I discovered some great lectures from Benjamin Graham when he was a professor at Columbia University. There are a total of ten lectures which are from Graham's class in 1946. I summarized the main points of each and something new I learned from it.
This is great information that you will not read in either The Intelligent Investor or Security Analysis. I will be going through all ten lectures and releasing them over the next few days. To see Part I click here, to see part II click here http://www.gurufocus.com/news.php?id=119551, part III is here: http://www.gurufocus.com/news.php?id=119662, and part IV is here: http://www.gurufocus.com/news.php?id=119707.
The Rediscovered Benjamin Graham Lectures – 5
In part five of Benjamin Graham’s lectures, he dives in speaking about valuation of a company once again using future earnings as a strong benchmark. This time, however, he also brings up immediately off the bat that the SEC had valued a specific company (Childs’) by using future earnings while also adding back in the excess working capital towards the total value. This is very interesting he claims because while the SEC is free to do as they please, a good security analyst would not have done this.
As he moves on in the discussion, he brings up American Radiator and how calculations were computed to actually calculate earning power based upon actual future sales and using an expected profit margin. The biggest difference about this form of estimating a company’s stock is that they actually calculate the net per stock and they also make sure that they calculate numbers based upon the near future only. This is viewed as more conservative to some, but many also agree that it could give you a far more accurate stock price than calculating ongoing future earnings for decades at a time.
Also brought up, however, is the fact that American Radiator did not try to deceive anyone; but still did not disclose that the earnings that they reported in their statistics were comprised mainly of numbers that occurred during a boom period. This is a major significance because it also represents one of the largest of problems that occurs in the building industry. If you do not take into effect the statistics provided during both the boom and the downturn (or bust) periods, then you could end up with significant errors in your expectations. His example shows that the earnings were based upon expected building figures, yet while the figures went up through the year 1951, by 1952 the sales numbers would have dropped by around half. These are definitely significant changes that would have affected the earnings and therefor the price.
One of the major problems that affected the valuation of this specific example is that the building industry seemed to be in a low, then the country went to World War 2, and then right about the time that the war ended the building industry hit a boom period. Valuating a given company during such periods can be dangerous, but major events in our everyday lives continue to affect our markets almost constantly. The important thing is to continue to try and evaluate based upon a level of expected normal earnings versus the optimal earnings that a company could be experiencing in order to remain unbiased.
Then after some discussion, Graham clarifies a point from one of his earlier lectures. Rather than only valuing a company’s earnings based upon the next 5 years, it should be understood that the time frame may need to be extended in order to give a true meaning; this is especially true if you are trying to analyze statements over the next five years when you believe that the next 5 years could be a boom period. The important thing to remember and take away from this lecture of his is that there will always be formulas and computations to analyze, but you cannot 100% trust the numbers alone. Only when you have all of the information (both statistical and market / economic climate information), can you make a truly accurate analysis.
http://www.wiley.com/legacy/products/subject/finance/bgraham/benlec5.html
http://www.valuewalk.com/
This is great information that you will not read in either The Intelligent Investor or Security Analysis. I will be going through all ten lectures and releasing them over the next few days. To see Part I click here, to see part II click here http://www.gurufocus.com/news.php?id=119551, part III is here: http://www.gurufocus.com/news.php?id=119662, and part IV is here: http://www.gurufocus.com/news.php?id=119707.
The Rediscovered Benjamin Graham Lectures – 5
In part five of Benjamin Graham’s lectures, he dives in speaking about valuation of a company once again using future earnings as a strong benchmark. This time, however, he also brings up immediately off the bat that the SEC had valued a specific company (Childs’) by using future earnings while also adding back in the excess working capital towards the total value. This is very interesting he claims because while the SEC is free to do as they please, a good security analyst would not have done this.
As he moves on in the discussion, he brings up American Radiator and how calculations were computed to actually calculate earning power based upon actual future sales and using an expected profit margin. The biggest difference about this form of estimating a company’s stock is that they actually calculate the net per stock and they also make sure that they calculate numbers based upon the near future only. This is viewed as more conservative to some, but many also agree that it could give you a far more accurate stock price than calculating ongoing future earnings for decades at a time.
Also brought up, however, is the fact that American Radiator did not try to deceive anyone; but still did not disclose that the earnings that they reported in their statistics were comprised mainly of numbers that occurred during a boom period. This is a major significance because it also represents one of the largest of problems that occurs in the building industry. If you do not take into effect the statistics provided during both the boom and the downturn (or bust) periods, then you could end up with significant errors in your expectations. His example shows that the earnings were based upon expected building figures, yet while the figures went up through the year 1951, by 1952 the sales numbers would have dropped by around half. These are definitely significant changes that would have affected the earnings and therefor the price.
One of the major problems that affected the valuation of this specific example is that the building industry seemed to be in a low, then the country went to World War 2, and then right about the time that the war ended the building industry hit a boom period. Valuating a given company during such periods can be dangerous, but major events in our everyday lives continue to affect our markets almost constantly. The important thing is to continue to try and evaluate based upon a level of expected normal earnings versus the optimal earnings that a company could be experiencing in order to remain unbiased.
Then after some discussion, Graham clarifies a point from one of his earlier lectures. Rather than only valuing a company’s earnings based upon the next 5 years, it should be understood that the time frame may need to be extended in order to give a true meaning; this is especially true if you are trying to analyze statements over the next five years when you believe that the next 5 years could be a boom period. The important thing to remember and take away from this lecture of his is that there will always be formulas and computations to analyze, but you cannot 100% trust the numbers alone. Only when you have all of the information (both statistical and market / economic climate information), can you make a truly accurate analysis.
http://www.wiley.com/legacy/products/subject/finance/bgraham/benlec5.html
http://www.valuewalk.com/
