📖Benjamin Graham

Earning Power

🌳 Advanced★★★★★

A company's demonstrated ability to generate consistent earnings is the primary driver of its stock valuation.

💬

Earning power is the key element in the valuation of a common stock.

— _Security Analysis_，1934

🏠 Everyday Analogy

Just as one evaluates character in a matchmaking process, buying stocks requires assessing a company's ability to generate profits. No matter how handsome or wealthy a person may be, poor character ultimately makes them unreliable; similarly, no matter how popular or sharply a stock rises, without sustainable profitability, it is merely a castle in the air. A truly good company is like a time-honored restaurant—regardless of external changes, it consistently delivers value to customers and creates profits for shareholders.

📖 Core Interpretation

Profitability is the core element of stock valuation.
💎 Key Insight：Earning power, defined as the expected average earnings under normal business conditions, is Graham's preferred valuation anchor. It should be measured over a full business cycle, not a single exceptional year. Companies with stable, predictable earning power command higher valuations than those with volatile or unproven earnings.

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❓ Why It Matters

In the long run, stock prices follow earnings, as profitability determines intrinsic value.

🎯 How to Practice

Analyze the profit trends over the past 5-10 years to assess the stability and growth of earnings.

🎙️ Master's Voice

The margin of safety is always dependent on the price paid.
Graham taught that no investment is inherently safe or risky—it depends on price. A great company at too high a price is a bad investment.

⚔️ Practical Guide

✅ Decision Checklist

  • What margin of safety does this price offer?
  • Am I paying too much?
  • Is the discount sufficient?

📋 Action Steps

  1. Calculate intrinsic value first
  2. Demand meaningful discount
  3. Walk away if margin is insufficient

🚨 Warning Signs

  • Paying fair value
  • No margin of safety
  • Hoping for higher prices

⚠️ Common Pitfalls

✕Profits from a single year may not be representative.
✕Focus on long-term averages and trends.

📚 Case Studies

1
Dot-com Bubble Valuation Discipline (1999)
Graham-style analysis rejects profitless tech stocks despite market euphoria, focusing on established firms with strong earnings and low P/E ratios.
✨ Outcome：Portfolio avoids 2000–2002 crash losses and later outperforms broad tech-heavy indices over the decade.
2
Post-Crisis Blue-Chip Bargains (2009)
After the 2008 crash, an investor applies Graham’s earning power and margin-of-safety tests to buy profitable large caps at historically low earnings multiples.
✨ Outcome：Over the following 5–7 years, holdings recover strongly, producing substantial absolute gains and market-beating risk-adjusted returns.

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