Boomers have freedom both to spend and withhold spending.
Because they already have enough housing, cars, and clothing, they not only have the freedom to spend on what they want; they have the freedom to withhold until they find exactly what they want, whether that’s a Jaguar, a Hummer, or a Cadillac. This elevates the importance of brands in reaching growing, profitable market segments. If brand managers can create fans among aging baby boomers, the likelihood of converting interest into a sale is greater, because the boomers can
- However, Mick Jagger himself seems each year to discover another new family
responsibility, if you follow the paternity suits filed in various places.
probably afford to buy it. That’s a major difference in their lifestyle compared to a decade ago.
Aging baby boomers become fans of brands that fulfill certain expectations-quality products that are aesthetically pleasing, personally satisfying, natural, convenient, easy to use, and, if possible, noncaloric. Expect empty nester boomers to indulge in luxury travel, restaurants, and the theater, which often means they need more fashionable clothing, jewelry, and the designer brands found in department and specialty stores. They watch their waistlines and diets and are good prospects for spas, health clubs, skin care products and cosmetics, beauty parlors, and healthier foods. As they approach retirement, they purchase condominiums and begin to take more frequent but perhaps value oriented vacations, often purchased online. They need financial planners with financial products oriented toward asset accumulation and retirement income-perhaps even stocks that pay dividends.
The Investor and His Advisers 1. The examinations are given by the Institute of Chartered Financial Analysts, which is an arm of the Financial Analysts Federation. The latter now embraces constituent societies with over 50,000 members.
2. The NYSE had imposed some drastic rules of valuation (known as “haircuts”) designed to minimize this danger, but apparently they did not help sufficiently.
3. New offerings may now be sold only by means of a prospectus prepared under the rules of the Securities and Exchange Commission.
This document must disclose all the pertinent facts about the issue and issuer, and it is fully adequate to inform the prudent investor as to the exact nature of the security offered him. But the very copiousness Endnotes 583of the data required usually makes the prospectus of prohibitive length. It is generally agreed that only a small percentage of individuals buying new issues read the prospectus with thoroughness. Thus they are still acting mainly not on their own judgment but on that of the house selling them the security or on the recommendation of the individual salesman or account executive.
Security Analysis for the Lay Investor:
General Approach
1. Our textbook, Security Analysis by Benjamin Graham, David L. Dodd, Sidney Cottle, and Charles Tatham (McGraw Hill, 4th ed., 1962), retains the title originally chosen in 1934, but it covers much of the scope of financial analysis.
Of course, we cannot promise a like spectacular experience to all intelligent investors who remain both prudent and alert through the years. We are not going to end with J. J. Raskob’s slogan that we made fun of at the beginning: “Everybody can be rich.” But interesting possibilities abound on the financial scene, and the intelligent and enterprising investor should be able to find both enjoyment and profit in this three ring circus. Excitement is guaranteed.
534 The Intelligent InvestorCOMMENTARY ON POSTSCRIPT Successful investing is about managing risk, not avoiding it. At first glance, when you realize that Graham put 25% of his fund into a single stock, you might think he was gambling rashly with his investors’ money. But then, when you discover that Graham had painstakingly established that he could liquidate GEICO for at least what he paid for it, it becomes clear that Graham was taking very little financial risk.
But he needed enormous courage to take the psychological risk of such a big bet on so unknown a stock.
And today’s headlines are full of fearful facts and unresolved risks: the death of the 1990s bull market, sluggish economic growth, corporate fraud, the specters of terrorism and war. “Investors don’t like uncertainty,” a market strategist is intoning right now on financial TV or in today’s newspaper. But investors have never liked uncertainty-and yet it is the most fundamental and enduring condition of the investing world. It always has been, and it always will be. At heart, “uncertainty” and “investing” are synonyms. In the real world, no one has ever been given the ability to see that any particular time is the best time to buy stocks. Without a saving faith in the future, no one would ever invest at all. To be an investor, you must be a believer in a better tomorrow.
Graham highlights four extremes:
- an overpriced “tottering giant”
- an empire building conglomerate
- a merger in which a tiny firm took over a big one
- an initial public offering of shares in a basically worthless company
The past few years have provided enough new cases of Graham’s extremes to fill an encyclopedia. Here is a sampler: LUCENT, NOT TRANSPARENT In mid 2000, Lucent Technologies Inc. was owned by more investors than any other U.S. stock. With a market capitalization of $192.9 billion, it was the 12th most valuable company in America.
Was that giant valuation justified? Let’s look at some basics from Lucent’s financial report for the fiscal quarter ended June 30, 2000:
This document, like all the financial reports cited in this chapter, is readily available to the public through the EDGAR Database at www.sec.gov.A closer reading of Lucent’s report sets alarm bells jangling like an unanswered telephone switchboard:
- Lucent had just bought an optical equipment supplier, Chromatis
Networks, for $4.8 billion-of which $4.2 billion was “goodwill” (or cost above article value). Chromatis had 150 employees, no customers, and zero revenues, so the term “goodwill” seems inadequate; perhaps “hope chest” is more accurate. If Chromatis’s embryonic products did not work out, Lucent would have to reverse the goodwill and charge it off against future earnings.
Investing in Stocks of Financial Enterprises
A considerable variety of concerns may be ranged under the rubric of “financial companies.” These would include banks, insurance companies, savings and loan associations, credit and small loan companies, mortgage companies, and “investment companies” (e.g., mutual funds).* It is characteristic of all these enterprises that they have a relatively small part of their assets in the form of material things-such as fixed assets and merchandise inventories-but on the other hand most categories have shortterm obligations well in excess of their stock capital. The question of financial soundness is, therefore, more relevant here than in the case of the typical manufacturing or commercial enterprise. This, in turn, has given rise to various forms of regulation and supervision, with the design and general result of assuring against unsound financial practices.
Broadly speaking, the shares of financial concerns have produced investment results similar to those of other types of common shares. Table 14 7 shows price changes between 1948 and 1970 in six groups represented in the Standard & Poor’s stock price indexes. The average for 1941
September 4th, 2009 — Investment Strategies
Of these tests the most severe under recent financial conditions are those of financial strength. A considerable number of our large and formerly strongly entrenched enterprises have weakened their current ratio or overexpanded their debt, or both, in recent years.
Our last two criteria are exclusive in the opposite direction, by demanding more earnings and more assets per dollar of price than the popular issues will supply. This is by no means the standard viewpoint of financial analysts; in fact most will insist that even conservative investors should be prepared to pay generous prices for stocks of the choice companies. We have expounded our contrary view above; it rests largely on the absence of an adequate factor of safety when too large a portion of the price must depend on ever increasing earnings in the future. The reader will have to decide this important question for himself-after weighing the arguments on both sides.
We have nonetheless opted for the inclusion of a modest requirement of growth over the past decade. Without it the typical company would show retrogression, at least in terms of profit per Stock Selection for the Defensive Investor 349dollar of invested capital. There is no reason for the defensive investor to include such companies-though if the price is low enough they could qualify as bargain opportunities.
September 4th, 2009 — Investment Strategies
But Qwest’s financial reports held an odd little revelation. In late 1999, Qwest decided to recognize the revenues from its telephone directories as soon as the phone books were published-even though, as anyone who has ever taken out a Yellow Pages advertisement knows, many businesses pay for those ads in monthly installments.
Commentary on Chapter 12
All the above examples are taken directly from press releases issued by the companies themselves. For a brilliant satire on what daily life would be like if we all got to justify our behavior the same way companies adjust their reported earnings, see “My Pro Forma Life,” by Rob Walker, at msn.com/?id=2063953. (”. . . a recent post workout lunch of a 22 ounce, bone in rib steak at Smith & Wollensky and three shots of bourbon is treated here as a nonrecurring expense. I’ll never do that again!”)Abracadabra! That piddly sounding “change in accounting principle” pumped up 1999 net income by $240 million after taxes-a fifth of all the money Qwest earned that year.
Like a little chunk of ice crowning a submerged iceberg, aggressive revenue recognition is often a sign of dangers that run deep and loom large-and so it was at Qwest. By early 2003, after reviewing its previous financial statements, the company announced that it had prematurely recognized profits on equipment sales, improperly recorded the costs of services provided by outsiders, inappropriately booked costs as if they were capital assets rather than expenses, and unjustifiably treated the exchange of assets as if they were outright sales. All told, Qwest’s revenues for 2000 and 2001 had been overstated by $2. billion-including $80 million from the earlier “change in accounting principle,” which was now reversed.
September 4th, 2009 — Investment Strategies
Meanwhile, all too many chief financial officers give “earnings guidance,” or guesstimates of the company’s quarterly profits. And some firms are hype o chondriacs, constantly spewing forth press releases boasting of temporary, trivial, or hypothetical “opportunities.” A handful of companies-including Coca Cola, Gillette, and USA Interactive-have begun to “just say no” to Wall Street’s short term thinking. These few brave outfits are providing more detail about their current budgets and long term plans, while refusing to speculate about what the next 90 days might hold.
(For a model of how a company can communicate candidly and fairly with its shareholders, go to the EDGAR database at www.sec.gov and view the 8 K filings made by Expeditors International of Washington, which periodically posts its superb question and answer dialogues with shareholders there.) Finally, ask whether the company’s accounting practices are designed to make its financial results transparent-or opaque. If “nonrecurring” charges keep recurring, “extraordinary” items crop up so often that they seem ordinary, acronyms like EBITDA take priority over net income, or “pro forma” earnings are used to cloak actual losses, you may be looking at a firm that has not yet learned how to put its shareholders’ long term interests first.
September 4th, 2009 — Investment Strategies
In this chapter we shall use whatever designation is most applicable, with chief emphasis on the work of the security analyst proper.
The security analyst deals with the past, the present, and the future of any given security issue. He describes the business; he summarizes its operating results and financial position; he sets forth its strong and weak points, its possibilities and risks; he estimates its future earning power under various assumptions, or as a
- The National Federation of Financial Analysts is now the Association for
Investment Management and Research; its “quarterly” research publication, the Financial Analysts Journal, now appears every other month.”best guess.” He makes elaborate comparisons of various companies, or of the same company at various times. Finally, he expresses an opinion as to the safety of the issue, if it is a bond or investmentgrade preferred stock, or as to its attractiveness as a purchase, if it is a common stock.
In doing all these things the security analyst avails himself of a number of techniques, ranging from the elementary to the most abstruse. He may modify substantially the figures in the company’s annual statements, even though they bear the sacred imprimatur of the certified public accountant. He is on the lookout particularly for items in these reports that may mean a good deal more or less than they say.
September 4th, 2009 — Investment Strategies
278 Commentary on Chapter 10These are the building blocks on which good financial decisions must be founded, and they should be created mutually-by you and the adviser-rather than imposed unilaterally. You should not invest a dollar or make a decision until you are satisfied that these foundations are in place and in accordance with your wishes.
Commentary on Chapter 10 279CHAPTER Security Analysis for the Lay Investor:
General Approach
Financial analysis is now a well established and flourishing profession, or semiprofession. The various societies of analysts that make up the National Federation of Financial Analysts have over 13,000 members, most of whom make their living out of this branch of mental activity. Financial analysts have textbooks, a code of ethics, and a quarterly journal.* They also have their share of unresolved problems. In recent years there has been a tendency to replace the general concept of “security analysis” by that of “financial analysis.” The latter phrase has a broader implication and is better suited to describe the work of most senior analysts on Wall Street. It would be useful to think of security analysis as limiting itself pretty much to the examination and evaluation of stocks and bonds, whereas financial analysis would comprise that work, plus the determination of investment policy (portfolio selection), plus a substantial amount of general economic analysis.