Tabell’s Market Letter – March 09, 1973

——————————————————————————————————— TABELL'S MARKET LETTER 909 STATE ROAD, PRINCETON. NEW JERSEY 08540 DIVISION OF MEMBER NEW YORK STOCK eXCHANGE, INC MEMBER AMERICAN STOCK eXCHANGE March 9, 1973 -,- ,,- What has been a longstanding topic of debate in investment circles reached the front page of the Wall Street Journal last week. The headline of a long lead article, written in that publication's usual thorough and cogent style, noted that the yen of big investors to buy growth stocks alarms some analysts . Thus a phenomenon which is, to our mind, of overriding importance to both the market forecaster and the investment manager reached mass-circulation status. We confess that we are of one accord with the Journal in the opinion that the subject is worth focusing on, and we therefore propose to devote this and a number of subsequent issues of this letter to considering it. It is no doubt best to begin by defining just what it is we are examining in terms as close as possible to those a proponent of growth stock investment might use. There are, such an advocate would inSist, out of all the many equity issues available to the investor, a relatively select few which have, over a long period of time, demonstrated the ability to achieve consistent year-to-year and, indeed, quarter-to-quarter earnings increases, these at a rate, moreover, substantially in excess of the average long-term return for all equities. This ability may be due to any of a number of factors, which may include excellence of management, the power to earn an aboveaverage return on invested capital, a proprietary or technological advantage in an industry growing faster than the economy as a whole, or a combination of these. In any case, the theory would run, the uniqueness of these companies makes them particularly appropriate vehicles for conservative long-term investment, the price being paid—and this is usually implicit rather than stated in the defence—being of little, or, at least, secondary, consideration. The Wall Street Journal article quoted an officer of one of the larger New York City banks as saying, high piE's .. . don't bother me a bit. It's much more ortnt- to -getbehindthe-Pf-to s ee 'how'muclrl.-di-scounHn- Ctl!! e.-'trnino–nctten-usedl—I defense of growth stocks is that they are one-decision stocks. The only decision, \n theory, which must be made is the one to buy—not two separate decisions as to where to buy and where to sell. Thus the theory, and it is our intention to spend some time examining its implications. Yet for any discussion to be complete, more than just the theory must be examined, for equally or perhaps even more important is the extent of its acceptance. Thus, as a 1969 S.E.C. study quoted in the Journal pOinted out, amounts ranging from 40 to more than 50 of the total capitalization of IBM, Xerox, Avon Products, Sears Roebuck and Eastman Kodak, were at that time concentrated in the hands of some 200 institutions. Today's figure is probably larger. Clearly this sort of concentration has had implications for past and will have implications for future markets. We intend, therefore, to consider two separate questions. First, is the one-decision, unique- growth-stock theory going to be a viable way of managing assets in the 1970's, and second, does the fact that large amounts of assets are in fact being deployed in accordance with the tenets of the theory impose hitherto non-existent risk for equity prices or new dangers to the institutional structure of securities markets It is important, we think, to separate one question from the other. Whatever one's opinion as a market analyst may be as to the effect of the concentration noted above, it should not dissuade him as an investment manager from deploying funds for their maximum effectiveness, and, if that effectiveness is to be achieved in the classic growth stocks, so be it. On the other hand, blind commitments to theory should not operate to bias the manager's judgment as to risks being taken. Before commencing our discussion in detail in next week's letter. we should, in all candor, confess a few of our own biases. One centers on a healthy skepticisim regarding the one-decision theory. -'The job of the investment manager can be defined as the making of deciSions, and we know of few other areas where one confidently announces that he will do his job more effectively by doing it less. We have noticed few one-decision advocates offering to halve their fees in return for making half the number of decisions. Our second bias involves philosophical doubts as to the viability of universally-held theories. In the vernacular, if we were all so smart, wa should all become rich, and many investors, quite obviously, have not become so. These are, however, but philosophical objections, and, in rebuttal, the growth-stock advocate can, and properly, point to a hard record of exceptional actual results. We shall examine these results—and, more importantly, the probability of their future dupllcation—in our next issue. Dow-Jones Industrials (1200 p.m.) 969.45 . S&P (1200 p.m.) 113.62 AWTrk ANTHONY W. TABELL DELAFIELD, HARVEY, TABELL No statement or expreSSton of opinion or ony other maHer herein conloll1ed 15, or n 0 be deemed to be, directly or mdHectly, on offer or the SOllCllolion of on oHer to buy or sell any secvr1ty referred to or mentioned The moiler 1 presented merely for the corwerlenc of the subscrIber While oNe believe the sources of our Informo lion to be reliable, we In no way represent or guarantee the accuracy thereof nor of the statements mode herem Any actIOn to be talren by the subSCriber should be based on hiS own Investigation and mformallon Janney Montgomery Scoll, Inc, as a corporation and Its officers or emoloyees, may now have, or may later toke, poSitions or trades In respect to any eCUfltles menlloned m thiS or any future Issue, and such POSition moy be different from any views now or hereafter expressed In thiS or ony other 'Sue Janney Montgomery Scott, Inc which IS regIstered With the SEC as on mvestment adVisor, may give adVICe to lIs Investment adVISOry and othel customers mdependently of any statements made Ul thIS or In any other Issue Further information on any security mentioned herein IS available on request