rationalization of a concept

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CFA Institute Rationalization of a Concept Author(s): Lawrence R. Kahn Source: Financial Analysts Journal, Vol. 28, No. 1 (Jan. - Feb., 1972), p. 100 Published by: CFA Institute Stable URL: http://www.jstor.org/stable/4470894 . Accessed: 16/06/2014 12:50 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp . JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]. . CFA Institute is collaborating with JSTOR to digitize, preserve and extend access to Financial Analysts Journal. http://www.jstor.org This content downloaded from 91.229.229.162 on Mon, 16 Jun 2014 12:50:38 PM All use subject to JSTOR Terms and Conditions

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Page 1: Rationalization of a Concept

CFA Institute

Rationalization of a ConceptAuthor(s): Lawrence R. KahnSource: Financial Analysts Journal, Vol. 28, No. 1 (Jan. - Feb., 1972), p. 100Published by: CFA InstituteStable URL: http://www.jstor.org/stable/4470894 .

Accessed: 16/06/2014 12:50

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .http://www.jstor.org/page/info/about/policies/terms.jsp

.JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range ofcontent in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new formsof scholarship. For more information about JSTOR, please contact [email protected].

.

CFA Institute is collaborating with JSTOR to digitize, preserve and extend access to Financial AnalystsJournal.

http://www.jstor.org

This content downloaded from 91.229.229.162 on Mon, 16 Jun 2014 12:50:38 PMAll use subject to JSTOR Terms and Conditions

Page 2: Rationalization of a Concept

be gained from them on a relative basis. When one views the stock mar- ket in this fashion, one realizes the tremendous impact of confidence, ex- pectations, and public psychology. There is no magical "right" level for the stock market. It is simply a mirror that reflects all the emotions, fears, dreams and hopes of the American people. Today's troubled stock market reflects not supply and demand but the current level of confidence, which re- mains at a low ebb.

FRANK E. BLOCK

Senior Vice President Girard Bank Philadelphia

RATIONALIZATION OF A CONCEPT

The October issue of Fortune maga- zine carried an article entitled "A Bad New Era for Common Stocks." The article is a classic example of pseudo academic treatment of an intricate problem. It is well written and quite erudite. As a result, it is plausible and may be easily acceptable. The trouble with the article is that the author started out with a predetermined con- clusion, picked his substantiating evi- dence and ignored or casually passed over all contradictory material. Inter- estingly enough, when all the evidence is weighed the article substantiates more than ever the need for profes- sional money management.

The article starts with the premise that the securities market is the place to "get rich quick." Mr. Seligman then uses the old political and academic ploy of setting up a straw man and establishing his point by destroying it. Unfortunately, or should I say fortu- nately, a straw man is not real. The idea of the securities market as a place to make a quick buck is the anti- thesis of the real objectives of serious long term investment management. The years of 1969 and 1970 also prove that the "casino" theory is hardly valid. Many went broke learning this.

The article rests on the quaint theory that the 1945-1965 period was a continuous bull market. This can be superficially substantiated by ignoring major moves in the market. If one wishes to follow this thesis one could

also say that the period from 1900 to date has been a bull market. But in- dividual owners of stock know that declining periods are real. In resting on the theory of the 1945-65 bull mar- ket the author passes over the 29.3 per cent decline from the peak in Decem- ber of 1961 to the low of June, 1962 and the 22 per cent drop from Feb- ruary to October of 1966. Even more importantly, he ignores the shifts in the evaluation of various classes of stocks which if ignored in reality could keep the investor in a permanent bear market.

Considerable weight is given to the spread between the gross return on common stocks and the present yield on bonds. By neatly setting up a care- fully chosen period of 1965 to the end of 1970 before the present rally really got under way, the author equates a gross return of five per cent with the present bond yield of 71/2 to 8 per cent. When one chooses one's period to prove a point one can be correct without being right. He does point out that in the long range 1926-60 period, the gross return would have been 9.3 per cent and that in the somewhat more

recent five-year perods the return ran as high as 12%/ per cent. But these lat- ter periods are really as fallacious as the low return he utilizes. He probably could have been even more startling had he used the 1929-34 period when there was a negative return. Many similar writers did during that time. They washed out the stock market as an investment area in the same way the present author does. The validity of both judgments may be equal.

Considerable stress is laid on the negative aspects of inflation. No one would argue this. The article was written, however, before real steps were taken to correct the inflation. The present trend which will bring infla- tionary pressures sharply lower and improve corporate earnings substan- tially negates the carefully drawn analogies.

While it is true, as the author states, that considerable impetus to stock prices over the past decade has risen from the expansion of equity in- vestments by pension funds and mu- tual funds, it must be borne in mind that the whole pension idea is con- tinuing to expand and that over the years considerable additional demand will be derived from this source. I hope that the same is true for mutual fund demand.

In all, the question posed really ap- pears to be one of degree. If what the author really means is that stock prices will not always go up at the same rate as they did at the peak of bull markets, I would say that his statement is true but obvious. If he also means, as he seems to, that many changes constantly occur in the mar- kets and that profits are not a one- way street, I would agree. From a professional money management point of view, I think that the strongest point is one he makes himself: "There will still be broad based rallies and individual issues may soar." This is what professional management par- ticipates in and enables their investors to benefit from.

LAWRENCE R. KAHN Sr. Vice President -Investments National Securities & Research Corporation New York, N. Y.

The Dayton Power and Light Company

Dayton, Ohio 45401

DIVIDEND NOTICE The Board of Directors today declared quarterly dividends on the Common and Preferred Stock of the Company as follows: Common Stock, $0.411/2 per share. Preferred Stock:

Series A $0.9375 per share Series B $0.9375 per share Series C $0.975 per share Series D $1.87 per share Series E $1.925 per share

Dividends will be payable on December 1, 1971, to stock- holders of record at the close of business November 5, 1971.

Oct. 22, 1971 J. E. Theobald Oct.22 1971 Vice President and Secretary

100 FINANCIAL ANALYSTS JOURNAL / JANUARY-FEBRUARY 1972

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