Found this message on the Berkshire Hathaway message board on Yahoo. A refreshing reminder of what we are attempting to do on this thread.
__________________________________________________________________________________________
This is the first of three articles by a young and relatively unknown investment manager by the name of
Benjamin Graham. This was his coming out, as it were. This, his first major article, appeared in Forbes in
1932. When this article was published he was just starting to work on Security Analysis.
"Suppose you were the owner of a large manufacturing business. Like many others, you lost money in 1931;
the immediate prospects are not encouraging; you feel pessimistic and willing to sell out- cheap. A
prospective purchaser asks you for your statement. You show him a very healthy balance sheet, indeed. It
shapes up something like this:
Cash and U.S. Gov. Bonds.......$ 8,500,000
Receivables and Merchandise....$15,000,000
Factories, Real Estate, etc....$14,000,000
(Total Assets).................$37,500,000
Less owing for current accts...$-1,300,000
Net Worth......................$36,200,000
The purchaser looks it over casually, and then makes you a bid of $5,000,000 for your business- the cash,
Liberty Bonds, and everything else included. Would you sell? The questions seems like a joke, we admit.
No one in his right mind would exchange 8 1/2 million in cash for five million dollars, to say nothing of the 28
million more in other assets. But preposterous as such a transaction sounds, the many owners of White
Motors stock who sold out between $7 and $8 per share did that very thing- or as close to it as they could
come.
The figures given above represent White Motors' condition on December 31st last. At $7 5/8 per share, the
low price, the company's 650,000 shares were selling for $4,800,000- about 60 per cent of the cash and
equivalent alone, and only one-fifth of the net quick assets {cash, marketable securities, and short-term
recievables minus short-term debt}. There were no capital obligations ahead of the common stock, and the
only liabilities were those shown above for current accounts payable.
The spectacle of a large and old established company selling in the market for such a small fraction of its
quick assets is undoubtedly a startling one.
But the picture becomes more impressive when we observe that there are literally dozens of other
companies which also have a quoted value less than their cash in bank. And more significant still is the fact
that an amazingly large percentage of all industrial companies are selling for less than their quick assets
alone- leaving out their plants and other fixed assets entirely.
This means that a great number of American businesses are quoted in the market for much less than their
liquidating value, that in the best judgement of Wall Street, THESE BUSINESSES ARE WORTH MORE
DEAD THAN ALIVE.
For most industrial companies should bring, in orderly liquidation, at least as much as their quick assets
alone. Admitting that the factories, real estate, ect., could not fetch anywhere near their carrying price, they
should still realize enough to make up the shrinkage in the proceeds of the receivables and merchandise
below book figures. If this is not a reasonable assumption there must be something radically wrong about
the accounting methods of our large corporations.
A study made at Columbia University School of Business under the writer's direction, covering some 600
industrial companies listed on the New York Stock Exchange, disclosed that over 200 of them- or fully one
out of three- have been selling at less than their net quick assets. Over fifty of them have sold for less than
their cash and marketable securities alone.
...Busineses have come to be valued in Wall Street on an entirely differnt basis from that applied to private
enterprise. In good times the prices paid on the Stock Exchange were fantastically high, judged by ordinary
business standards; and now, by the law of compensation, the assets of these same companies are suffering
an equally fantastic undervaluation."
post.messages.yahoo.com!+Your+recommendation+has+been+added+to+the+total+for+this+message.%3c/b%3e%3c/font%3e%3chr+size=1%3e |
