earnings per share in 1973–1975—say $4—the analyst may value
one as low as 40 and the other as high as 100. Let us deal briefly
with some of the considerations that enter into these divergent
multipliers.1.General Long-Term Prospects.No one really knows anything
about what will happen in the distant future, but analysts and
investors have strong views on the subject just the same. These
views are reflected in the substantial differentials between the
price/earnings ratios of individual companies and of industry
groups. At this point we added in our 1965 edition:For example, at the end of 1963 the chemical companies in the
DJIA were selling at considerably higher multipliers than the oil
companies, indicating stronger confidence in the prospects of the
former than of the latter. Such distinctions made by the market are
often soundly based, but when dictated mainly by past perfor-
mance they are as likely to be wrong as right.We shall supply here, in Table 11-3, the 1963 year-end material
on the chemical and oil company issues in the DJIA, and carry their
earnings to the end of 1970. It will be seen that the chemical compa-
nies, despite their high multipliers, made practically no gain in
earnings in the period after 1963. The oil companies did much bet-
ter than the chemicals and about in line with the growth implied in
their 1963 multipliers.^5 Thus our chemical-stock example proved to
be one of the cases in which the market multipliers were proven
wrong.*
Security Analysis for the Lay Investor 291* Graham’s point about chemical and oil companies in the 1960s applies to
nearly every industry in nearly every time period. Wall Street’s consensus
view of the future for any given sector is usually either too optimistic or too
pessimistic. Worse, the consensus is at its most cheery just when the
stocks are most overpriced—and gloomiest just when they are cheapest.
The most recent example, of course, is technology and telecommunications
stocks, which hit record highs when their future seemed brightest in 1999
and early 2000, and then crashed all the way through 2002. History proves
that Wall Street’s “expert” forecasters are equally inept at predicting the