Security Analysis by Benjamin Graham and David Dodd was first published in 1934. It is a fundamental book for serious students of value investing.
In Chapter 39, Mr. Graham and Mr. Dodd discuss the price-to-earnings ratio (PE ratio). The authors talk about the historical context of this ratio and the absurdities of its usage. For example, basing the ratio on current earnings is not correct generally. There are no rules that an analyst can use to find the true value of the stock. So, being conservative makes sense with appropriate adjustments for capital structure and any specific quirks of the balance sheet.
The authors talk about high PE ratios attached to "good" common stocks. In effect, such behavior makes these good stocks speculative in nature similar to low-price stocks of questionable businesses. Thus, writers provide guidelines for conditions that would make it suitable for a common stock investment operation.
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