Tabell’s Market Letter – August 23, 1974

..— – TABELL'S MARKET LETTER 909 STATE ROAD, PRINCETON, NEW JERSEY 08540 DIVISION OF MEMBER NEW YORK STOCK EXCHANGE, INC MEMBER AMERICAN STOCK EXCHANGE August 23, 1974 Ayear and a half ago, we published a series of four letters exammmg some of the impilcations of the ThenpopUTai theorY-ofgrowttl stock InvestmeOn ApiIU19-73 we P7IBfislles-umriiaryra-na1;onclu' sian based on those four letters. That summary is reprinted herewith,verbatim and in its entirety. There lS, of course, nothing new under the sun. The following quotation is an appropnate summary of what we have, in our series, lndicated was taklng place over the past few years. Selectivity took on a new character by reason of the overshadowing emphasis placed on expected future growth as the pnme criterion of an attractive investment. There was nothing wrong with these .. 1deas, except that it was almost impossible not to carry them too far. With encouragement from the past and a rosy prospect in the future, the buyers of 'growth stocks I were certain to lose their sense of proporllon and to pay excessive prices. The above is not Anthony Tabell writing in 1973 about 1971-72. It is Benjamin Graham writmg in 1951 about 1928-29. As readers may have gathered from our previous letters, we find ourselves, on this issue at least, comfortably in Dr. Graham's camp. Eut, If mindless projection of growth rates is not the simple key to investment success, what is an alternative philosophy We offer herewith three principles 1) Two and two make four. 2 There are no one-decision stocks. 3) Investor confidence varies more than earn- ings. Let us examine some of the implications of these three suggestions. It was Eernard Baruch who first suggested that in periods of market optimism it was necessary to repeat to oneself that two and two were four. We are, ln other words, willing to accept the intuitive conclusion that, when large numbers of buyers are agreed that a given method of investment lS a sure road to success, that method cannot prove viable over the long term. The enforcement of this principle 1S the function of the marketplace, and it is our belief that the market will be no less effic1ent in this task m the future than -it-hasbeenin'1hepast; — – – -',..,, – – – It should be made clear that what is being sa1d here implies no critiC1sm whatever of the fundamental merits of recognized growth issues, suggests that they should not sell at some premlUm over other 1ssues or affirms that they cannot under any circumstances be attractive purchase candidates. What we are suggesting, along with Graham, 1S that the concept that such 1ssues represent appropriate mvestment vehicles for conservative accounts, regardless of the pnce being paid, lS, to put it mildly, ludicrous. Secondly, we think the suggestion that there exists a class of one-decision stocks, where all that is necessary is to buy and hold, constitutes an abdication of the investment manager's responsibility. Were the mvestment manager perfect, his initial selections for purchase would, of course, be only those stocks which were going to provide the maximum long-term rate of return, and these could be held effec- tively indefinitely. Investment managers, however, are far from perfect. Each initial purchase memorial- izes the manager continually to decide whether to hold or not to hold, depending upon whether the original expectations are being fulfilled and to what extent the market price discounts these expectations. Finally, as we have pOinted out, the b1ggest factor in price change, over relat1vely long periods of time, tends to be caus ed not by earnings but by investor confidence in thos e earnings — this confidence being most readily expressed by the statlstic of the price/earnings ratio for individual stocks. Th,S fact has two implications. The first provides the reason for our convichon, which will surpnse no one, that technical analysis is an indispensible factor in the mvestment decision-making process. It 1S equally important m evaluating common stocks to have some idea of what the market is likely to pay for future earning power as it is to forecast what that eamlng power is going to be. Technical work, we think, is a most useful guide in making such a projection. The second implication of investor confidence variability is that price level, In relation to earnings and in turn to comparable vEduation of other stocks;-must beapri1ne criteria inlnveslment selectionIt'ls-' axiomatic that a stock having a low multlple, thus suggesting low investor confidence, has more potential on the upside should investor confidence increase and less risK on the downside should it continue to deteriorate. Willingness to ignore the price being paid, even in companies of the most prishne qualIty I involves, in our view, another abdication of the investment manager's responsibility by reason of the assumption of unnecessary risK. It may be suggested, of course, that recent markets have hardly tended to prove the soundness of these tenets vis-a-vis the simple-minded growth approach and, indeed, may even have suggested the opposite concluslon. We continue to believe, however, that the principles above represent viable guide- posts to a successful investment philosophy. Dow-Jones Industrials (1200 p.m.) 706.82 S & P Compo '1200 p.m.) 73.24 ANTHONY W. TABELL DELAFIELD, HARVEY, TABELL Cumulative Index (8/22/74) 419.19 AWT/jb ..- No statement or expressIon af aplnion or any other matter herem contained IS, or , to be deemed to be, dtredly or Indirectly, on offer or the solIcitatIon of an offer to bvy or sell any securtty referred to or mentIoned The matter IS presented merely for the converolenc6' of the subscrtber Whde -Ne belIeve the sources of our mfarma- tlon 10 be reliable, we In no way represent or guarantee the accuracy thereof nor of the statements mude herem Any action 10 be token by Ihe subSCriber should be based on hIS own Inves\lgatlan and Information Janney Montgomery Scali, Inc, 0 a corporation, ond Its offICers or employees, may now have, or may later toke, poslttons or trades m respect to any seclJrltles mentIoned In thIS or any flJtlJre ISSlJe, and SlJch POSitIon may be different from any views now or hereafter expressed In thIS or any other Issve Janney Montgomery Sc01l, Inc, which IS registered WIth the SEC 0 on mvestment adVIsor, may give adVICe to Its Investment adVisory and othel customers mdependently of any statements mode m thIS or In any other ISSlJe FlJrther tnformatlan on any 5eClJrtty menhoned herem IS avadable on reqlJesl