Which Earnings Figure for Graham's “Stock Selection for the Defensive Investor”?
"In the Income Statement that you've linked to, look for the line labeled ""Net Income"". That's followed by a line labeled ""Preferred Dividends"", which is followed by ""Income Available to Common Excl. Extra Items"" and ""Income Available to Common Incl. Extra Items"". Those last two are the ones to look at. The key is that these lines reflect income minus dividends paid to preferred stockholders (of which there are none here), and that's income that's available to ordinary shareholders, i.e., ""earnings for the common stock""."
Essentially, yes, Peter Lynch is talking about the PEG Ratio. The Price/Earnings to Growth (PEG) Ratio is where you take the p/e ratio and then divide that by the growth rate (which should include any dividends).  A lower number indicates that the stock is undervalued, and could be a good buy. Lynch's metric is the inverse of that: Growth rate divided by the p/e ratio.  It is the same idea, but in this case, a higher number indicates a good value for buying. In either case, the idea behind this ratio is that a fairly priced stock will have the p/e ratio equal the growth rate.  When your growth rate is larger than your p/e ratio, you are theoretically looking at an undervalued stock. While it is true that this formula may have historically outperformed the market you have to keep one important thing in mind: once the formula is out in the open, the market inefficiency will disappear. Here is what I mean. Historically there have always been various inefficiencies in the market structure. Some people were able to find these and make good money off them. Invariably these people tend to write books about how they did it. What happens next is that lots of people get in on the game and now you have lots of buyers going after positions that used to be under-priced, raising demand and thus prices for these positions. This is how inter-exchange arbitrage disappeared. Its how high frequency trading is running itself into the ground. If enough demand is generated for an inefficiency, the said inefficiency disappears or the gains get so small that you can only make money off it with large amounts of capital. Keep in mind, as Graham said, there is no silver bullet in the stock market since you do not hold any data that is unavailable to everyone else. "Yes, and the math that tells you when is called the Kelly Criterion. The Kelly Criterion is on its face about how much you should bet on a positive-sum game. Imagine you have a game where you flip a coin, and if heads you are given 3 times your bet, and if tails you lose your bet.  Naively you'd think ""great, I should play, and bet every dollar I have!"" -- after all, it has a 50% average return on investment.  You get back on average 1.5$ for every dollar you bet, so every dollar you don't bet is a 0.5$ loss. But if you do this and you play every day for 10 years, you'll almost always end up bankrupt.  Funny that. On the other hand, if you bet nothing, you are losing out on a great investment.  So under certain assumptions, you neither want to bet everything, nor do you want to bet nothing (assuming you can repeat the bet almost indefinitely). The question then becomes, what percentage of your bankroll should you bet? Kelly Criterion answers this question.  The typical Kelly Criterion case is where we are making a bet with positive returns, not an insurance against loss; but with a bit of mathematical trickery, we can use it to determine how much you should spend on insuring against loss. An ""easy"" way to undertand the Kelly Criterion is that you want to maximize the logarithm of your worth in a given period.  Such a maximization results in the largest long-term value in some sense. Let us give it a try in an insurance case. Suppose you have a 1 million dollar asset.  It has a 1% chance per year of being destroyed by some random event (flood, fire, taxes, pitchforks). You can buy insurance against this for 2% of its value per year.  It even covers pitchforks. On its face this looks like a bad deal.  Your expected loss is only 1%, but the cost to hide the loss is 2%? If this is your only asset, then the loss makes your net worth 0.  The log of zero is negative infinity.  Under Kelly, any insurance (no matter how inefficient) is worth it.  This is a bit of an extreme case, and we'll cover why it doesn't apply even when it seems like it does elsewhere. Now suppose you have 1 million dollars in other assets.  In the insured case, we always end the year with 1.98 million dollars, regardless of if the disaster happens.  In the non-insured case, 99% of the time we have 2 million dollars, and 1% of the time we have 1 million dollars. We want to maximize the expected log value of our worth.  We have log(2 million - 20,000) (the insured case) vs 1% * log(1 million) + 99% * log(2 million). Or 13.7953 vs 14.49.  The Kelly Criterion says insurance is worth it; note that you could ""afford"" to replace your home, but because it makes up so much of your net worth, Kelly says the ""hit it too painful"" and you should just pay for insurance. Now suppose you are worth 1 billion.  We have log(1 billion - 20k) on the insured side, and 1%*log(999 million) + 99% * log(1 billion) on the uninsured side. The logs of each side are 21.42 vs 20.72.  (Note that the base of the logarithm doesn't matter; so long as you use the same base on each side). According to Kelly, we have found a case where insurance isn't worth it. The Kelly Criterion roughly tells you ""if I took this bet every (period of time), would I be on average richer after (many repeats of this bet) than if I didn't take this bet?""  When the answer is ""no"", it implies self-insurance is more efficient than using external insurance.  The answer is going to be sensitive to the profit margin of the insurance product you are buying, and the size of the asset relative to your total wealth. Now, the Kelly Criterion can easily be misapplied.  Being worth financially zero in current assets can easily ignore non-financial assets (like your ability to work, or friends, or whatever).  And it presumes repeat to infinity, and people tend not to live that long. But it is a good starting spot. Note that the option of bankruptcy can easily make insurance not ""worth it"" for people far poorer; this is one of the reasons why banks insist you have insurance on your proprety. You can use Kelly to calculate how much insurance you should purchase at a given profit margin for the insurance company given your net worth and the risk involved.  This can be used in Finance to work out how much you should hedge your bets in an investment as well; in effect, it quantifies how having money makes it easier to make money." Security Analysis(very difficult for beginners )& Intelligent Investor by Benjamin Graham. All about(book series by McGraw) on Stocks,Derivatives,Options,Futures,Market Timings. Reminiscence of a Stock Operator (Life of jesse Livermore). Memoirs , Popular Delusions and Madness of the Crowds by Charles Mackay. Basics of Technical analysis includig Trading Strategies via Youtube videos & Google. Also opt for Seeking alpha free version to learn about portfolio allocation under current scenario there will be few articles as it will ask for premium version if you love it then opt for it. But still these books will do. "In this instance ""quotational"" is a reference to a market price quote, not a mathematical function.  Staunch ""value investors"" like Graham, Dodd, Munger, Buffett et al. believe there is a material difference between what security is ""worth"" and what the current market mood quotes as its price.   You, the investor, perform your analysis then derive a value for a security. If there has been no material change to an aspect of the security you analyzed then there hasn't been a change in that security's value, even if there has been a decline in the price quoted by the market, that is a ""quotational loss.""" PEG is Price to Earnings Growth.  I've forgotten how it's calculated, I just remember that a PEG ratio of 1-2 is attractive by Graham & Dodd standards. "The company was paying ""only"" $1 a share in dividends, compared to $10 a share in earnings. That is a so-called payout ratio of 10%, which is low. A more normal payout ratio would be 40%, something like $4 a share. If a $13 stock had a $4 dividend, the dividend yield would be about 30%, which would be ""too high,"" meaning that the price would go up to drive down the resulting yield. Even $1 a share on a $13 stock is a high dividend of about 7%, allowing for appreciation to say, the $20-$25 range. Graham was a great believer in the theory that management should pay out ""most"" of its earnings in dividends. He believed that by holding dividends so far below earnings, the company was either being ""stingy,"" or signalling that the $10 a share of earnings was unsustainable. Either of these would be bad for the stock. For instance, if $1 a share in dividends actually represented a 40% payout ratio, it would signal management's belief that they could normally earn only $2.50 a year instead of $10." I’ll start with what worked for me, to get me hooked. This list is by no means exhaustive.   *One Up On Wall Street* by Peter Lynch discusses competitive advantages and staying close to the story of a business. Explores the concept of ‘buy what you know’. He has also written *Beating the Street*.  *The Drunkard’s Walk: How Randomness Rules Our Lives* by Leonard Mlodinow is not dissimilar to *A Random Walk Down Wall Street*, but I preferred this book as it explores the concepts of randomness and survivors bias.   *Against the Gods* by Peter Bernstein is a dense book, but in my opinion is the definitive text on the development of numbers, probability theory, and risk management. I absolutely love this book.   *The Most Important Thing* by Howard Marks is immensely readable, enjoyable, and looks at value investing for the long run. Howard Marks has been a macro behavioural investor before behavioural investing was a thing.   Speaking of behavioural biases, *Thinking, Fast and Slow* by Daniel Kahneman is a spectacular look at how your brain’s quick-trigger responses can often be wrong.  On the subject of behaviour and biases, *Influence: The Psychology of Persuasion* by Robert Cialdini is another topic-defining book  More books by long term veteran professional investment managers that should be enjoyed: - *The Little Book That (Still) Beats the Market* by Joel Greenblatt - *Beat the Crowd* by Ken Fisher - *Big Money Thinks Small* by Joel Tillinghast - *Common Stocks and Uncommon Profits* by Philip A. Fisher - *The Little Book of Behavioural Investing* by James Montier - *Margin of Safety* by Seth Klarman  And I’ll be banned from this forum without mentioning *The Intelligent Investor* by Benjamin Graham.    As per some other comments, my personal opinion is that books that describe events or periods of time like *Liars’ Poker* [80s Junk Bonds], *The Big Short* [Financial Crisis], *When Genius Failed* [the LTCM collapse, excellent read by Rogers Lowenstein], *All The Devils Are Here* [by McLean and Nocera, another Financial Crisis book, much better than Lewis’s, IMO] are all educational and quite entertaining, but don’t honestly have much to do with the actual nuts and bolts of the real financial industry.   Enjoy! "From the Vanguard page -  This seemed the easiest one as S&P data is simple to find. I use MoneyChimp to get -  which confirms that Vanguard's page is offering CAGR, not arithmetic Average. Note: Vanguard states ""For U.S. stock market returns, we use the Standard & Poor's 90 from 1926 through March 3, 1957,"" while the Chimp uses data from Nobel Prize winner, Robert Shiller's site." "Here is how I would approach that problem: 1) Find the average ratios of the competitors: 2) Find the earnings and book value per share of Hawaiian 3) Multiply the EPB and BVPS by the average ratios. Note that you get two very different numbers.  This illustrates why pricing from ratios is inexact.  How you use those answers to estimate a ""price"" is up to you.  You can take the higher of the two, the average, the P/E result since you have more data points, or whatever other method you feel you can justify.   There is no ""right"" answer since no one can accurately predict the future price of any stock." "I would change that statement to ""very few people can CONSISTENTLY beat the market "". Successful strategies will get piled into and reduce returns. Markets will pick up inefficiencies, but at the same time they do exists. Tons of interesting reading especially in regards to value. Is there a risk premium that we don't know for value? Or is it a market behavior thing?" "For some studies on why investors make the decisions they do, check out  For a more readable, though less rigorous, look at it, also consider Kahneman's recent book, ""Thinking, Fast and Slow"", which includes the two companion papers written with Tversky on prospect theory. In certain segments (mostly trading) of the investing industry, it is true that something like 90% of investors lose money. But only in certain narrow segments (and most folks would rightly want traders to be counted as a separate beast than an 'investor').  In most segments, it's not true that most investors lose money, but it still is true that most investors exhibit consistent biases that allow for mispricing. I think that understanding the heuristics and biases approach to economics is critical, both because it helps you understand why there are inefficiencies, and also because it helps you understand that quantitative, principled investing is not voodoo black magic; it's simply applying mathematics for the normative part and experimental observations for the descriptive part to yield a business strategy, much like any other way of making money." A bullish (or 'long') call spread is actually two separate option trades.  The A/B notation is, respectively, the strike price of each trade. The first 'leg' of the strategy, corresponding to B, is the sale of a call option at a strike price of B (in this case $165).  The proceeds from this sale, after transaction costs, are generally used to offset the cost of the second 'leg'. The second 'leg' of the strategy, corresponding to A, is the purchase of a call option at a strike price of A (in this case $145). Now, the important part: the payoff.  You can visualize it as so. This is where it gets a teeny bit math-y.  Below, P is the profit of the strategy, K1 is the strike price of the long call, K2 is the strike price of the short call, T1 is the premium paid for the long call option at the time of purchase, T2 is the premium received for the short call at the time of sale, and S is the current price of the stock.  For simplicity's sake, we will assume that your position quantity is a single option contract and transaction costs are zero (which they are not). P = (T2 - max(0, S - K2)) + (max(0, S - K1) - T1) Concretely, let's plug in the strikes of the strategy Nathan proposes, and current prices (which I pulled from the screen).  You have: P = (1.85 - max(0, 142.50 - 165)) - (max(0, 142.50 - 145)) = -$7.80 If the stock goes to $150, the payoff is -$2.80, which isn't quite break even -- but it may have been at the time he was speaking on TV. If the stock goes to $165, the payoff is $12.20. Please do not neglect the cost of the trades!  Trading options can be pretty expensive depending on the broker.  Had I done this trade (quantity 1) at many popular brokers, I still would've been net negative PnL even if NFLX went to >= $165. Then I'll cite it as the last paragraph of step 3 in getting started. He says everything is insider trading and that's bullshit; if he had any interest in giving real advice he would define insider trading as trading with material, non-public information as it says in all the statutes.  It's the same meaningless nonsense as the paragraph before that, where he says good investors don't time the market but know when to get in and get out. Those are the same things at the level he has described them; it would take a book with actual investing advice like Ben Graham's The Intelligent Investor or A Random Walk Down Wall Street for an actual view into investment. Benjamin Grahams strategy was to invest in REALLY SAFE stocks. In his time lean businesses weren't as common as they are now and he found many companies with assets greater than the value of their shares. Putting a number figure on it isn't really necessary but the concept is useful. Its the idea that bigger companies are less turbulent (Which is something to avoid for an investor). Most companies in the top 500 or whatever will satisfy this.