Getting Into Solid Investment Values

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Over a long period of time, solid investment values remain the most durable criteria in the selection of equities. This article from the 1960s offers an historical look back at the market.

In these days of generally high market prices, however, they have become rarities, especially available at bargain-counter prices. When we say solid investment values, we have two things in mind: (1) a high degree of market stability and (2) long-range growth potential.

An outstanding example of such solid investment values is Lehman Corporation which, at 29d (Oct. 16, 1961), is 3.3 percent discount from its net asset value of $30.91 at the end of the 1961 September quarter. Its asset value actually fails to reflect its true value because of the many substantial unrealized capital gains in its portfolio which will be distributed to stockholders in the form of dividends, capital gains and increased asset value over the years.

Whenever speculative fever runs high, investors tend to forget such basic investment criteria as asset values, income and capital structure. Asset value is a company's book value as reflected in the balance sheet. Book value has become less of a factor in determining price as the market has attached more and more importance to such "intangibles" as patents, franchises, trade names, which are often omitted or carried at nominal amounts on the books.

The disparity between book values and market values was, of course, particularly wide in the recent market, where earning, growth or prospects for growth far outweighed the book values of assets.

Many investment trust shares are available at sizeable discounts partly because of lack of sales promotion and partly because investors normally prefer direct stock ownership. When you own stocks in an investment trust, you have only indirect ownership in the securities of the investment trust's portfolio.

They are shares of the "closed-end" investment firms, as contrasted with the "open-end" mutual funds and most of them have traded on the New York Stock Exchange (NYSE). Investors need only to pay a comparatively small NYSE commission for buying these shares in contrast to the "high load" charged by mutual fund shares.

In addition to selling at a discount from their net asset value, investment trust shares afford the investor the benefits of experienced management, diversification of holdings and reasonable hope for long-term capital appreciation.

In its May 1960 Investment Letter, Carreau & Co. tabulated investment trusts to illustrate the disparity between net asset value and market value per share.

In addition to the "leverage" in capitalization, Carreau & Co. listed the following factors as determining the size of discounts for the investment trust shares: (1) options outstanding to buy shares at less than net asset value; (2) amount of unrealized cap ital gains, since such gains become taxable when realized; (3) management policies in retiring shares in the open market; and (4) performing record of management over a period of years, that is, its ability to increase net asset value per share faster than the market in a rising phase and preventing net asset values from declining as rapidly as the average during a market decline.

Well-selected investment trust shares sometimes are clearly ideal buys for small investors not only as "discounts" from asset values, but also as a "single-package" diversification.

When investing, look to solid investments with high stability and long-range growth potential. Timely advice then, and just as important now.

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