#70 CUREDET PROBLEMS OF THE IinvEsTOR Benjamin Graham, A. Vilfred Hay OUTLINE OF NOVHIGRR 6 LecTURE Benjamin Graham RULES FOR APPRAISAL OF COMON STOCKS FOR INVESTIDUT PURPOSES 1. praised Value is det: db; He 19 Earn’ Bone ating epee cotemmined by. (a) settoetane fap Basateenb tz necessary, set value, 2 Harning Power should ordinarily represent an estimate of average earnings for the next five years. 3. Earning Pover should ordinarily be derived from actual earnings over some period in the past, there trend hes been neutral, the period should be five to seven years, ‘here definite trend is shown, actual earnings for last yoar of reasonably normal general business may be taken, if it seems desirable. In deriving Earning Pover, the past earnings ney be adjusted for known or highly probable develonments — e.g, changes in capital ization, properties, tax rates, Changes of a quelitetive nature == e.g., in competitive conditions, products, managenent — should be reflected in the multiplier, 5, The multiplier should reflect prospective changes in earnings, multiplier of 12 is suitable for stocks with neutrel prospects. Increases or docreases fron this figure must depend on the judgment end preferences of the appraiser. However, in al) but the most exceptional cases the moxinun multiplier should te 20 and the minimum should be 4, 6, If tangible aaset value is less then earning power value (earning power X mitiplier), the letter should be reduced by 257) of the deficiency to give the final Anpraised Value, (Do not increase for excess tangible value except as under 7). 7 If Net Ourrent Asset Value exceeds earning pover value, the letter should be increased by 50;) of the excess to give the final 4pprissed Yelue, 8. Where extraordinary conditions prevail —~ e.g, var profits or war restrictions, e,ierporery royalty or reiital situation -- the azount of the total/gain or loss per shere due to such conditions should be estimated, and added tu ox subtracted from the epnraised clue es determined vithout conszisving the abnormal conditions, 9. Where the capitalization structure is highly gpeculative -- ives, the total of senior securities is disproportionately large -- then the velue of the entire enterorise should first be determined as if it ind comort stobk only. This value should be apportisns’ detiteon the senior securities and the common stock on @ basis which recognizes the going-concern value of the senior clains, (lote di“ference between this trectment and a valurtion based on dissolution =izhis of the senior securities), If m adjustment is neoded for extraordinary conditions, referred to in (8), this chould be made in the total enterprise velue, not on @ per-share-of-comion basis. 10, The nore geculative the position of the connon stock -- for whatever reason -~ tho less practical dependence can be accorded to the dopraised Valne found.