It is also extremely relevant for investing in Japan, as the Japanase stock market as of today has a lot of features resembling the 1970's/ 1980's in the west.
The Era of Piling Up Cash
"(...) There’s no question that the Ben Graham approach was evolved in another era and designed for that time. Corporate managers in the thirties and forties did not fear inflation, they feared going broke. They wanted a cushion against adversity, and sometimes that impulse led them to piling up cash far beyond their needs. Rather than reporting not only all their earnings, but even earnings they did not have—as became the fashion in the sixties—they actually hid their earnings through a variety of devices and reserves so that they would have something for the leanyears. Now corporate managers, fearing inflation and also wanting to look good on a quarterly earnings basis, leveraged their companies. Meanwhile, conglomerates already leveraged sought out the remaining cash-rich companies. So there is not as much Graham material around as there once was, and yet the market does provide it from time to time.(...)"
On the Irrelevance of Current Income
"(...) there was not always this attention to hyping up current income. (...) it used to be the other way around. (...) Management liked to pile up cash, as a reserve against leaner years. They did not want to report income. The stock market was sleepy; besides, the stock market valued assets and dividends, not reported income. If you reported big profits, your unions would ask for more money. The tax man would ask for more money. Your shareholders would expect a bigger dividend.(...)"
"(...) Gradually this changed. (...) Shareholders began thinking that if you could get the stock to go up by plowing the dividend money back in, dividends were for old ladies. The corporation discovered that the more it borrowed, the higher the earnings and the higher the stock, so it began to leverage. The trend finally culminated in the late 1960’s when conservative managements were punished for their conservatism. If you carried your patents at zero, if you had written off everything and piled up the cash—if, in short, you had built up your assets—you were vulnerable to a company with no assets and a fast-moving, high-priced stock. Your own stock would have a one-shot jump when the offer would be made, but then you would be swallowed up into the company with the sexy paper, (...) Not all managements liked the trend, but once it got going, few were strong enough to buck it.“I wish to hell the stock market didn’t want to see the earnings go up all the time,” the chairman of a hotel chain told me. “Business just isn’t like that. Every year is not always bigger than the last year, and we have to bend things around a lot to get them to come out right.”Why not report it the way it is? “Then the stock would go down, and we’d be at a disadvantage vis-à-vis our competitors in hiring executives, making new hotel deals, and so on. If you could get everybody to go along at the same time, we’d do it. (...)"
"(...) The worst sandbagging for an investor (..) when the numbers were changed retroactively. Universal Widget says it earned 50¢ in 1969, $1 in 1970, and $1.50 in 1971.You buy in, and then they tell you, Sorry, we’ve changed our accounting; we didn’t earn that at all. Put a little d in front of those numbers for deficit.(...)"
"(...) It is scarcely fair to ask everybody to be an accountant. (...) You can, of course, get the annual report, and throw the thing away if there are fifteen footnotes or if the notes are incomprehensible.(...)"
The Value of Common Sense And the Virtue of Not Being an Instituiton
"(...) Ultimately, there is only one defensive quality that can serve as protection, and that is common sense. Does it really make sense to believe that this cigarette company is increasing its earnings 30 percent a year? (...) to believe that in an industry as easy to enter as shell homes, this producer is going to continue earning 50 percent more every year? (...)"
"(...)Finally, a minority of individuals, those with some time and the proclivity to do their own work, can do very well. But a time may be coming in which it would be possible to be successful with just the old tenet that used to work, anticipate the institutions. While institutions are big and muscular, their records are not all that awesome. (...) their managers (...) tend to run in packs, like beagles. All you have to do is find the scent before the beagles do.(...)"
"(...) institutions, (...) love the security of a front-running company with growing earnings, and they are wary of small companies because they cannot move in and out of them well in size. If you can find the smaller, growing company and sell it to the institutions when it gets a bit bigger, (...)"
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