“The secret to successful investing can be reduced to two simple words: know value.” These famous words were uttered by Arnold Bernhard more than 25 years ago.
Here is an excerpt from the December 2011 edition of Investment Quality Trends (p. 10):
My friend Dr. Mark Skousen recently presented me with a copy of The Maxims of Wall Street, his collection of “old Wall Street chestnuts, proverbs, slogans, poems, and aphorisms, drawing from experiences in the marketplace and reading dozens of books about Wall Street lore and legend.” One of the vignettes is titled A Rich Man’s Pearl of Wisdom #2, “Two Little Words.”
“When I was a young man, I had the opportunity to meet one of Wall Street’s legends, Arnold Bernhard, founder of Value Line Investment Survey, called “the most trusted name in investment research.” Bernhard pioneered Value Line, famous for its one-page assessment of publicly traded companies.
We had lunch together at his offices on 3rd Avenue in mid-Manhattan, and I shall never forget the occasion. He was in his late eighties by then and had only a year or two to live. Bernhard wanted to talk about his offshore properties in the Bahamas (I lived in Nassau for two years, 1984-85), but I had a more philosophical interest.
I asked, ‘Mr. Bernhard, you have lived a long, successful career on Wall Street. If you could reduce your approach to investing to one sentence, what would it be?” He reached for his cane, stood up, and walked slowly toward the window overlooking 42nd Street. “Young man,” he said deliberately, “the secret to successful investing can be reduced to two simple words: know value.”
He said that everyone on Wall Street knew the prices of stocks and other assets, but few understood what these assets were really worth, or what they would be worth in the future. Paraphrasing Oscar Wilde, Bernhard declared, ‘Brokers, security analysts and investors – the whole lot – know the price of everything and the value of nothing.”
According to Bernhard, investors have no sense of history. They know little about what makes markets move and are only successful as long as the trend doesn’t change. But what happens when the trend changes and a bull market turns into a treacherous bear market, or vice versa? “Then people find out what real values are!” concluded Bernhard.”
Kelly Wright of Investment Quality Trends continues to write:
If the sole purpose of investing is to realize a return on investment, there is nothing more immediate and fundamentally representative of value and a return on investment than the receipt of dividends.
Of the three fundamental measures of value, price-to-earnings (P/E), price-to book value (P/B), and dividend yield, the dividend yield, which exists only if there is a receipt of dividends, is the only measure of fundamental value that is tangible. This is to say that you can’t spend or reinvest a P/E ratio or a P/B ratio; you can only spend or reinvest cash.
Fundamentally then, the underlying value of a stock lies within its dividend, which determines yield.
In a world of unanswered questions what I do know is this; great, high-quality companies with long track records of performance, over time, increase their dividends and reward shareholders with higher stock prices. To be sure the journey is often bumpy; investing is no greeting card commercial. At the end of the day though, investing in the stock market really is about those two little words; know value.
The complete article appears in the 2011 December first edition of Investment Quality Trends on page 10.
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