The Intelligent Investor: The Definitive Book On Value part 54. 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 | 516 The Intelligent Investor acquire equities at 12 times recent earnings . with an earnings return of on cost. He may obtain a dividend yield of about 4 and he will have of his cost reinvested in the business for his account. On this basis the excess of stock earning power over bond interest over a ten-year basis would still be too small to constitute an adequate margin of safety. For that reason we feel that there are real risks now even in a diversified list of sound common stocks. The risks may be fully offset by the profit possibilities of the list and indeed the investor may have no choice but to incur them for otherwise he may run an even greater risk of holding only fixed claims payable in steadily depreciating dollars. Nonetheless the investor would do well to recognize and to accept as philosophically as he can that the old package of good profit possibilities combined with small ultimate risk is no longer available to him. However the risk of paying too high a price for good-quality stocks while a real one is not the chief hazard confronting the average buyer of securities. Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions. The purchasers view the current good earnings as equivalent to earning power and assume that prosperity is synonymous with safety. It is in those years that bonds and preferred stocks of inferior grade can be sold to the public at a price around par because they carry a little higher income return or a deceptively attractive conversion privilege. It is then also that common stocks of obscure companies can be floated at prices far above the tangible investment on the strength of two or three years of excellent growth. These securities do not offer an adequate margin of safety in any admissible sense of the term. Coverage of interest charges and preferred dividends must be tested over a number of years .
