Behind you is a careful determination of your fitness as an investor. You have set your objectives. You have made contact with the man who win be your agent and confidante in all transactions. You know the market place in which you and he will be operating, and you have fundamental knowledge of the types of securities available to you.



All right, what do you buy?

Whether you want income, growth, or safety, your challenge now is to survey the field and narrow it down to the stock that seems best to meet your requirements. This means research.

You will feel like the amateur you are at first.

There are experts of every description who have a big lead on you in wisdom and experience. There are sober scholars who have made a lifetime specialty of rails, oils, utilities, or steels.

There are bushy-tailed tipsters offering tempting morsels that, in all truth, turn out well enough just often enough to be most disconcerting. And there is information and advice millions of words of it streaming from hundreds of sources and ranging in substance from half-sheet flimsies to Graham and Dodd's great keystone volume, "Security Analysis."

It is perfectly acceptable procedure to let these sources (except the tipster) help guide your selections. Unless you expect, first crack out of the box, to uncover a bonanza overlooked by the professionals, you probably will end up buying a pretty well-known and predictable issue, anyway.

Still, there is virtue in going as far as you can in marshalling your own facts and reaching your own conclusions. To be on the safe side, you may wish to check the results of your research with your broker. But conducting your own selection process will give you valuable insight into the technique and discipline of security analysis.

Discipline need not eliminate the fun, and it can be a healthy balance to an overly romantic view of stocks. You may love airplanes, movies, and bourbon, but that doesn't necessarily mean that aircraft, entertainment, and distillery stocks are a good buy at the moment.

At the outset, let it be said that a full-fledged security analysis is a painstaking, highly specialized bit of business. Essentially, it is an effort to predict a company's potential earning power and, hence, the present value of its stock as an investment.

The analyst's raw materials are statistics. He studies earnings reports, balance sheets, stock-market records, and the various ratios that can be derived from them. He considers the company's long-term debt schedule, its expansion plans contemplated or under way?and its tax position.

He compares the company with its competitors, and checks the performance of its industry group against that of other groups or of the economy as a whole. All of this data, of course, is history. But if the analyst is diligent, his study will turn up statistical patterns and trends that reveal a great deal about the company's consistency, stability, and vigor, and suggest more than a little about its basic quality.

To this he adds what he can learn about such largely un-measurable values as the skill and enterprise of the company's management, the possible sales appeal of an upcoming new product, and the growth factors evident in the industry.

In due time, he reaches several conclusions, each bearing on the others. The first is a statement of what the facts?and the surmises?suggest as to the general quality of the company. The second predicts the per-share earnings which might be expected in the next year.

The third?the most difficult feature of security analysis?relates the stock's quality and potential to its current price and attempts to say whether, at this level, it is a good investment.

A little reflection, of course, will show how delicate is the balance of these three factors. On a quality basis, for instance, a bright, young electronics company would almost certainly be considered inferior, say, to Westinghouse.

Yet if its initial plant-expansion program had been largely depreciated and written off, and the products in which it specialized were in great demand, the earnings prospect could be most attractive and, over the short term, relatively safe. Handsome earnings, however, might have to be discounted if speculative buying of the stock had already shot the price up.

On the other hand, if the company had been largely overlooked, and rested comfortably at a low price level, anticipation of even a modest increase in earnings could make the stock a worthwhile investment.

Most analyses are confined to the short term. There may be factors enabling the analyst to take a longer view. It has been clear since 1945, for instance, that industrial emphasis on electronics and automation virtually guaranteed a glowing future for these fields, whereas full development of peacetime uses for atomic energy may still be a decade off.

Such generalities, however, do not say very much about the prospects of individual companies, and any analyst will admit that the farther ahead he looks, the greater the chance for error.

To be frank about it, any analysis will contain many imponderables. Even an experienced analyst inevitably must include informed guesses, inspired hunches, and the "feel" of a situation in arriving at a conclusion.

For, excepting the hard figures of a company's financial statements, there are no numerical values to be gleaned from such items as managerial efficiency or sales potential. All the analyst can do is to establish relativities: if Company X's management, on the basis of observable performance, rates 90, then Company Y's officials can be graded no higher than 80. And if there is validity in this relationship, then a weight must be assigned to the importance of the management factor in the total company performance.

The ramifications, of course, are soon beyond calculation. It may be, for instance, that Company Y is an old-line corporation whose stability and earning power is beyond question.

This should help to give you some idea of how to value and pick a good share. Using modern software can help you.

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