/2\t184.9 143.1 148.5 109.1
1937 64\t
7/8\t34 194.4 113.6 158.7 84.2
1938 48 27
1/4\t158.4 99.0 119.3 73.5\t
1939 44\t5/8\t31 155.9 121.4 118.3 86.7\t
1Weekly indexes of prices (1926  \x02100) of 350 industrial issues in 1939 and 347 issues in earlier years.\t
It was little short of nonsense for the stock market to say in 1937 that
General Electric Company was worth $1,870,000,000 and almost pre-
cisely a year later that it was worth only $784,000,000. Certainly nothing
had happened within twelve months’ time to destroy more than half the
value of this powerful enterprise, nor did investors even pretend to claim
that the falling off in earnings from 1937 to 1938 had any permanent sig-
nificance for the future of the company. General Electric sold at 64\t
7/8\t
because the public was in an optimistic frame of mind and at 27\t1/4\t
because the same people were pessimistic. To speak of these prices as rep-
resenting “investment values” or the “appraisal of investors” is to do vio-
lence either to the English language or to common sense, or both.
Four Problems.\tAssuming that a common-stock buyer were to seek
definite investment standards by which to guide his operations, he might

Introduction to the Second Edition[31]\t
well direct his attention to four questions: (1) the general future of corpo-
ration profits, (2) the differential in quality between one type of company
and another, (3) the influence of interest rates on the dividends or earn-
ings return that he should demand, and finally (4) the extent to which his
purchases and sales should be governed by the factor of timing as distinct
from price.
The General Future of Corporate Profits. If we study these questions in
the light of past experience, our most pronounced reaction is likely to be a
wholesome scepticism as to the soundness of the stock market’s judgment
on all broad matters relating to the future. The data in our first table show
quite clearly that the market underestimated the attractiveness of industrial
common stocks as a whole in the years prior to 1926. Their prices gener-
ally represented a rather cautious appraisal of past and current earnings,
with no signs of any premium being paid for the possibilities of growth
inherent in the leading enterprises of a rapidly expanding commonwealth.
In 1913 railroad and traction issues made up the bulk of investment bonds
and stocks. By 1925 a large part of the investment in street railways had
been endangered by the development of the automobile, but even then there
was no disposition to apprehend a similar threat to the steam railroads. The widespread recognition of the factor of future growth in com-
mon stocks first asserted itself as a stock-market influence at a time when
in fact the most dynamic factors in our national expansion (territorial
development and rapid accretions of population) were no longer oper-
ative, and our economy was about to face grave problems of instability
arising from these very checks to the factor of growth. The overvalua-
tions of the new-era years extended to nearly every issue that had even
a short period of increasing earnings to recommend it, but especial favor
was accorded the public-utility and chain-store groups. Even as late as
1931 the high prices paid for these issues showed no realization of their
inherent limitations, just as five years later the market still failed to
appreciate the critical changes taking place in the position of railroad
bonds as well as stocks. Quality Differentials. The stock market of 1940 has its well-defined
characteristics, founded chiefly on the experience of the recent past and
on the rather obvious prospects of the future. The tendency to favor the
larger and stronger companies is perhaps more pronounced than ever.
This is supported by the record since 1929, which indicates, we believe,
both better resistance to depression and a more complete recovery of

earning power in the case of the leading than of the secondary compa-
nies. There is also the usual predilection for certain industrial groups,
including companies of smaller size therein. Most prominent are the
chemical and aviation shares—the former because of their really remark-
able record of growth through research, the latter because of the great
influx of armament orders.But these preferences of the current stock market, although easily
understood, may raise some questions in the minds of the sceptical. First
to be considered is the extraordinary disparity between the prices of
prominent and less popular issues. If average earnings of 1934–1939 are
taken as a criterion, the “good stocks” would appear to be selling about
two to three times as high as other issues. In terms of asset values the
divergence is far greater, since obviously the popular issues have earned
a much larger return on their invested capital. The ignoring of asset val-
ues has reached a stage where even current assets receive very little atten-
tion, so that even a moderately successful enterpri