The Intelligent Investor: The Definitive Book On Value part 34. The purpose of this book is to supply, in a form suitable for laymen, guidance in the adoption and execution of an investment policy. Comparatively little will be said here about the technique of analyzing securities; attention will be paid chiefly to investment principles and investors’ attitudes. We shall, however, provide a number of condensed comparisons of specific securities - chiefly in pairs appearing side by side in the New York Stock Exchange list in order to bring home in concrete fashion the important elements involved in specific choices of common stocks | 316 The Intelligent Investor future years say not more than five. This evidently they will not do either since they have already conveniently disposed of the entire sum as a 1970 special charge. The more seriously investors take the per-share earnings figures as published the more necessary it is for them to be on their guard against accounting factors of one kind and another that may impair the true comparability of the numbers. We have mentioned three sorts of these factors the use of special charges which may never be reflected in the per-share earnings the reduction in the normal income-tax deduction by reason of past losses and the dilution factor implicit in the existence of substantial amounts of convertible securities or A fourth item that has had a significant effect on reported earnings in the past is the method of treating depreciation chiefly as between the straight-line and the accelerated schedules. We refrain from details here. But as an example current as we write let us mention the 1970 report of Trane Co. This firm showed an increase of nearly 20 in per-share earnings over 1969 versus but half of this came from returning to the older straight-line depreciation rates less burdensome on earnings than the accelerated method used the year before. The company will continue to use the accelerated rate on its income-tax return thus deferring income-tax payments on the difference. Still another factor important at times is the choice between charging off research and development costs in the year they are incurred or amortizing them over a period of years. Finally let us mention the choice between the FIFO first-in-firstout and LIFO last-in-first-out methods of valuing inventories. Nowadays investors need to be aware of several other accounting factors that can distort reported earnings. One is pro forma or as if financial statements which report a company s earnings as if Generally Accepted Accounting Principles GAAP did not apply. .
