I am having a bit of trouble understanding the following quote:

Companies that are inherently speculative because of widely varying earnings tend to sell both at a relatively high price and at a relatively low multiplier in their good years, and conversely at low prices and high multipliers in their bad years.

I'm a little confused that he is saying 'high price' and 'low multiplier' in the same sentence. When he uses the term 'multiplier', I'm assuming he is talking about the P/E ratio. So a 'low multiplier' should mean a lower price, not a higher price, right? To me it just doesn't make sense that he could be describing a single company as high priced but with a low P/E.

Am I missing something here?

The quote can be found on page 165 in the following PDF:


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    In their good years you'd expect earnings also to be high wouldn't you? Not an answer yet as the wording is clumsy and I want to make sure that I understand properly but that's my current reading... – MD-Tech Aug 15 '19 at 11:28
  • The quoted paragraph is so poorly written / thought-out as to be mostly useless / unintelligible. I'd ignore it. (And probably ignore the book.) – Fattie Aug 15 '19 at 12:10
  • Keep in mind that The Intelligent Investor was written 70 years ago, so it is not a helpful guide to investing today. The prevailing view at the time was that sound investments produced steady, reliable income. Bonds. If you were daring, utility stocks, i.e., highly regulated companies that paid regular high dividends. Common stocks? Only if they paid significant dividends, and even then, that wasn't investing, it was speculation. – Pete Becker Aug 15 '19 at 12:37
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    I don’t know what version you have read, but the most recent was written in 1970, about 50 years ago, and the version I’m reading has commentary chapters to explain subjects in modern terms with modern examples. Regardless, I think the book still has a lot to offer, despite the market/world being very different. Lastly, he does not identify all common stock investments as speculation. – Addison Aug 15 '19 at 12:42

If you continue reading that page and look at the table it refers to, it shows years where Chrysler has a relatively high price (82-101) but low P/E ratios (6.7-10.8), and periods with low prices (52-56) and high P/E ratios (22.9-26.2). How I interpret this is that Chryslers earnings (the denominator) swing wildly (between 2.13 and 24.92) but their prices do not follow. So It results in periods where the price does not reflect the volatility of the earnings.

If you also look at the context of this analysis, it's talking about exceptions to the rule it posits regarding value investing, that you should focus on low P/E ratio stocks.

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  • @D Stanley, Ohh, so 'price' is literally price, I thought he meant P/E. Also you're saying he is giving an exception to the rule that low P/E = good value investment, right? – Addison Aug 15 '19 at 20:41

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