buy tchotchkes for children

 

buy tchotchkes for children at eToys than at a traditional toy store. As analyst Gail Bronson of IPO Monitor told the Associated Press on the day of eToys’ stock offering, “eToys has very, very smartly managed the development of the company last year and positioned themselves to be the children’s center of the Internet.” Added Bronson: “The key to a successful IPO, especially a dot-com IPO, is good marketing and branding.” Bronson was partly right: That’s the key to a successful IPO for the issuing company and its bankers. Unfortunately, for investors the key to a successful IPO is earnings, which eToys didn’t have. Commentary on Chapter 17 445 FIGURE 17-3 A Toy Story eToys Inc. Toys “R” Us, Inc. Fiscal year Fiscal quarter ended 3/31/1999 ended 5/1/1999 Net sales 30 2,166 Net income (29) 27 Cash 20 289 Total assets 31 8,067 Market value of common stock (5/20/1999) 7,780 5,650 All amounts in millions of dollars. Sources: The companies’ SEC filings. CHAPTER 18 A Comparison of Eight Pairs of Companies In this chapter we shall attempt a novel form of exposition. By selecting eight pairs of companies which appear next to each other, or nearly so, on the stock-exchange list we hope to bring home in a concrete and vivid manner some of the many varieties of character, financial structure, policies, performance, and vicissitudes of corporate enterprises, and of the investment and speculative attitudes found on the financial scene in recent years. In each comparison we shall comment only on those aspects that have a special meaning and import. Pair I: Real Estate Investment Trust (stores, offices, factories, etc.) and Realty Equities Corp. of New York (real estate investment; general construction) In this first comparison we depart from the alphabetical order used for the other pairs. It has a special significance for us, since it seems to encapsulate, on the one hand, all that has been reasonable, stable, and generally good in the traditional methods of handling other people’s money, in contrast—in the other company—with the reckless expansion, the financial legerdemain, and the roller-coaster changes so often found in present-day corporate operations. The two enterprises have similar names, and for many years they appeared side by side on the American Stock Exchange list. Their stock-ticker symbols—REI and REC—could easily have been confused. But one of them is a staid New England trust, administered by three trustees, with operations dating back nearly a century, and with dividends paid continuously since 1889. It has kept throughout to the same type of prudent investments, limiting 446 its expansion to a moderate rate and its debt to an easily manageable figure.* The other is a typical New York-based sudden-growth venture, which in eight years blew up its assets from $6.2 million to $154 million, and its debts in the same proportion; which moved out from ordinary real-estate operations to a miscellany of ventures, including two racetracks, 74 movie theaters, three literary agencies, a public-relations firm, hotels, supermarkets, and a 26% interest in a large cosmetics firm (which went bankrupt in 1970).† This conglomeration of business ventures was matched by a corresponding variety of corporate devices, including the following: 1. A preferred stock entitled to $7 annual dividends, but with a par value of only $1, and carried as a liability at $1 per share. 2. A stated common-stock value of $2,500,000 ($1 per share), more than offset by a deduction of $5,500,000 as the cost of 209,000 shares of reacquired stock. 3. Three series of stock-option warrants, giving rights to buy a total of 1,578,000 shares. 4. At least six different kinds of debt obligations, in the form of mortgages, debentures, publicly held notes, notes payable to banks, “notes, loans, and contracts payable,” and loans payable to the Small Business Administration, adding up to over $100 million in March 1969. In addition it had the usual taxes and accounts payable. Let us present first a few figures of the two enterprises as they appeared in 1960 (Table 18-1A). Here we find the Trust shares selling in the market for nine times the aggregate value of Equities stock. The Trust enterprise had a smaller relative debt and a better A Comparison of Eight Pairs of Companies 447 * Here Graham is describing Real Estate Investment Trust, which was acquired by San Francisco Real Estate Investors in 1983 for $50 a share. The next paragraph describes Realty Equities Corp. of New York. † The actor Paul Newman was briefly a major shareholder in Realty Equities Corp. of New York after it bought his movie-production company, Kayos, Inc., in 1969. ratio of net to gross, but the price of the common was higher in relation to per-share earnings. In Table 18-1B we present the situation about eight years later. The Trust had “kept the noiseless tenor of its way,” increasing both its revenues and its per-share earnings by about three-quarters.* But Realty Equities had been metamorphosed into something monstrous and vulnerable. How did Wall Street react to these diverse developments? By paying as little attention as possible to the Trust and a lot to Realty Equities. In 1968 the latter shot up from 10 to 373 ⁄4 and the listed warrants from 6 to 361 ⁄2, on combined sales of 2,420,000 shares. While this was happening the Trust shares advanced sedately from 20 to 301 ⁄4 on modest volume. The March 1969 balance sheet of Equities was to show an asset value of only $3.41 per share, less than a tenth of its high price that year. The book value of the Trust shares was $20.85. 448 The Intelligent Investor TABLE 18-1A. Pair 1. Real Estate Investment Trust vs. Realty Equities Corp. in 1960 Real Estate Realty Equities Corp. Investment Trust of New York Gross revenues $ 3,585,000 $1,484,000 Net income 485,000 150,000 Earned per share .66 .47 Dividend per share none .10 Book value per share $20. $4. Price range 20–12 53 ⁄8–43 ⁄4 Total assets $22,700,000 $6,200,000 Total liabilities 7,400,000 5,000,000 Book value of common 15,300,000 1,200,000 Average market value of common 12,200,000 1,360,000 * Graham, an avid reader of poetry, is quoting Thomas Gray’s “Elegy Written in a Country Churchyard.” A Comparison of Eight Pairs of Companies 449 TABLE 18-1B. Pair 1. Real Estate Realty Equities Corp. Investment Trust of New York Price, December 31, 1968 261 ⁄2 321 ⁄2 Number of shares of common 1,423,000 2,311,000 (March ’69) Market value of common $37,800,000 $75,000,000 Estimated market value of warrants — 30,000,000a Estimated market value of common and warrants — 105,000,000 Debt 9,600,000 100,800,000 Preferred stock — 2,900,000 Total capitalization $47,400,000 $208,700,000 Market value per share of common, adjusted for warrants — 45 (est.) Book value per share $20.85 (Nov.) $3.41 November 1968 March 1969 Revenues $6,281,000 $39,706,000 Net for interest 2,696,000 11,182,000 Interest charges 590,000 6,684,000 Income tax 58,000b 2,401,000 Preferred dividend 174,000 Net for common 2,048,000 1,943,000 Special items 245,000 cr. 1,896,000 dr. Final net for common 2,293,000 47,000 Earned per share before special items $1.28 $1.00 Earned per share after special items 1.45 .20 Dividend on common 1.20 .30 Interest charges earned 4.6
1.8
a There were warrants to buy 1,600,000 or more shares at various prices. A listed issue sold at 301 ⁄2 per warrant. b As a realty trust, this enterprise was not subjected to Federal income tax in 1968. The next year it became clear that all was not well in the Equities picture, and the price fell to 91 ⁄2. When the report for March 1970 appeared the shareholders must have felt shell-shocked as they read that the enterprise had sustained a net loss of $13,200,000, or $5.17 per share—virtually wiping out their former slim equity. (This disastrous figure included a reserve of $8,800,000 for future losses on investments.) Nonetheless the directors had bravely (?) declared an extra dividend of 5 cents right after the close of the fiscal year. But more trouble was in sight. The company’s auditors refused to certify the financial statements for 1969–70, and the shares were suspended from trading on the American Stock Exchange. In the over-the-counter market the bid price dropped below $2 per share.* Real Estate Investment Trust shares had typical price fluctuations after 1969. The low in 1970 was 161 ⁄2, with a recovery to 265 ⁄6 in early 1971. The latest reported earnings were $1.50 per share, and the stock was selling moderately above its 1970 book value of $21.60. The issue may have been somewhat overpriced at its record high in 1968, but the shareholders have been honestly and well served by their trustees. The Real Estate Equities story is a different and a sorry one. Pair 2: Air Products and Chemicals (industrial and medical gases, etc.) and Air Reduction Co. (industrial gases and equipment; chemicals) Even more than our first pair, these two resemble each other in both name and line of business. The comparison they invite is thus of the conventional type in security analysis, while most of our other pairs are more heteroclite in nature.† “Products” is a newer 450 The Intelligent Investor * Realty Equities was delisted from the American Stock Exchange in September 1973. In 1974, the U.S. Securities and Exchange Commission sued Realty Equities’ accountants for fraud. Realty Equities’ founder, Morris Karp, later pleaded guilty to one count of grand larceny. In 1974–1975, the overindebtedness that Graham criticizes led to a financial crisis among large banks, including Chase Manhattan, that had lent heavily to the most aggressive realty trusts. † “Heteroclite” is a technical term from classical Greek that Graham uses to mean abnormal or unusual. company than “Reduction,” and in 1969 had less than half the other’s volume.* Nonetheless its equity issues sold for 25% more in the aggregate than Air Reduction’s stock. As Table 18-2 shows, the reason can be found both in Air Reduction’s greater profitability and in its stronger growth record. We find here the typical consequences of a better showing of “quality.” Air Products sold at 161 ⁄2 times its latest earnings against only 9.1 times for Air Reduction. Also Air Products sold well above its asset backing, while Air Reduction could be bought at only 75% of its book value.† Air Reduction paid a more liberal dividend; but this may be deemed to reflect the greater desirability for Air Products to retain its earnings. Also, Air Reduction had a more comfortable working-capital position. (On this point we may remark that a profitable company can always put its current position in shape by some form of permanent financing. But by our standards Air Products was somewhat overbonded.) If the analyst were called on to choose between the two companies he would have no difficulty in concluding that the prospects of Air Products looked more promising than those of Air Reduction. But did this make Air Products more attractive at its considerably higher relative price? We doubt whether this question can be answered in a definitive fashion. In general Wall Street sets “quality” above “quantity” in its thinking, and probably the majority of security analysts would opt for the “better” but dearer Air Products as against the “poorer” but cheaper Air Reduction. Whether this preference is to prove right or wrong is more likely to depend on the unpredictable future than on any demonstrable investment principle. In this instance, Air Reduction appears to belong to the group of important companies in the low-multiplier class. If, as the studies referred to above†† would seem to indicate, that group as a A Comparison of Eight Pairs of Companies 451 * By “volume,” Graham is referring to sales or revenues—the total dollar amount of each company’s business. † “Asset backing” and book value are synonyms. In Table 18-2, the relationship of price to asset or book value can be seen by dividing the first line (“Price, December 31, 1969”) by “Book value per share.” †† Graham is citing his research on value stocks, which he discusses in Chapter 15 (see p. 389). Since Graham completed his studies, a vast body of scholarly work has confirmed that value stocks outperform (cont’d on p. 453) 452 The Intelligent Investor TABLE 18-2. Pair 2. Air Products Air Reduction & Chemicals 1969 1969 Price, December 31, 1969 391 ⁄2 163 ⁄8 Number of shares of common 5,832,000a 11,279,000 Market value of common $231,000,000 $185,000,000 Debt 113,000,000 179,000,000 Total capitalization at market 344,000,000 364,000,000 Book value per share $22.89 $21.91 Sales $221,500,000 $487,600,000 Net income 13,639,000 20,326,000 Earned per share, 1969 $2.40 $1.80 Earned per share, 1964 1.51 1.51 Earned per share, 1959 .52 1.95 Current dividend rate .20 .80 Dividend since 1954 1917 Ratios: Price/earnings 16.5
9.1
Price/book value 165.0% 75.0% Dividend yield 0.5% 4.9% Net/sales 6.2% 4.25% Earnings/book value 11.0% 8.2% Current assets/liabilities 1.53
3.77
Working capital/debt .32
.85
Growth in per-share earnings 1969 versus 1964 +59% +19% 1969 versus 1959 +362% decrease a Assuming conversion of preferred stock. whole is likely to give a better account of itself than the highmultiplier stocks, then Air Reduction should logically be given the preference—but only as part of a diversified operation. (Also, a thorough-going study of the individual companies could lead the analyst to the opposite conclusion; but that would have to be for reasons beyond those already reflected in the past showing.) Sequel: Air Products stood up better than Air Reduction in the A Comparison of Eight Pairs of Companies 453 1970 break, with a decline of 16% against 24%. However, Reduction made a better comeback in early 1971, rising to 50% above its 1969 close, against 30% for Products. In this case the low-multiplier issue scored the advantage—for the time being, at least.* Pair 3: American Home Products Co. (drugs, cosmetics, household products, candy) and American Hospital Supply Co. (distributor and manufacturer of hospital supplies and equipment) These were two “billion-dollar good-will” companies at the end of 1969, representing different segments of the rapidly growing and immensely profitable “health industry.” We shall refer to them as Home and Hospital, respectively. Selected data on both are presented in Table 18-3. They had the following favorable points in common: excellent growth, with no setbacks since 1958 (i.e., 100% earnings stability); and strong financial condition. The growth rate of Hospital up to the end of 1969 was considerably higher than Home’s. On the other hand, Home enjoyed substantially better profitability on both sales and capital.† (In fact, the relatively low rate of Hospital’s earnings on its capital in 1969—only 9.7%—raises the intriguing question whether the business then was in fact a highly profitable one, despite its remarkable past growth rate in sales and earnings.) When comparative price is taken into account, Home offered (cont’d from p. 451) growth stocks over long periods. (Much of the best research in modern finance simply provides independent confirmation of what Graham demonstrated decades ago.) See, for instance, James L. Davis, Eugene F. Fama, and Kenneth R. French, “Characteristics, Covariances, and Average Returns: 1929–1997,” at http://papers.ssrn.com. * Air Products and Chemicals, Inc., still exists as a publicly-traded stock and is included in the Standard & Poor’s 500-stock index. Air Reduction Co. became a wholly-owned subsidiary of The BOC Group (then known as British Oxygen) in 1978. † You can determine profitability, as measured by return on sales and return on capital, by referring to the “Ratios” section of Table 18-3. “Net/sales” measures return on sales; “Earnings/book value” measures return on capital. much more for the money in terms of current (or past) earnings and dividends. The very low book value of Home illustrates a basic ambiguity or contradiction in common-stock analysis. On the one hand, it means that the company is earning a high return on its capital—which in general is a sign of strength and prosperity. On the other, it means that the investor at the current price would be especially vulnerable to any important adverse change in the company’s earnings situation. Since Hospital was selling at over four times its book value in 1969, this cautionary remark must be applied to both companies. 454 The Intelligent Investor TABLE 18-3. Pair 3. American Home American Hospital Products 1969 Supply 1969 Price, December 31, 1969 72 451 ⁄8 Number of shares of common 52,300,000 33,600,000 Market value of common $3,800,000,000 $1,516,000,000 Debt 11,000,000 18,000,000 Total capitalization at market 3,811,000,000 1,534,000,000 Book value per share $5.73 $7.84 Sales $1,193,000,000 $446,000,000 Net income 123,300,000 25,000,000 Earned per share, 1969 $2.32 $.77 Earned per share, 1964 1.37 .31 Earned per share, 1959 .92 .15 Current dividend rate 1.40 .24 Dividends since 1919 1947 Ratios: Price/earnings 31.0
58.5
Price/book value 1250.0% 575.0% Dividend yield 1.9% 0.55% Net/sales 10.7% 5.6% Earnings/book value 41.0% 9.5% Current assets/liabilities 2.6
4.5
Growth in per-share earnings 1969 versus 1964 +75% +142% 1969 versus 1959 +161% +405% CONCLUSIONS: Our clear-cut view would be that both companies were too “rich” at their current prices to be considered by the investor who decides to follow our ideas of conservative selection. This does not mean that the companies were lacking in promise. The trouble is, rather, that their price contained too much “promise” and not enough actual performance. For the two enterprises combined, the 1969 price reflected almost $5 billion of good-will valuation. How many years of excellent future earnings would it take to “realize” that good-will factor in the form of dividends or tangible assets? SHORT-TERM SEQUEL: At the end of 1969 the market evidently thought more highly of the earnings prospects of Hospital than of Home, since it gave the former almost twice the multiplier of the latter. As it happened the favored issue showed a microscopic decline in earnings in 1970, while Home turned in a respectable 8% gain. The market price of Hospital reacted significantly to this oneyear disappointment. It sold at 32 in February 1971—a loss of about 30% from its 1969 close—while Home was quoted slightly above its corresponding level.* Pair 4: H & R Block, Inc. (income-tax service) and Blue Bell, Inc., (manufacturers of work clothes, uniforms, etc.) These companies rub shoulders as relative newcomers to the New York Stock Exchange, where they represent two very different genres of success stories. Blue Bell came up the hard way in a highly competitive industry, in which eventually it became the largest factor. Its earnings have fluctuated somewhat with industry conditions, but their growth since 1965 has been impressive. The company’s operations go back to 1916 and its continuous dividend record to 1923. At the end of 1969 the stock market showed no enthusiasm for the issue, giving it a price/earnings ratio of only 11, against about 17 for the S & P composite index. By contrast, the rise of H & R Block has been meteoric. Its first A Comparison of Eight Pairs of Companies 455 * American Home Products Co. is now known as Wyeth; the stock is included in the Standard & Poor’s 500-stock index. American Hospital Supply Co. was acquired by Baxter Healthcare Corp. in 1985. published figures date only to 1961, in which year it earned $83,000 on revenues of $610,000. But eight years later, on our comparison date, its revenues had soared to $53.6 million and its net to $6.3 million. At that time the stock market’s attitude toward this fine performer appeared nothing less than ecstatic. The price of 55 at the close of 1969 was more than 100 times the last reported 12- months’ earnings—which of course were the largest to date. The aggregate market value of $300 million for the stock issue was nearly 30 times the tangible assets behind the shares.* This was almost unheard of in the annals of serious stock-market valuations. (At that time IBM was selling at about 9 times and Xerox at 11 times book value.) Our Table 18-4 sets forth in dollar figures and in ratios the extraordinary discrepancy in the comparative valuations of Block and Blue Bell. True, Block showed twice the profitability of Blue Bell per dollar of capital, and its percentage growth in earnings over the past five years (from practically nothing) was much higher. But as a stock enterprise Blue Bell was selling for less than one-third the total value of Block, although Blue Bell was doing four times as much business, earning 21 ⁄2 times as much for its stock, had 51 ⁄2 times as much in tangible investment, and gave nine times the dividend yield on the price. INDICATED CONCLUSIONS: An experienced analyst would have conceded great momentum to Block, implying excellent prospects for future growth. He might have had some qualms about the dangers of serious competition in the income-tax-service field, lured by the handsome return on capital realized by Block.1 But mindful of the continued success of such outstanding companies as Avon Products in highly competitive areas, he would have hesitated to predict a speedy flattening out of the Block growth curve. His chief 456 The Intelligent Investor * “Nearly 30 times” is reflected in the entry of 2920% under “Price/book value” in the Ratios section of Table 18-4. Graham would have shaken his head in astonishment during late 1999 and early 2000, when many hightech companies sold for hundreds of times their asset value (see the commentary on this chapter). Talk about “almost unheard of in the annals of serious stock-market valuations”! H & R Block remains a publicly-traded company, while Blue Bell was taken private in 1984 at $47.50 per share. concern would be simply whether the $300 million valuation for the company had not already fully valued and perhaps overvalued all that one could reasonably expect from this excellent business. By contrast the analyst should have had little difficulty in recommending Blue Bell as a fine company, quite conservatively priced. SEQUEL TO MARCH 1971. The 1970 near-panic lopped one-quarter off the price of Blue Bell and about one-third from that of Block. Both then joined in the extraordinary recovery of the general marA Comparison of Eight Pairs of Companies 457 TABLE 18-4. Pair 4. H & R Block Blue Bell 1969 1969 Price, December 31, 1969 55 493 ⁄4 Number of shares of common 5,426,000 1,802,000a Market value of common $298,000,000 $89,500,000 Debt — 17,500,000 Total capitalization at market 298,000,000 107,000,000 Book value per share $1.89 $34.54 Sales $53,600,000 $202,700,000 Net income 6,380,000 7,920,000 Earned per share, 1969 $.51 (October) $4.47 Earned per share, 1964 .07 2.64 Earned per share, 1959 — 1.80 Current dividend rate .24 1.80 Dividends since 1962 1923 Ratios: Price/earnings 108.0
11.2
Price/book value 2920 % 142 % Dividend yield 0.4 % 3.6 % Net/sales 11.9 % 3.9 % Earnings/book value 27 % 12.8 % Current assets/liabilities 3.2
2.4
Working capital/debt no debt 3.75
Growth in per-share earnings 1969 versus 1964 +630% +68% 1969 versus 1959 — +148% a Assuming conversion of preferred stock. ket. The price of Block rose to 75 in February 1971, but Blue Bell advanced considerably more—to the equivalent of 109 (after a three-for-two split). Clearly Blue Bell proved a better buy than Block as of the end of 1969. But the fact that Block was able to advance some 35% from that apparently inflated value indicates how wary analysts and investors must be to sell good companies short—either by word or deed—no matter how high the quotation may seem.* Pair 5: International Flavors & Fragrances (flavors, etc., for other businesses) and International Harvester Co. (truck manufacturer, farm machinery, construction machinery) This comparison should carry more than one surprise. Everyone knows of International Harvester, one of the 30 giants in the Dow Jones Industrial Average.† How many of our readers have even heard of International Flavors & Fragrances, next-door neighbor to Harvester on the New York Stock Exchange list? Yet, mirabile dictu, IFF was actually selling at the end of 1969 for a higher aggregate market value than Harvester—$747 million versus $710 million. This is the more amazing when one reflects that Harvester had 17 times the stock capital of Flavors and 27 times the annual sales. In 458 The Intelligent Investor * Graham is alerting readers to a form of the “gambler’s fallacy,” in which investors believe that an overvalued stock must drop in price purely because it is overvalued. Just as a coin does not become more likely to turn up heads after landing on tails for nine times in a row, so an overvalued stock (or stock market!) can stay overvalued for a surprisingly long time. That makes shortselling, or betting that stocks will drop, too risky for mere mortals. † International Harvester was the heir to McCormick Harvesting Machine Co., the manufacturer of the McCormick reaper that helped make the midwestern states the “breadbasket of the world.” But International Harvester fell on hard times in the 1970s and, in 1985, sold its farm-equipment business to Tenneco. After changing its name to Navistar, the remaining company was booted from the Dow in 1991 (although it remains a member of the S & P 500 index). International Flavors & Fragrances, also a constituent of the S & P 500, had a total stock-market value of $3 billion in early 2003, versus $1.6 billion for Navistar. fact, only three years before, the net earnings of Harvester had been larger than the 1969 sales of Flavors! How did these extraordinary disparities develop? The answer lies in the two magic words: profitability and growth. Flavors made a remarkable showing in both categories, while Harvester left everything to be desired. The story is told in Table 18-5. Here we find Flavors with a sensational profit of 14.3% of sales (before income tax the figure was 23%), compared with a mere 2.6% for Harvester. Similarly, Flavors A Comparison of Eight Pairs of Companies 459 TABLE 18-5. Pair 5. International Flavors International & Fragrances 1969 Harvester 1969 Price, December 31, 1969 651 ⁄2 243 ⁄4 Number of shares of common 11,400,000 27,329,000 Market value of common $747,000,000 $710,000,000 Debt 4,000,000 313,000,000 Total capitalization at market 751,000,000 1,023,000,000 Book value per share $6.29 $41.70 Sales $94,200,000 $2,652,000,000 Net income 13,540,000 63,800,000 Earned per share, 1969 $1.19 $2.30 Earned per share, 1964 .62 3.39 Earned per share, 1959 .28 2.83 Current dividend rate .50 1.80 Dividends since 1956 1910 Ratios: Price/earnings 55.0
10.7
Price/book value 1050.0% 59.0% Dividend yield 0.9% 7.3% Net/sales 14.3% 2.6% Earnings/book value 19.7% 5.5% Current assets/liabilities 3.7
2.0
Working capital/debt large 1.7
Interest earned — (before tax) 3.9
Growth in per-share earnings 1969 versus 1964 +93% +9% 1969 versus 1959 +326% +39% had earned 19.7% on its stock capital against an inadequate 5.5% earned by Harvester. In five years the net earnings of Flavors had nearly doubled, while those of Harvester practically stood still. Between 1969 and 1959 the comparison makes similar reading. These differences in performance produced a typical stock-market divergence in valuation. Flavors sold in 1969 at 55 times its last reported earnings, and Harvester at only 10.7 times. Correspondingly, Flavors was valued at 10.4 times its book value, while Harvester was selling at a 41% discount from its net worth. COMMENT AND CONCLUSIONS: The first thing to remark is that the market success of Flavors was based entirely on the development of its central business, and involved none of the corporate wheeling and dealing, acquisition programs, top-heavy capitalization structures, and other familiar Wall Street practices of recent years. The company has stuck to its extremely profitable knitting, and that is virtually its whole story. The record of Harvester raises an entirely different set of questions, but these too have nothing to do with “high finance.” Why have so many great companies become relatively unprofitable even during many years of general prosperity? What is the advantage of doing more than $21 ⁄2 billion of business if the enterprise cannot earn enough to justify the shareholders’ investment? It is not for us to prescribe the solution of this problem. But we insist that not only management but the rank and file of shareholders should be conscious that the problem exists and that it calls for the best brains and the best efforts possible to deal with it.* From the standpoint of common-stock selection, neither issue would have met our standards of sound, reasonably attractive, and moderately priced investment. Flavors was a typical brilliantly successful but lavishly valued company;