Don’t take a single years’ earnings seriously – Ben Graham
The fact that Ben Graham devoted an entire chapter to earnings per share in The Intelligent Investor makes it important enough for value investors to sit up and and take note.
The most valuable part of Benjamin Graham’s chapter on earnings (Chapter 12) is that value investors should pay attention to a company’s long term past in order to come to a conclusion/view etc about the long term future.
Since most investors place too much faith in earnings Graham suggested the use of average earnings over the following time periods:
- Over 10 years
- Over the past 3 years
- Over the past 3 years ten years ago then compare the most recent 3 year average with that of 10 years ago
The chief reason why an averaging process is used over such a long period of time is that during its operating history, a company’s management will ‘massage’ earnings figures either by inflating them or reducing them.
Yes reducing them.
The averaging process makes sure you get a better general idea of earnings (either positive or negative) and can compare that to the industry average, other companies in the same sector/industry as well as other companies you are researching.
What about you? Do quarterly or yearly results affect the way you view the investment merits of an individual stock?