The Intelligent Investor - The Definitive Book On Value Investing

COMMENTARY ON CHAPTER

“Would you tell me, please, which way I ought to go from

here?”

“That depends a good deal on where you want to get to,” said

the Cat.

—Lewis Carroll, Alice’s Adventures in Wonderland

Putting a Price on the Future

Which factors determine how much you should be willing to pay for a

stock? What makes one company worth 10 times earnings and

another worth 20 times? How can you be reasonably sure that you are

not overpaying for an apparently rosy future that turns out to be a

murky nightmare?

Graham feels that five elements are decisive.^1 He summarizes them as:

• the company’s “general long-term prospects”


• the quality of its management


• its financial strength and capital structure


• its dividend record


• and its current dividend rate.

Let’s look at these factors in the light of today’s market.

The long-term prospects. Nowadays, the intelligent investor

should begin by downloading at least five years’ worth of annual

reports (Form 10-K) from the company’s website or from the EDGAR

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(^1) Because so few of today’s individual investors buy—or should buy—individ-
ual bonds, we will limit this discussion to stock analysis. For more on bond
funds, see the commentary on Chapter 4.