Valuation Reports and Security Analysis

Abstract

Every professional group in American life seeks to find rules and formulaeby which correct decisions can be made easily. Any schoolboy likes to be ableto look in the back of the book for the answers to his problems - at least, forthe tough ones. There are no answers in the back of the investor's book; nofoolproof rules to put money to work in any industry, particularly in thedynamic oil industry, in order to achieve the goals desired by "the typicalAmerican investor." We define "the typical American investor" as one who wantsto buy something that has the strength of a Government bond; that yields 10 percent; and that will, at the very least, double in price within six months andone day. Sometime ago a series of valuation reports were prepared for my firm. Theyhad been prepared for investment guidance a a sufficient number of yearspreviously to permit their conclusions to be tested in the market place. It wasdisillusioning to find no important relationship between the conclusions ofthese valuation reports and the subsequent market performance of the commonstocks involved. In fact, one of the issues looked upon with the greatest favorbecause its market price bore an unusually low ratio of about 30 per cent toits then appraised value has had over the years, since the reports wereprepared, one of the smallest price gains of any of the major oil issues. It istoday selling for about 40 per cent of its appraised value. Of course, theissue's appraised value has increased along with all values in the industry, particularly in the post war period of inflation. This stock entered thisperiod with an abnormally low ratio between market price and appraised value, and this low ratio has continued without making it a good purchase at anytime.