compared with about 20 time.~neeo R~!1. ba~iilil :for'~~ I to~r!i~~ th~1l1 buy i\:."'Tied with th~m o censequences to come It doe~ not n~ce'iuutril:y tollow ri@® in 'the pric@ ot III individual ~tock or in the market ~verage~ mU13lt b(~ a d(illcline» but the only rea80n to view with confidence the tutll]'re ot a that ha~ al~uy advanc~d jjub~tl!mtially in prelenCIiil "ot ~. One pO!!s:filibilitYiJ i~ Il ven popular one in prelent thought.~$$ orin lIIilimilar !.et!~ pO~lil:::lil1ti@~ :from prll!!l!llent evel~ int'~rm.rket h!!Uil een III lIl.rd f'luctuat·ions" But the third :pc~~ibility il1J> that th~ natlU"~ thllll market has not ehlltllgl'lld :from it~ earlie!l\!t timel(1t.e&il~ive ~$laJim:blln ill the TOry period which wag.Cc(i!J~sion b .aviil also very diltailed data on stock pric~1@)in the llJnited State~ $Jinl!:lillll 1811. time~ Th~ imp1icatiolG. The mOlt recent example or exrc.ably by ~ub.\.ttllelf.uItve1!M4e in mu:t'WlJl. ~Ad I.'J\:'t~l£'n~: J('(®a:!IDonll0» othe:J(' than the actual price movement :.. tiiat rille that h@l. IIIdVI!'W.all 'i> .t of prev. in the m&rk~rt aVer&g<!lliil am tltlking :abOlu.~~nt p:r~etice of calcul\'ll.tOl mod~:rli.t<1i!l t dO'~'i'il/tl.rf~ JUlt don it have a tinancb.1iID '1.

l1z.trom 1871 to about 1954.ce againllt a v~lZ'Y .n thl!!lory.he prop<!llr nft ~lrtaudardl of v:lll'U~ could certainly either i~ inner~eon~eioUf!Jln~~~ or by mathematical shall hav~ to w~it$ probably for a eon~ider:llbl~ length of ti~ li~term. Qtt in the earnings of corporations genera wot~d Justify a higher valuation of these earnmgs th"u in former yearl.61ab1®new !llitandari.rot PI1iil.. But the great problem.methodlJ ofval= uationlii ar~ ultr:l.®ly the pr~~~nt l®vel. the Dow Jone§! {mit and th~ per cent .entlarge I !Jcal.which e a would a C@ntral VUU. valu.~tj) el1iil..t© cU'l'Y on 1 cuc'Thdatiou tllj a proeelll\i which le~ larg~ tluctuilll. ISGerv:Iltive]5but "1\i.e for a te!1lt..rOl.$I.~.. time it llBeemlid e litock maJ1"ket~lill have .~not beeause gOV@ll'nm~ntiJ commitment to pre'.n4!lt1dthe vllU"W1tionll'lot other ~xpert~ t.hod.ccept<llld to j)ay 1955 up differ~nt I1iiI.t then n~w con'.1l prior to the Employment Act of 19460 I{e think thillBnew 1nsit.. which 18 an exceptionally long period of tim.(j int~l"4fj~t bonds .ID v:Illu. u:d:ng oth~r met.1iill th~ old bl1iil.~.lrk~t YlIJi nally !iii~f(..[!l8ilentime the aViI'lrag~ earnin.ld to know what I ml1J!&tl1 new llita:nda::rdl.ent ju. prlllltat1©n ~omo d®gr~@J. 400.l:trilll.viIll..xpll!Srienc4i~ bilU!l@d cour-se '1fliS m.)1 my cl!1lntral value wal alliO arOu.!'i§ In the meq.number' of people in the late 1920'm. falling . It yo~JJ. who got ~ COrI'(l@llpondingviw of UI/Ila&tcek !U.ti©n~ ~ound what in the end Will n~w c~:r. that by the time you have had a long enough period to giv~ you ~uf'fici<!lnt confidence yout' form of meas'lXt"EHlI. the almoliit inv:Ilriabl~ exp~r1~nce i.h the Iltock market tbtotuation.h~ po~~ibility-=vh1~h :1.lf'kti!'t vllUueJ-~wn1ch w~r@ PI'IWtty w~ll I1iiI.inel d~p~rl. t mre ab©ut $33 on.ry i "If@ a flu..:then -WOuld appear to d<!llmon.eIi a3J appl1~d to th~ ~toek l'Iil1iil.y llhiiC:ll hq been oao IiI2lJ tlGruM® .t theae .dgivil ~ now til. T.~ Th<e (lld $ItiJJld~!i of value $ which h~ 'beilHn e decades and pl!!lrhap~ g@n~r'ationil" no long~r 1lil1818in to 'be tlllina'ble.lu~ a'11~r:lli@J ~iJ.ric~ of early 1955 when I te~titied b~tore the ~tock m~k®t was about.rkl!lt.pitl1iil.:a!ll\pl~t..1JJ* e.pitalizliilldat twicif:lJ tb..11:11~~*med to come to about that lEnrel.~ CiIilntral Vl1iiI. but nll not hav® tho advantage of "tarting from a very l®~fel~= 11 adm1~f!Jlibl® i.ne pl".l V~J. C@Jrillinly th€fl in 1962 ~:W~~sl!~nt!. J:l:iI!Il1ee ha:lfe added an arbitrary Vii 50 per cent to thilll yaluation blJ1i@J~d upon oUJ:' old milthOO.tled Iiiitand.4 of one and the 1mpr<!ll1111 l·ecOVQIl. gave '~::lp~h®irMd plung~d into Wul Str®®t takl1 MVlIllltqO of it&!! yond4llrful tllt1iJ!!"®. :trom lllhat it n.etu.tratetha.f!S~curity AnalYlIIiIll" publimhed lagJt y~ar» and to recogn1zQIl "the probability that Zltooks ~hould be valued more lib@rlAlly nov than in the plAiltiJ our chhf'· reason that t incidentalj.glill tor a'.r.s that thE!! market will MVallCI!. l1iil.Y"l.e of about If . The action of th~ stock mark~t liii~.* That wow. U'Mo:rtrwlately in this! kind of workp where you are trying to det<!1lrmine relatioIlshipill base(! upon pal5t behavior.too lw.on!!t that I will talk l~teJ1' s ~f!Jl hw can you d®t®rmine the proper new bujJJ ~orcommon 1&lto\~kf!Jl and therefore how can you detlirmiBe the ~~.rIJdngl of 'thifll iIlltocu the DQfir JQn~.=conl<li!rvative and m1Illch . ~ We had to deu with thifil problem in the fourth edition fJf. For t1ll:1l'.ar ll!!Nsi9 propli:iF~l~'Vel for now?" !di!@~~It)(f!Jl®l®d qU~iltion in a paper thil to the Fi>nano411Asgj in" in December' 1961$ and &!laid then that th~ JlU1.ill~ I think e hapll)®ned ~ineo 1961 b®v.1IIJepresBionll has changed d the climat~ of corpo:Jf:llt<8earning.pproachif:lJ6\ll on relli. Averag<l'i tor t~n y~l1iiI..u. .$i~ of about on present p.~ $33 atBo6%-. aitbough they did work out extremely well throUg.'! pretty IItead11y fromapJllr'oxim:llt.Slti©lll i())f th~ ©th~r kind~ No doubt you <b~ illltl1J!r~~t.' ditionlii !l!lup~rllll®de d th~ m~ai'filll"ement 1&1 no lO:l!1gel'dependablCl'l :for the future.!lton1ngor ~.

A friend of' mine.on=ever ~ince 1871"" ~9B BJhO'Wn the CO'lfl~&j ~d MolQdorflllkytudi~~~ Now by ~ we c&n expecf a rat~ growth of @!Jarn:tnglfl di vid@nd~of l~# a and then ill1l we need it'rll :I! d:i.lhan an oVlillrall 7~ t a All th~t ~ound~ fine but if you th~t by $om~th~ future growth r~t~ would be 3-!$ inSlltt!adof 4~.ihard.in divid~nd~ aad appr~c1t'l:ti.nd i!li\ :iii! a littll'll mor~ thU.ck tOio About two years ago $ actually not very long before the big market break. a~ th~n get a 3~ return in d1vid~nd~ ~d ~ 4~ ann~al r~tUl~n in growth0 might:!. concept 1ncrealJing'. bonds 'With no dgn of IJ.li~h and justified . Iltti t·aa.. But th1. T.(l1M 3~ WlI.hl!ll two av"''''agiI!J~ IiIO clo~~' teon a ten-to-onl!? bads in their price 1I!v~1~dividends and earningii~that you can.. nf'ty year. m~ ~howyou hQW that could be done.l'bitrarily gavl'!lto it.~ . On that basili th<tll owJon~1I D iI abou.ta. u~l!!lth~ two figureli almollilt:1rrl. Th~re illl a lot Qf . Let me now PQint out at 8triking ar~a in which the uncertainty of the proper valuation of common~tocks 18 brought to the fore@ That i~ this Vtlry question of the relation~hip between div14~nd return on stock~ and th~: interelt rate on bQnds~ For .~ .. we could the~e at th~ present level with eonfldenc~.~' could give on a situation which does not admit ve of l!ii..:Jay r~lltlly dependable calcmJ. Dow JOl!1@!Ji. ~a1d it vaa all bosh to talk abQut ~tock yield~ li~ the baii~ ot evaluation. ~tocks might rise until their yield became less than that of oond~. Well...liderablylesal than.l'hall no ~pecial authority behind It was merelytlue belillt judgment th!ll. very development wa~ a sure sign that you were in a dangerous marke·t-= one heading for a bad fall.:Iil plillu$ttb1~ enough and would J'WIitify the pr~fjJent level of 750 for the Dow Jon~~ AV!lllI'ag".p so enamored of that idea he lilJiled wail it constantly in his market letter~$ More than that he actually had the relation= ship between ~tQck yield~ and bond yields printed in a nice chart-d~sign on neck tie8 imported from Pari~. relationllhip.\Sta:nd~d POQr div1d~nd r@. return to . and ~a1d that this wa~ the tir~t time that anybody hlLd analyized the technical pOi!lt1on of the IBtock ll'Wrkfltfrom hil1llnecktime.1uggling with figurelJl that can 01$ done now a~ uway~ $ but non~ of the~e nethod~ in it~elf giv~~ a dependable re~ult~ To a great extent th~ f'1gwJ.l!.® the man who is (lflleeting of them..010.I'n of to mM~ up de~1r~d 7t% total.tUl"~ yemrl. and that general attitude iii very often determined intuxn by what the ~tock market ha~ been doing. For awhile I wore th1~ tie at ~ome of my l~cture~..5 th.rt1lllll:"n ~.th~m you get quit~ III diff~rliJj~c~" if now expec'Ung a 3t% growth ratlillJ1 yQU11111 nelld l:1 4~ di vid~nd r\i$turn to mUll up required 7~.t the which '!if~ II. think that even l~IIH.t IiIhoUd:d h_11ft."~1Ei ~lfIlected are determined . vhich he di~tribut~d hi~ friends including me.hatU~what commQn ~tock~ hav~ on th~ i\lv~rage. claimed the main thing wa" the psychology and attitude of the public.:re~» but if:!. to Slti.vidend ret1.'oit it b quit~ pO&!li~ib1~ d~v¢!llopit m~thod ~'o va1uationwhieh.ayfirl'lrt that 1nV~SltOJl. in a huge newspaper advertisement he abandoned thi~ concept completely.erchang~ablyfor purposee of de~cription or an0 j You mu~t recognize that this level of 570J which i!l derived from q ~b:ltrary mark '011) of 50% from the old l~v'llll.@ Hence uzy broker friend" fQund this. You fj. Wnenth~ ~tock market i~ at 750 you t~e an optimi~tic attitud~ and use soae favorable tigu. and a cOl'r~Bponding vlltlue of' about tor thli:JSta.lli! about th~ actu~l annual growth in dividends in the litlilt ten yliJj~'iI=. liince 1958 stockil have b~en yielding cO:l2. and a"se~ed thi!!i factor was strongly buJ.ndard averag~ Liflt me point out that t."1 likG to get ~ ov@r~al1 returJl of 7~ on their mon~y in f\ll. the generLl. 10'IUk'1d.atiQn~.. A!!l a matter of fillet if on~iI iltlff:1eillllntly C)l?t~imi!ilrtic and wU. right now market priee. se"ll~ere at decline mOlltpeQple would jump back to the and more conservative evllluation methodil. or more it was a t<lnet in Wall street that stocks should yield : co~iderably more than bondse In Ipeculative market...Dow Jones Average.. head of an important brokerage hOUAU~.

llltorj!j mUlt be prepared in their thinking and in their policy for wide price movem~nt~ in either direction. I'elmtion~hip for th!l.bl® gElt it from an expez-t sueh ali mlfll to or %!JJlybody el~~.!1t:~t'U'l:'e)l b f or it an indication thmt thilll !lltock mllrki!!j'1.t th~ marketi~ p~ychology was th~ best basi~ tor foreci1l. had paSlIIIl!ld bound!!! in lilpeculative exct'lli!!lelt.edard..a t"'all of' more than 5~ in the ~ho:rt period \ of 6 months" General Electric. brings us to th~ third whioh I enumerat~dJ1 namely that w~ ar~ ~till going to have wid~ fluctuathe :future. You ought.l'ket. But the thought that thl~ mark~t may have been oV<!llr-1taluedin the lm!llt yearl. been clellI'ly overvalued hal) fiYe yllllil'Sy in th~ lI1lam~ '!:faythat it wa~ clearly underva'lued during ·tht) period 1949-19541 Thb iilth(jl mlll. Speculative enthyial~ll!! pushed it up to 607 in December 1961Jlfrom \ which it declined to 300 in Jun!!il 1962-. Let me give you ~ome exampl~i~ The mowt impre~~ive to ~y mind wm~that of Inter= \ national Bu~inei!J1i1l Machines which ilil undoubtably th@il ~&ding commcn ~tock in the ( l \ entire m$.hm 3%.. in May pit.gel!! a yield a little bit more 'I:. 400 per cent while IlItockilil verlil.!al invei!rtor doelin It have that to ~il'orry about the fluctuation!! of' the ~rtoclt mtlIl. 6 confid~nt buying of ~tock~.howe. Because that r@lation&1lhip haa exilited the past fiv~ y~lIlr~ doe~'itm permanent. the mli"i.. and they used it to determin~ the probable top l~vel~ for '.~to The actions ot ·the public w1"l. to r!I!Jmember lillO. I cOll~id\l!)r mOlJt probable one . Th~se very \wide swings underline the t'ac·t th.lf'.h!'t1l~p~ot to nev i&i!.rket of the late 1920'~ thi~ rela~ tionship proved to be unreliable a~ ~ ~hort=term market forecastero So they tOO. ) For many years they tllllked about. turned thdr back th~ complfltely on -th~ comparbon of stoel". the Ililtock m(!rk~t adv~nci5~.ence mOlt and on which I can be the le215il't n1ight~ni.jhuation at \somettmes and"undoubtably subililtantial under evalUa!. They shoukd not be taken in by soothing li!ltllt~m@mt!lll a rf.lIl'lllI had no hesiti!!. And if thit. You won~t be abl® get th~ answer to thillt by math~matic~.1l t.Iundervalu~d fiftilll®ll y~arl ago. No doubt thmt i~ th~ point which would int~rest the audf.ng.l in it spectacular i\Jt&tement using <lI!.~ting.dover so ma:t!Y d~cadellil in the Pi!!. which ill! the oldest high grade investment common \ stock. though 1 t far from cllrtmin.! now aBJit \ alwaYI) wu. one of our \ best chemical companiell..-. th~ probable cour iUI of :the stock m&rk~t from the pre~ent level. That happened ~om~time in 1928" and they iiltiek ·to thb vi~wpoint to -the grell"c Clrai\'lh 1929~ of The pre~~nt r~lationship g~ve~ con$iderably low~r yield~ on ~tock~ th~ on bonds .rticruliilJr'ly= 11.t . hich. relationlJhip betweenlitock yie!ldilll and bond yieldl.l!t'ficiem.1"'~~g :th~ 1960=61 extravaganza in "'chat field arl! an indication of: it9Jl inherent of r~~traint. in the sense it is liltill 1\llubj\!ilct 1/"1!~ry to otubstantial over-ev~.vitz the i1tock mark~t which i~ ~'I.. ju~t am it Will. and UoS.o e!llltabliilh more restraintlJl t in th~ public behavior thrul it . so you III have to an!!llw~rh:llt t for youxsl!l1. yields land bond yields and 8aid thi1l.hat I don it ~~1il?J any char. rlSa&i for thinking on' W ilthall hltviIZl theiiJe wide fluctuation~of whioh we had a taste in 1962. My chief re~ion for mentioning thi~ incident 12 that I had ~p~nt ~ lot t1m~ ~tudying the w~~kly &nalysei of ~tock market one our olde~t fin~cial ~ervic~~ which ~tarted in 1909 ~d I found the identic~l experience took place jUlt 30 year~ before in thi~ ~ervice (whol~ name I al~o won't m~ntion. d@clin~d from a high of 100 in 1960 to 54 in 1962" Dow Ch~mical.t the i$ltock max>ket i~ b&l1ically the !\lllllmt.~li'ialues were forced up a to exce~l!liv" level~ a market enthU!Illial£!m produced large subsequent declines. ~ In my view th<!!re is an import&nt difference b~tween th~ pl'~~ent !!Itock m<arket and the m!lJlJ:'ket more at or lest!)! the same level in Dec®mbilf!l' 1961c At that ti..tion about predicting that then there would have to be Q fairly n~ar=t~rm collap~e of the newiuue mllU'k@t.ag@ human in naturemll viii-a".ny=billioll-dollar quel$tion. fell from it. shrank trom 109 in 1959 to a low of 38 in 1962. high of 101 to a low of 40."nl~~ d!.lmoililt same Language . Steel which lis an old leader.le I can '!jay about.rketo It b timtl now to way what lit't.tion~ at other~0 My basic conclusion is tha-'e invl!!storlill ail well a~ ~peclJ.l1. In the great bull mit.t w all . that many of the highe!ii\t grad~ common5ltock. High grade bonds yi~ld about.. you wonit be iJ.

1m actultlly a cons Lder-ab.l w~$kn~~~e~ to ~how the~elv~~. Thll'l!ilecond claim 'which b that iii no real IIltock market" but only. th!!.co. and that it iii illusory to talk about what happens to the market q a whole as having a mllJor bearing on how the inve~tor fare~o I di~agreewith that point ot view on thr~e groundso Th~ f'ir~t ltii that I doubt that 'th~ mark~t i~ r~ally so much diff4!!rent in this resp4!!ct from what it al\. ©oll:lll.pll@il!!l p without for thtUll1llP technic:IIl. rMlJ:"ket !!.Leunderlying con1 si~tency in the ~toCk m~k~t if you mea~l~e it~ movem~nt~ by comparing two ~v~rages which seem to be quite dif'f~rento One of th@mi~ the DowJone~ Indu~trial Averag@. high d bor::rowing!ill n margin. but that a large and di~turbing d~clin® i~ likely totak~ place ~ain iliomCfttime':in thil'l futUl"'~!J and that '\\1@!l lihould btl! prepartlld in thought and action for it.pwll'lXd. It i~ the general view in Wall Street that such characteri~tic abus~~ mu~t d~velop again befor@ the stock market can have anoth~r collap~efl==or b~for@!la tru® bear m&rket can b~gin (if it i~n~t againllt the law to use th@!l irty word~ i'~ d mark@!lt12) Thl2l~@l a1:l'!l~el would large public ~mul peoplitllwho . u the Wall Str~e't peopl.ur~ that the disparity and diver~ity of stock~ betwfAflnthol(j that acbed 't~~ll and thoiie thatllcted poorly wall almost a~ great then Ilt$ we see nov.But d~@pi e that fact it wall el!llllent:hl. Now thb coa.'l:nMII~1I!i ot: the and I have mentionlltdw But there il alway~ a fir~t tim~ ~v~rythingo opinion then rll&gard:1ngth~ prl@iiiilntmarket l~r1.I'T'~nt high l~y~lli of th~ mark~t ar~ not accom:pl!!. i~ II.Ll.mil tention Ilou. will be th~ tim!!! in mark~t hi~torY!i I believe JJ that we would have the IifInd a bull m&rket without the @!:l!:ce:~~~£!l l\. The ©ollapme might b@ triggered by ~om@ untoward ~conomil~~ politic!ll or d~v~lopment.o a reco"lfery begq in But a compar$:tivlI!Jly I!lhort till1fJ!l artd it hal clJJ.l f th@ n!!lw".apsed it li!lll"~lyflft~ct in ~ome ~firio~ ny th~ gelneral l~vel or stock s it m:tgh:t pO!lilt!!ibly u~b.rket vhich inwardly I have been expecting for ~am~ tim~ pa$to The new i~~ue coll~p~e came per ~chedul@ and it did have a major mdver~e ~ft~ct on the relt at the II1$l. But if thing~ do happen that way H.gh. only II a market of I2ltockil."I'i~d tht.t~:/1i.a moment or I~ -= two of dilcu~iono What they mea.~dtl¥l pb:u~iblr@ ~rnJ:m.v~rage~to new he 19. Since then I hav~ up Wlking predictionli@ The important point now i~ 'that m)J.ny such.e liki!!! to ~ay.nby !l!aying thill is that inveiitment ruultlldepend only on what happen~to individual ~~curit1ell» somll'lof which will go up and otherfj dOWll.¥Il.ni!ll!d ~XC~~:Illeil in thllll n@!lw=iliilue markilt iIlnd in lome oth~r direc= tionli whi~h mad~ it app~ar ~o ~~lnerable in 1961. ba~t!!l(l on exp®ri~nc~p and so one might gueI!Jsthat ·thlll! lUtrk®t well con3t.inu(I!i g~nleriiltlly ~.l!.l:"'ience in Wall StrfJ@!lt.! dell!lerveo.ny IlJpflcific predictionllJ v.t@r r<lllcipit:lll.don't know what th@!lY ar@!l Oing.fhich I made I '\\1ould like to point out that the laiJt tim~ I made aIIY ~toClk market dictionl wa~ in the year wh~n my firm judged.lf'or invelitorllil to be guided t by a vi~w alii to the g~n~rlil~ levl'llll of 'th~ ~tl)ck mark~to It 1m lIuprbing to me that 'it/all Street peopllfl haven ta.'l.i~!litUeifl o r o i!!l_pre@ 110 on. You might well al~ume that if there 0 0 . and I am . . nec~s~ary a~~umption for inve~tor~ to make.htll.fti!))l mlulltbe rllth~r incon= clu~iveJ ~ld I ~h~ll my l~t~r prelcriptlon of policy on the Il~~umption that inve~tor~ c~ot hav~ a d~pendabl~ vi~w on 'the mQI'ketq~ future action in th~ next year or ~o.k~n the time to make a study of the spreM in price movements b~twe~n individual stocks in rec~nt years 11$ compared with what happened in former yt!ar!!ilo (I haVil!! ~t'wient at UClA who h going to mUe thiil! study a and it may prove quit~ illluuinatory}o The second rl!!laiiSon1 that there j. me qualified to writ~ their y mark~t letter9 ba~~d on the fact th~t I had one month'~ ex~ pe. I which wer~ contr&ry to inward expilllctatimuli but not to I!!.fay~ was in the pa~to I have some recollection of' the market in 1928 and 1929.. and for ~~n~ibl$ ~p~cuIators too if there ar~i. quite iiIt wh:ile~ But l<liltme point' for out nf'or -th@ that it net impol!l\~1bl®1 th~ory that the market!ii high l~vill in alone aooeer or l.\)~neW:lll. which conlllbt~ of only 30 !litock~" Itnd the other is the Standi!U"d & Poor'!J CompOlite Averag@ which con8i~t~ of 500 ~toc~.~I' in the be~ mJl.I"k~!rt.

he marklsrt averages by making o'Wn aeleetions or by taking expert ' pessimistic: atatem.that extent its prospects are a1$0 likely to be fully reflected and perhap!lI over=ref'lectil\ld in the market price. bot1ght today.r. Now~with r~spect..ii 'expendituxe.'Llt . I' dix'ected ef'forto 'rhe record that the have had great d:tf'whole in "I:.a:mle on the whole. '1lh~ man may be :right or he may be wrong in saying' that some unpopular stock ig.iss~s .l. .5.VU -to make up a portf~tQ.L'llll!...and g~mera11y so only for it is short tsrm--it~ aff~ct is likely 'be already reflected in the . .'approXimat:~ipg these reason to expect about as! 'good results! a.u. .:t:.~ket lev~l. Let me give you my rea~onSf I say fir~t that to the extent that an econonrlc forilllcast lappear:s dl/!lI=H!llflJlable-"."'e years in comparison with '~the1f. But the jv-s'tif1cat1on for the mutual fundilliia that actually do follow ~uch a ~ound ~~d ~1mple policy_ I mtu."...U/.mO:n atock~ i\\'I!houJ.rate oc~ cupation or amusementjl I don't think thElre iii any good I1!lvid~ncehat a r~cognized t and publicly used m~thod of stock market f'orecastir.. o.yermge!ij giv~n by mOBt new!'llpaper~ g~t virtually a now you 'which m~!lfliil parity change. to il1ltod~ mark~t forecatlllting as! such. 11.llJ..g can be r~li~d upon to be pro= of pric~ mov~m~ntlll thlfm an &~r~rag~ including only 30 litock~ ditf~r~nt from on~ embracing 500@ ~ut if you obmerv~ the I>!.rOl~ma:nce the 30 iltocks in of: DowJones as I:ndex* an investq:.h ". foreca!rllting.mtand speculatiye profitll 'which can be made th~refrom.d.y misce1lan~o'Wi! group .1level .tq.to make money out of forecast~ es to the future prospects of any individual security.s'. On thEl othter hand.e.ent is found' th~ imrestment 'whi(:h repxiIJIsenta combination of about the beet the country!) and a tremendo'l. ad been able II by some ..'1~~a:tl. In the pa~t ten yldla... Thia indicateiS that you cannot tell a priorft. '. 'I'o th«l e~tent that investor~ generally agree that this! company has good future proO"iipect!i!l tQ~. is: favorable that 'CO!l!l.' r third and moat important r~aaon why the inVtlstor be ledto emphasLse hi!W f~election of individlli... were the very in"t~lliglliint and l::ar~ful stock sel~ction$ by the mal18g~rflll." of money timilJ. Th~ :price of common b~ stock!!l alS1) ~v<1ilrybody !llhO'iud ~know ref'lll1'Jctsthl\1lJ g@lJneral xpil!)jctationof a good e 1964.) that the apparentl.. longer term busfness forecal!!lts have proY~n'll:rareH. as a 1Z1lep@. dge or blue-chip e in the Dow Joneid Avez-age. Sometimes you find the contrary tjase where a Wall Street man may say "Nobody likes this stock~ nobody ha~ confidence in 1t$ but I have confidence in it and I know its results are going to be bett(~r in the future~" That I s an interesting and valuabl:~ conclusion if tru~..>..y month a ~~r . economic forecasting» of market.» ..ng to do oyer the futul.ra of the is thee fact that ther~ La no indication that the i:mrestoX'·t bett~)Jr than t.·al efficacy ro.r~ the DeNJones Averag~ ro~e from to 750» while the Standard Poor I s index rose fr~m .nwnEr~pr6f stock!! :is gof.a1l ·inves'tors 'f'ace in trying .' \ ".al stocks.·"'J.. and to neglect the gen .g going have a very good futtU'e e That 18 the dil<$j~. Siml1ar1y~ take the ca~e where an individual 8tock is favored by one of my own fraternity of security analysi~ i~ because he i~ optimistic about its future earnings and general ~o~pect"'~.. The trouble is that in mO!i!t ases you can't r<l!Jly itli!ld~= c on p~ndabili ty. almoat day by day and c@rtainJ. and there ia no "ray to make from ito Ji'or ~ iii'S cannot ~ay because the foreca!lEt for 1964. and expert selection common sbocka. actually had a bett~r advance than th~ ".. / / I year.h<ill per.t soae sl!:epticism the geneJ. in their relation to the inve~tm~...

th: g~~~ral mark~'''te Thill r~a~on i~ you ~:A~h~ g1l!neral marki!lt and you can.il ! m~an that one wa$l\Xl!Jl'nrer to "bti.tion~ ~ '!Whichwould lead him to own more \~0lD.to g@t !"®:1:!l'ulta thrul the aVl!erag~. Ll&t ml& now make a g~n~ral For obvious l'~a~on!fj it is 1mpos~:l.rd~ I of fefund that when I l3~iGudied record from 1898 to' 1933 p a period about 35 yeal"'8=-tM" from folloWing this mecha.dEJb~twe~n bonds and stocklll (ca~h &11. t d.rk~t ~e~ms high 0 0 0 \e .1y &iugge~tion iii that th~ mininnlm pold tionof thii'lli .~ and l~s5l commonsrtock:!1ll Wh€il1 the ma.0. Now let m~ come to part two~ what inve$tment policy to follow und~r the condition~ di~cuIl!lB~d? My v1ew~ th~reon ar~ and definit~ and ~trongo In my u@arly fifty year~ of exper tence in Wall Street live found that I know l~81s and les8 about what th~i :!!ltockma:rket i~ going to do but I know morllll nd mor'e about what Lnveaa tor!:i oughf to do $ and that i 8l a pretty vital change in atti tudilll The first point is that the inve~tor i~ r~qu..liarly enough tha.tere~t enormously ~ P:li:"evioT." Let me illu~tratlill what I mean by rllf~rt!lnce the famoWi nDOIi Th~oryn known of th~ m~thod~ used tel" tor~cMting the ~tock market.irfld by the very insecurity ruling in the world of 'today to maintain at all 'tim~il some divi~ion of hh fun.ni.~ llla.:i'::imum ~horud be 75%.itfei.da.(~c~i!ll~ary :tor must.l~ mechanically® By thi. ~ the time when DowTheory hrul.l method:were~'i'~marltably good.J( Ij·tock~ back at a lWeI' than he th~m :tor.l. as a s and :t~or "th€l av~rag~ in. a 1\. portfolio mi:il:ahoukd be he Ld within th~iHli!l) and 25% tig~ll'It1!~o Any such variations llilhCftud b@ clearly ba8~d em vakus cOllsidera.wefulmethod with th~ mark<et action in the ~s and ifelarly 1930!s.'10id mor-e @uc'c~~ll!lfullythan obhez-s unlil!lsfj perhaps he thinks independ~ntly from the crowdJ that i~ unlell!l~ he is conmtltutlonally different from the avterage. .e miromu.VfHl'Jltor I5lpll'lcrua"torl1 91" todo ~ett~~ thRtl.t in no case in the next a.b10 J!o1". Now» let me $lummari2:eup thiilil ~tag~ Th~ inVi!!lstoloneeds commonstock~ in hb portfolio» but thes~ introduc~ ha2:a. th. thilil con~ililquililnc@~ exactly the ~ame method in thilil mSJ1'ket 1933» and I ±~o'lmd pecu. few dililvot~d adhErents fj and which iIiIl~~had b~~n prililtty ~kililpticalo ~~~ DowTh~ory bililcameextremely popular af't~r 1933. ! will mor® briefly on that later... consequently the !lUi!Ximum holding o:t bonds 'tfOrut'tbe 75ap and.o rJ@lti]:.d~t"ined !2\ignalli to buy and iiI~ll stock~ by t.ori'((.h@mf@~l"lJ"t~~f:rom ·th~ g®n®:ral public and put off into a cataF!' _ gory.portfolio held in commonmtock~ shoukd be 25~ and th.y of ..l.dietSl the r~~ult~ of applying the mechanical concepbs of the DmifTheor'J s in which have well .he m(fir~l!Mmt the averag~ t~ough resistan<!~ points upward or downva.m25'%= the figurelil being r~'V'erliJ)edo yariationil mad~ in hi&.!. AiBJ o'l1 y DowTheory b i!llt1ll p<l!lri!llued a. '1iio a'l'l!ii J()J.!slyit had been a kind of: esonez-ac (nuy 13.t1l0l1sbocks wh~n th~ market se~ll1i!il low in to val1J.~r bhan I do beli~v~ i~~ il'£l possible a / / mil". tollow some sound prin~ which are th~ valu~ of th~ ~~c~Jriti~~ and not to th~il" market actiOllo The oth~r i~ that their m~thod of op~l'ation must be ba8llieally d.in onililbenililtit through following thI!!JDow $igna.rds of wide fluctuations which he cannot ~xp~ct to a. public's in.!:"~nt than that of thlfll: ajority m ~ecurity buy~r11iio They have to cue t.on~rl! and ser"ic®~o I think all of t1:MUll vill t®ll yOll that it i~ not a ml!lJcllanical tlMflory that a ladt'gilil l@mililnt judgment hM tlO ® of in thl!!Jintililrpretat10n of thilil But once you that eleml!!Jntyou don't hav~ a theory anymor@ » have a c®rtain i!lxpertiill!!$ "!Afhich mayor may be depilijndabl~ and usefu. I macte some £'>Itlt). of practit:1. variou~ 'type~ of intl!1!r~lSt=bearing depoili ts may viewed ai!llbondequh'aleJ:lt~ 0) Jl..

whocould consider that ertockB Leas safe because they have dec. That was brought home to me shortly after the May 1962 break when a savings=and~loan company representati'le came to me questions.d' . I think. Nowwhile this is the classic language of investment authorities.Less variam~~ of thill 'type $I which are called "formula plans.ce Ln the bond componerrt but the decf.ca't on.s Lon b not of . 10 in relation to value. was th'l'.~ ho. and (c) the character neceasary to per'sue a c:onalli~tent poli. Nowthey are tiO like the ot. That i . But it could be follow~d by many inve!l'ltO!'81 the .. The first question he asked me was "Don't you think that commonstocks now are less safe than before because of the decline in the market?" That hit me between the eyese Her~ were financial peop.oI'1lJgeni!lJfally and 'GO that of !\\1peculatoI"salwaYio It is particularly true now because of t".nglik~ t.~l!'Ithod has worked out extremely well for who have had (a) the money.ion of • When a market rise brought it up to 40%they sold out one eighth of the i:I. follml the formula anymore. The main need here ia: for thre irnrestor to Mlect some rule which seems to be suitable for hi~ point of view~ one which will keep him out of misli" chhf.'t enough p to bring your proport1op back to 50%1 back into bonds or irito saving8 banks.Lf. That.0 30%they p 99ughtone sixt. Another approach that i~ practicable. or quarter after quarter.ne in price than they wer!!!l fter they had advanced in price.%..extent of an inflexible to z-ul.hegreat conrus ron between investment and specul. In that way you buy more ~hares . a more sophifilticat'liid app. For if you 'had f\:)llOWedone of t.h <cobring the' ratio up again to 35%. If you can do that you are guaranteed satisfactory suoc~~~ in your inve~tment~o Let me add that there are count.)famoui!Il Yale University ~y~tem.9:f IIItocks when the market level illZ low and t:l~!'~rer 13iharel!! "Mhen tlSlhigh. good until the marki'fran away on the 1 and then had too little in common~tockii. which '~wuld take advanbage of a rin L in the market level f'or wa11jl1!l J be sometihf.her untver-s LtLes. And conver~ely wh~n th~ went down so that your commonItock proportion had 45~ or 40%) you som~ of your bond mon~yto buy common~tockl!lland j:t back to ·thl! 50. Whenthe market l~v~l of th~ ~tocks ris~s to a point whC!ilr~ of the total or maybe 60% you voul.cy over the yearIJ regardless of whether th~ market ha~ been going up or down.hi~ Use a 50-50 di vis ion betw~en bonds and ~tock~.s b a "counsel. Nowlet me oome to the problemlll of security gelectiono Wehave talked about a bond component (and/or a ca~h=equivalent component) and a oommonstock com~ ponerrt .d then se. (b) the time. and they don It. I insi~t~ which will always maintain Eloml!!l intereSlt in common~tQcks regardlelu of' how high the ma:rcketLeveL goes .·.he~e older formulaiJ whioh took you out of commongtock51 entirely at some level of the markililt. but from Ii!. in which you the same amount of money in common stOcks year after year.h<!l'l in the market itself. of perfection" for mo~t invutor~. . They used a me ba£iillll for commonstocks!J a per-centage which at that time wa!!'legarded alit pretty rash r for an instltut..e that th~y should not increa~~ th~ of commonstockiJ in the portfolio ailil the market advance 1$ s except of cour-se through Jl. it is amazing how many people thiru{ in exactly opposite terms.. your di~appointm~nt would have b~en ~o great because of the ensui!!ing advance all probably to ruin you from the of intelligent investing for the re~t of your life. 0 Ii . a The policy I propose to have more common!il"Gockf!! when the mar-ket seems to be low and len vhen it seems to be high value iitandard~ is to th!l!!p!i4ychology of invesi. which wasot: the ~arlie!!lt f'o:1emula thods knovn. i~ the "Dollar Averaging" method. It was 2.Ld.Lnga to get back to 35% ~~ when it went down "1. I euppoSle thl1!l idea of having more common~tockl!llat low levels than at high Level. different of View.atdon '-'hich I shall refer to later. Th~r~ Iii Ii wide choi. and one.Le.Lf.LLo. ri:€le However .

(There i~ u~ually an advantage for the shrewd invemtor in buying ghar~s ot the clo~ed=end inve~tm~nt companies on the New York Stock Exch~ge.election? My .pal. One que~tion for th<!\! inYE)". I just want to ~ay in general terl:!'l8 that nobody can as:i!!umehat he can get exactly th~ $am~ deg:rrSfIf maf'iffity t o and dependabf.hat the "good stock~==chiefly the \growth li!tockllll bett<!!lrhan average prospectf!!==tend to be fully priced and with t 0 \ \ \ \'L. Government bonds 4. you can buy long term U. Government taxable bonds 3. verage was 3.. If they can get r(!l<? ~ultl!Jequal to the 1l:tyerages thil!ies.10% taxable.) Many :tnv{ll~torlil would think m:y prescription too ~imple.!f1a to the past holder of tax-frelJJbonds as compared with U. Corporate ovnez-s I&l'f'l. hav~ always yielded quite a bit more than the bonds to which they were junior. b~cau8~ t~ free bonds have advanc~d relative to others.S.~'FAGE too much tmpor-tance in most C1ll. when obtainable at dillcount.S. which may disapp~ar pretty ~oon in the n~w law.. and I don't want to get drawn into the controverlilY that has now begun as to whether their methods are complet~ly sound and their prospect s are compl®tely depsndab.ractable for year-s. Gov~rnment Bond~ at about .!II from net allltl!et val.Le . and I am glad I haYn't got thO!l time to do it. or el~6 put hil money in ~~veral of the well-establi$hed mutual fund~.. government. but it is gtill p~r~ua~iv~ for p~ople of sub~tantial means.cf. S. wrhich yield up to about 3~ for good quality and long maturity~ For mo~t investors who are in a tax bracket of more than 30~. tax=f'r~~ bonds have been th~ most att. tax=fr~e bonds should be bought only by peopl. but Another choice of great importance are tax=free and municipal bonds .IIJlY why shouldn't they try to get a in wily ~ubstantially highElr return by caref'ul and competently-adYillled . say.%» so you see the advantiage that has ~'lf't'l.06. \\Thiii! underlying problem of selection is J. My recommendation is that the inve~tor choome either hil own li~t of.California. The great tax advantage of preferred ~tocks to corporate buyers is now be atedly showing itl5l effect on relatiYII!yd.ve of the tax on these dividen1Jis individual ovmerlB save 85% J a very ~mall amoluit.93% and U. It ~hould be obv Lous that preferred stockfl!shou.. you can buy lavings=and loan $har~~ (b~ar in mind that th~y are not deipo!'!!it~ ~hare~) which now yield up to 5% in California. I would like to point out that in municipal bonds yielded 2.6~S In the taxable li"t.he should have as againit taxabl~ bonds.torwhich I won~t go into. 20 or 30 representative and leading compani~~. The reason i~ th~y have a great tax advantage for corporate owner~ which th~y don't hav~ for individual OWI1!!!lI'S. Leo/. longterm corporate bonds at 4. shor-t anSiwer has 1l:tlreadyeen ghren: If the inveli!!tmemt unds M a whole can't b f \ beat the av~rageljl even pretty clever innll!tors as a whole can it do it either. you can put your money in U.S. a and that of U. is wh~th@lr hll!l IlIlhould tak~ advantage of thl'!l 5~ offered by some of' the aav:1tngsand loan aSk'llociation!ll.elds. You may have noticed lalt week that one of the public utility compani~s offered a bond issue and a pr6f~rred~~tock i~~U6 at practically th~ same yield. rath~r than paying thfJ premium added on to thEli price of mo~t open~end ~hares.~.Ld be bought only by cor'por'atie imreltltor1l\l just a. you can buy high grade.S.Li.ving~~ and loan a~sociation~.r~8tor of ~Hhich didn It take advarrcage up to the clrtent.e 'who pay income tax. In October 63 the nnmf.30~$or 4~ it you do a littl~ selecting~ you can have ~avinglJ in commer-c LaL banks which gin you up to 4~ if he Id for one year.by in a !:lltandard of investrn. actually 'iMert') in a gift to the in. which can redeem at will. We come finally to common=stock investment.. Saving~ Bond~ at 3~.ue. That advantage ha~ diminished.0810 2 the same return the full tax on the governments. ..:tat yielding 5% M in one yidding 4%$ \'Ii'ith rewpect to pr~fl!!r~d~tockfj!the import point ill that thl!'!ydonot belong in the individual inve~tor!s portfolio. although hitherto preferred ~tock. m~ that I am not an ~xp~rt on ~a.

r~..thl:t at lilaa. of 1:o..~t customlr an lnv6~tor--p~riod.rt ot :invl'£!il'ltins be thll !3l. complllt@ly8illy p. As r le@ it. and wer. field of n1peoial I1tuat1onl" .1 they would I..ngtil&(2) Buy definitely "bargain illuu. From th:ll it Wa. no .:!. ":t~nd1ng 1:)\. commeroial bUllinlll.rminllotion thilll! would.. of the lix oampanill in the Dow Jonel Ind. / LfJt m~ ra:tflll a final qUISllt1on~ D~lp1\.IJcrio4!ld 1t~ invel!tm~nt value~ in to Th1.luatt." PAGE 12 .butit did d!ljUl. Speoulation i~ not bad in it~~lt$ ov@r~peculation 1~.t I.1i an Iil.d balil ~ lik~lyto ba1 takln over by a l~ger oonc~rn at a sood advanol in priol. ingll.rlil. did not prove that Rarve~t~r w~s a b@tt~r buy than IBM--it wasp alit tlU'IlfHi out"..~ . F~ ~uoh opportun1t1e~ remainJ perhaps they hay.)1 could b~ I.ot important oom~ pan!.1.iillY to calling @v@ryon!!lan ln~ ~tep v~~tor who bought hi~ ~h~r®1 outright» and finally to calling ~v. I>~Qulat1ng" not only wh~n 'l::rUIY $l. when div'rI1~ t1cat1on val obl. (Th~ ri$e of. Conv¢i.. IBM or 607.rio~$lbut ~v~n w~ it 'l::myli'! into a wond~rtul concern euch ~!!I IBM at "70 time!!!it!! h1ghellBrt:record@d .~!IlI\l.veil"tment ~ Iplcula .! 1nv~gtorl to do thil~ by buying value rathlr than prolp~ctg Qr pop~ ularity. be. conliltently profitabl. "ndfUtvorlil to prfld:ict urk~t moV1I1IIor to ~~l~ct tll.diii& that mbtuOi$ and harmed :l.llalYlltl eould mUljI to th~ ~. It i~ important that th. mind.~overl. Soml extraordinary r'lultl oould have be/fn obtained linee 1933 by buying il. ot th1g approaoh: (1) S~l. (. tak.. one. mOilt attractiv~ compan1~ull$ :.. $om~ example.be.v~ :f.y~r haVIjIlIomi notion of tha1 :fiSIko h~ might tUil'lg all w~ll a~ what profit hI might mak~~ I hav~ pointed out that my own con~erv~tlve apprat~al put th® inv~ltm~nt component in rBM!~ 1961 pric® ~t not more than $200 p~r~h~~ -~about $6 billion for th~ ~nt1re ent'rpri~~~~the r@mainderot th.lional ~I&.hare. . loon follow~d by a tall to 300. Average whioh lold at the lowest multiplier of their reoent earn:l." At th~ oth®r extr~m@ n~w Itock off~ring~pwhen th~ craz@ i..en 1nveetment and §peculatioll.. th~ fundamental problem in common stockm ill the market'~ 1n~ J~ction of a larg~ ~pecu1ativ~ element into the strong~st and be~t compan1'1 by eltablilhing an unt~nably high pric~ them.ry Wall Str.lliI .. Thele veri quite n~roul ~ to 81 late &1 1957. r@orgMizat1c)llllll mers..lr~@Jlyp I IItat~d. regardl~fnl ot pric(I.1 which I~ll on I.oh year the . ~h1e is a prot'.oh I~curity operatlon~ $.on" from itlJ vocabulary".ct Itockl. but it 11 not 1mpoliible for intelligent inv~ltorl to profit handsomely from it if \t~IY approa. publl~ mhould ltt$!.t8<tlt ~ in luppr~!I!I~ing the 1iford "lp~Clllat:!.\"hot hllUllli &1.3) Finally there il the wid. rlll!!rults'l I thil1k it 11 pOllible for lome strons.e.:!:~Te compOlllllntl'J th@ curr@ut prioe of WlY g1viflncommon IJtockp 110 that thlilin".'"' Typioally thell would be Iharel th~t sold for lell thlir value in working~capital &lo~el with nothing paid tor f1xld al8etl and goodwill..~e betto%' than ~v.g.rvGd.r@1lI of a good company al"4!l alwaYIi a 1lI0und 1nV8!1iaullnt. . 1nvlltor mUlt reoognize that thero al"l uncertain and h'no~ Ip~culativ~ \ .ilt. My r4!lCellnt crullad® hi!ltlJ oil'!n per-luau" Wall strlllJ<Iilt it hl!l..dbcouraging r~sultl! from. glamour . ar~ lik~ly to combin® fourth=r~t~ quality with ab~urdly high pric~-earning~ rAtio •• Therll ar~ bett'iill" opport'W'l1 tllUI in b!itv~lIln UtU'll! t extreme!J$ but mOllt inv~ii!ltorl on it. d look for them th@r~. quotation :r@prliuj~ntinga Il!p@ctillJ:t1ve v8. can the 1nt~11igent 1nv~lto:r toll ow any po11ci~1 ~ common=stock Isloction that prom1. To!lfY mind th~ mOlip valuablecontribut10n that l!J~cur1ty l. \ \ Th.pn of the company ill undoubtldly brilliant futtU:'l.. ~'O m \CONCLUSION.5) of International Ha::rvil-It~r 191.' I oft~n ov~rpriced.. ~ Intlrnational Ha:rvelter.. 11 th~ b~st 11lu~tration of my point®) Thil h~ add~ ~dgrlatly to th~ confu~lon b®tw.\llrly good idea of th~ elx:t~ntto which it a. l'ath. becaus~ it 11 ea~y -to tell onl'lllj~lf that thi IIha.t80~ of the high~lt pr1c~q(5.g. 11quidat1on~1 eto.onlBtrate : that the rilk taotor involved was much small!!r. in .n ~upplAnt'd by Iharel of Imall~r oompaniel selling on a rGl&tively d~prell..

de towardll the ineflcapabl@ variationlJ in pOllition and th~ in~vltil. at "lI'l'hB.[i Do you ..h. .:PJ'i:1'. ~trong ~ffort to hav~ more money ".ob~liifjY<l'J that t~ollo~!J'ing sound polici~~ almost ~ inv~stor". M08t important~ h<l!l mc.o lOllllllJany recomm~nd buy~ h~ alway~ aske~ in ~$turn$ WWhat ii.!lJis of co~t) CJ...d by your . promi81ng bUlllin<l!lI!Ui'l with :tle i@: elo~ely connec'sedv ) He m:ulIJt make ill./ and k@leJPmOlllt of hil funda in Iharll'U! of ill..'I and by adequate d:lverlllJificationQ (Exc(lJption: He ma. de.e~p well? tI I am opti:millt ~nough '\t.iWIl--<lIIVIIUlan tul-GoV'flr:nm<l!lnt""bond program" E1t irU1!it..intain a philoliophical mttitlll. in &ny policy h@ follc.·.t h(('. r<l!lcognizl'll~ to b(\1'l potentially high lillvel~.\tt\'J'JJ'i'fll bonds and common I!jtock~.t having t.{ant to "at "\\l"ell or to Il.h thifil!Sfb to 1l'U old Wall :str®~t i~~u~~ wtory" wh~n a c~rta~ln broker ?!I@.aL 1W'i th ·thl!llllUB uncertm1nti~!I by ill.IJocilated vU. policy of continuouil compromimle be"'..l)lvifjn in this world==&1!hould be ablifi to <$at lrl!!ill ~nough withou.blifj Umbtuifjl§l" lii8:.I:L~..~k..ocks at lOller mark<l!lt l<l!lvell (at least on thO! bi!l.t~d. in common I'!..cii~'t ffij1!.

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