Investing: The Last Liberal Art (Columbia Business School Publishing)

by Robert G. Hagstrom

analogy would be species). 1. In the 1930s and 1940s, the discount-to-hard-book value strategy, first proposed by Benjamin Graham and David Dodd in their classic 1934 textbook Security Analysis, was dominant. 2. After World War II the second major strategy that dominated finance was the dividend model. As the memories of the 1929 market crash faded and prosperity returned, investors were increasingly attracted to stocks that paid high dividends, and lower-paying bonds lost favor. So popular was the dividend strategy that by the 1950s, the yield on dividend-paying stocks dropped below the yield of bonds—a historical first. 3. By the 1960s, a third strategy appeared. Investors exchanged stocks paying high dividends for companies that were expected to grow their earnings at a high rate. 4. By the 1980s, a fourth strategy took over. Warren Buffett stressed the need to focus on companies with high “owner-earnings” or cash flows. 5. Today we can see that cash return on invested capital is emerging as the fifth new strategy.