The investor in common stocks, equally with the speculator, is dependent on future than past earnings. His fundamental basis of appraisal must be an intelligent and conservative "estimate" of the future earning power.
But his "measure" of future earnings can be conservative only if it is limited by "actual performances over a period of time." And in most instances he will derive the investment value of a common stock from the "average earnings of a period between 5 and 10 years."
This does not mean that all all common stocks with the same average earnings should have the same value.
The common-stock investor (@ the conservative buyer) will properly accord a "more liberal valuation" to those issues
> which have current earnings above the average or
> which may reasonably be considered to possess better than average prospects
> or possess an inherently stable earning power.
But it is essential that some moderate upper limit must "in every case" be placed on the multiplier in order to stay within the bounds of conservative valuation, suggested that "about 20 times average earnings" is as high a price as can be paid in an "investment" purchase of a common stock.
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