What can investors learn from someone who last wrote on investing nearly 40 years ago? While the market has changed dramatically since Benjamin Graham opined about the market in Intelligent Investor. With that in mind, I decided to take a look at what individual investors can still learn from Graham today. This article will cover how investors should view a fluctuating market, as well as the well-known Graham Number for evaluating stocks.
Part One of this series introduced Graham and explained how he felt about inflation and long-term investing. Part Two talked about Graham's distinction between defensive investors and enterprising investors. Part Three covered how investors should view a fluctuating market, as well as using the well-known Graham Number to evaluate stocks. This article, the final of the series, will discuss Graham's views on per share earnings and dividends and shareholder responsibility.
Two notes on per share earnings
As discussed in Part Three, earnings per share are an important part of the Graham Number. But Graham gives two notes of caution when considering earnings per shares: "don't take a single year's earnings seriously" and "look out for booby traps in the per-share figures." Graham urges a look at a "mean figure" of multiple earnings over a period of the previous seven to 10 years to help normalize the results for companies that may have had one-time events occur that affected earnings in a particular year.
Though accounting rules have changed since Graham's time to prevent such a practice, it used to be normal for companies to set up "contingency reserves" in good years to offset the losses expected in future years. Investors, if they are content to keep an eye on single year earnings results, should train themselves to look for special charges, or items that are supposed to occur in rare circumstances.
A recent example of this phenomenon is the $4.2 billion in special charges incurred by AT&T
Dividends and shareholder responsibility
In Benjamin Graham's day, most stock investors focused not on capital gains but on dividends. Investors sought higher dividends from management, while management was focused on reinvesting income back into the business. Graham believed that shareholders should demand a regular payout of earnings, or at least a demonstration that reinvested profits had produced an increase in shareholder value.
Share buybacks can often be used in lieu of a dividend to grow shareholder value. Berkshire Hathaway
If a company continues to hoard cash and not pay a dividend, shareholders may start to clamor for a dividend. This is happening with tech giant Apple
By examining earnings and holding management accountable to do the right thing with those earnings, an intelligent investor can truly begin practicing what Benjamin Graham taught throughout his illustrious career. In my humble opinion, Graham's methods are as relevant today as any other investing philosophy. The difference between speculating and investing is an important one, and by using the tools outlines in The Intelligent Investor, an investor can get closer to viewing stocks as ownership stakes in companies instead of a speculation on the market price of the shares traded.
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Fool contributor Robert Eberhard owns shares of Berkshire Hathaway. Follow him on Twitter, or click here to see his holdings and a short bio. The Motley Fool owns shares of Berkshire Hathaway, Microsoft, and Apple. Motley Fool newsletter services have recommended buying shares of Apple, Microsoft, and Berkshire Hathaway, as well as creating bull call spread positions in Apple and Microsoft.
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