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🧮 '''12 – Things to Consider About Per‑Share Earnings.''' A Wall Street Journal report on ALCOA’s 1970 results demonstrates how a single year can mislead: “primary” earnings were $5.20 per share, but “net income” after special charges was $4.32; on a fully diluted basis the figures fell to $5.01 and $4.19, and the December quarter’s $1.58 shrank to $0.70 once the charges were included. At a stock price of 62, a hasty reader might infer a sub‑10× P/E from the quarterly run rate, while careful footnote work shows something closer to 22×—a very different proposition. Graham dissects the dilution from convertibles and warrants, the proliferation of “special” or “nonrecurring” items that recur, and the tax‑credit alchemy that can make future earnings look larger by shifting losses into the present. He shows how “primary” versus “fully diluted” earnings can diverge widely and how timing of write‑offs can paint sunshine while hiding the clouds behind it. The remedy is to treat per‑share figures as a starting point, not a verdict, and to reconcile them to the underlying economics of the business across a full cycle. This chapter’s intent is to retrain attention from quarterly optics to normalized earning power. It works by reading footnotes, adjusting for dilution and accounting artifices, and insisting on multi‑year context before translating EPS into value. ''Don’t take a single year’s earnings seriously.''
⚖️ '''13 – A Comparison of Four Listed Companies.''' I present a live case study by lifting four adjacent names from the New York Stock Exchange list at year‑end 1970—ELTRA Corp. (formed from Electric Autolite and Mergenthaler Linotype), Emerson Electric Co., Emery Air Freight, and Emhart Corp.—and laying their numbers side by side. Prices, shares outstanding, and sales are concrete: Emerson’s market value topped roughly $1.6 billion against ELTRA’s $208 million and Emhart’s $160 million, while Emery, a domestic air‑freight forwarder, stood near $220 million. The telling contrast is not in balance‑sheet weakness but in valuation: on the 1968–1970 average, ELTRA and Emhart sold near 9.7× and 11.7× earnings with price‑to‑book of about 1.0×–1.2×, whereas Emerson and Emery fetched roughly 33× and 45× with price‑to‑book near 6.4× and 14.3×. Dividend history and stability weigh heavily: Emhart has not missed a payment since 1902, and both the “cheap pair” showed only modest earnings dips in 1970. I adjust for dilution where it matters—Emerson carried low‑dividend convertible preferred with market value around $163 million—and note that current ratios and debt were generally sound. The long record of price swings underscores market enthusiasm: from 1936–1968, Emhart rose roughly 17‑to‑1 from low to high, while Emery’s spread was about 528‑to‑1. On these facts I judge which names meet the seven statistical requirements for a defensive investor—adequate size, strong finances, an unbroken dividend record, no deficits, reasonable growth, and moderate ratios of price to earnings and to assets—then warn against paying any price for recent growth. The lesson is that comparable operating strength can command wildly different prices; the market often capitalizes fashion, not fundamentals. Value emerges by insisting on earnings power backed by assets and dividends, and by refusing to convert popularity into a justification for extreme multiples. ''Under our principles of conservative investment the first is not a valid reason for selection—that is something for the speculators to play around with.''
🧱 '''14 – Stock Selection for the Defensive Investor.''' I offer two practical paths. One is the “DJIA‑type” cross‑section: buy equal amounts of the leading industrials—thirty stocks will do—and achieve the market’s results at low effort and cost. The other is a quantitatively tested list that any careful reader can build by enforcing seven filters: minimum enterprise size (roughly $100 million of sales for industrials or $50 million of assets for utilities), strong current ratio near 2:1 and modest long‑term debt, at least ten years of positive earnings, at least twenty years of uninterrupted dividends, a decade of earnings growth of one‑third or better (using three‑year averages), a current price no higher than 15× the past three‑year average earnings, and a price no higher than 1.5× book value—or, equivalently, a P/E times P/B not exceeding 22.5. Applied to conditions at the end of 1970, the Dow names as a group met these rules, if a few only barely; issues like American Telephone & Telegraph at roughly 11× and Standard Oil of California at under 10× earnings illustrate the ceiling I set. The aim is a portfolio whose earnings yield, on purchase, is at least as high as prevailing yields on high‑grade bonds. This is a discipline of exclusion more than discovery: it screens out the too small, the too weak, the erratic, and the overpriced. The mechanism is simple arithmetic tied to investor temperament—buy quality at sensible multiples and accept that “good enough” beats the hunt for the perfect growth story. ''Our basic recommendation is that the stock portfolio, when acquired, should have an overall earnings/price ratio—the reverse of the P/E ratio—at least as high as the current high‑grade bond rate.''
🚀 '''15 – Stock Selection for the Enterprising Investor.''' I begin with independent evidence on what “skill” delivers: the Friend‑Blume‑Crockett study (McGraw‑Hill, 1970) examined January 1960–June 1968 and found that equal‑weighted random portfolios of NYSE stocks outperformed mutual funds in the same risk class by about 3.7% per year in low‑risk and 2.5% in medium‑risk categories (only 0.2% in high‑risk)—a sober reminder that beating the averages is hard even for professionals. Against that backdrop, I lay out workable edges the industrious reader can pursue: comb the Stock Guide for low‑multiplier industrials (under roughly 10×), then tighten the net with six additional tests akin to, but milder than, the defensive rules—sound liquidity (current assets at least 1.5× current liabilities), debt no more than 110% of net current assets, and the like—until a diversified list of 15 names emerges. I also revive a long‑proven hunting ground: bargain “net‑current‑asset” stocks available below working capital less all liabilities; after the 1970 break, about fifty such issues appeared, including well‑known brands like Cone Mills, Jantzen, National Presto, Parker Pen, and West Point Pepperell. Finally, I sketch three live “workouts” from late 1970–early 1971—Borden’s proposed stock‑for‑stock purchase of Kayser‑Roth, National Biscuit’s cash offer for Aurora Plastics, and the liquidation of Universal‑Marion—to show how controlled arbitrage, done across many cases, can yield 20%‑type annualized returns when consummations and time frames cooperate. The common thread is not prophecy but price: insist on a margin of safety, diversify across many small advantages, and let time rather than forecasting power do the heavy lifting. The mechanism is systematic mispricing—low multiples, excess working capital, and event‑driven spreads—that a patient, skeptical investor can capture without guessing the economy or the next fad. ''Yes indeed, if you can find enough of them to make a diversified group, and if you don’t lose patience if they fail to advance soon after you buy them.''
🔄 '''16 – Convertible Issues and Warrants.''' I open with facts on their growing prominence: by 1968–1970 more than half the preferreds in Standard & Poor’s guide carried conversion privileges, and in 1970 the New York Stock Exchange listed long‑term warrants for the first time—rights to buy 31,400,000 American Telephone & Telegraph shares at $52—signaling how far these hybrids had penetrated senior financing. The sales pitch is familiar: a bond’s or preferred’s protection plus the upside of common stock for the buyer; a lower coupon today and equity later for the issuer. Arithmetic cuts through the salesmanship: the conversion privilege usually trades off yield or quality for the buyer, and it surrenders future common‑share value for the company; when most issues are sold near bull‑market peaks, subsequent declines make the embedded option worth less just when credit risk is rising. History bears it out. Of preferreds offered in 1946, the convertibles’ average decline to the next low ran near 30% versus about 9% for straight preferreds; in the 1968–1970 sample, convertible preferreds dropped roughly 29% on average, while warrants slid about 33% and common stocks fell much more, with straight preferreds again holding up better. Warrants, in particular, can swell capitalization without adding assets, sometimes valuing the tail above the dog. For analysis, treat hybrids as you would any security: weigh coverage, credit, timing, and the fully diluted economics, and do not let the wrapper substitute for an adequate margin of safety. The mechanism is incentive and cycle: issuers sell option‑laden paper when optimism is richest; buyers who pay up for promise often end up with neither high income nor true protection. ''The safest conclusion that can be reached is that convertible issues are like any other form of security, in that their form itself guarantees neither attractiveness nor unattractiveness.''
📚 '''17 – Four Extremely Instructive Case Histories.'''
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