Which Earnings Figure for Graham's “Stock Selection for the Defensive Investor”?
"In the Income Statement that you've linked to, look for the line labeled ""Net Income"". That's followed by a line labeled ""Preferred Dividends"", which is followed by ""Income Available to Common Excl. Extra Items"" and ""Income Available to Common Incl. Extra Items"". Those last two are the ones to look at. The key is that these lines reflect income minus dividends paid to preferred stockholders (of which there are none here), and that's income that's available to ordinary shareholders, i.e., ""earnings for the common stock""."
The problem with predicting with accuracy what a stock price will do in any given situation is that there are two main factors that affect a stocks price. The first factor is based somewhat in math as it takes into account numbers such as supply and demand, earnings per share, expected earnings, book value, debt ratio and a wide variety of other numbers. You can compile all those numbers into a variety of formulas and come up with a rational estimate of what the stock should sell for. This is all well and good and if the market were entirely rational it would rarely make news because it would be predictable and boring. This is where our second factor throws a wrench in the works.  The second factor affecting stock price is emotional. There are many examples of people's emotions affecting stock price but if you would like a good example look up the price fluctuations of Apple  (AAPL) after their last couple earnings reports. Numerically their company looks good, their earnings were healthy, their EPS is below average yet their price fell following the report. Why is that?  There really isn't a rational reason for it, it is driven by the emotions behind unmet expectations. In a more general sense sometimes price goes down and people get scared and sell causing further decline, sometimes people get excited and see it as opportunity to buy in and the price stabilizes. It is much more difficult to anticipate the reaction the market will have to people's emotional whims which is why predicting stock price with accuracy is near impossible.  As a thought along the same line ask yourself this question; if the stock market were entirely rational and price could be predicted with accuracy why is there such a wide range of available strike prices available in the options market?  It seems that if stock price could be predicted with anything remotely reassembling accuracy the options market need a much smaller selection of available strike prices. "What you are seeking is termed ""Alpha"", the mispricing in the market. Specifically, Alpha is the price error when compared to the market return and beta of the stock. Modern portfolio theory suggests that a portfolio with good Alpha will maximize profits for a given risk tolerance. The efficient market hypotheses suggests that Alpha is always zero. The EMH also suggests that taxes, human effort and information propagation delays don't exist (i.e. it is wrong). For someone who is right, the best specific answer to your question is presented Ben Graham's book ""The Intelligent Investor"" (starting on page 280). And even still, that book is better summarized by Warren Buffet (see Berkshire Hathaway Letters to Shareholders). In a great disservice to the geniuses above it can be summarized much further: closely follow the company to estimate its true earnings potential... and ignore the prices the market is quoting. ADDENDUM: And when you have earnings potential, calculate value with: NPV = sum(each income piece/(1+cost of capital)^time) Update: See http://finance.fortune.cnn.com/2014/02/24/warren-buffett-berkshire-letter/ ""When Charlie Munger and I buy stocks..."" for these same ideas right from the horse's mouth" Value investing is an investment approach that relies on buying securities below their intrinsic values. There are two main concepts; one is the Intrinsic Value and the other is Margin of Safety.  Intrinsic value is the value of the underlying business - if we are talking about stocks - that can be calculated through carefully analyzing the business looking at all aspects of it. If there is an intrinsic value exists for a company then there is a price tag we can put on its shares as well. Value investing is looking to buy shares well below its intrinsic value.  It is important to know that there is no correct intrinsic value exists for a company and two people can come up with different figures, if they were presented the same data. Calculating the intrinsic value for a business is the hardest part of value investing.  Margin of Safety is the difference between the buying price of a stock and its intrinsic value. Value investors are insisting on buying stocks well below their intrinsic value, where the margin of safety is 20%-30% or even more. This concepts is protecting them from poor decisions and market downturns. It is also providing a room for error, when calculating the intrinsic value.  The approach was introduced by Benjamin Graham and David Dodd in a book called Security Analysis in 1934. Other famous investor using this approach is Warren Buffet Books to read:  I would start to read the first two book first. "Lots of good answers here about budgeting and other ideas.  Here's a couple more: Think about offense and defense.  Offense is how much money you make.  Are you making enough to survive on?  Is there a way you could bring in more income?  Defense is what you do with your money.  Do you have expensive habits?  Do you have problems with impulse spending?  Do you live in an expensive area with a high cost-of-living?  Think about some of these areas and pick one to attack first. If it is the defense side that is causing you problems (you did mention trying to live on less), consider reading Your Money or Your Life by Joe Dominguez and Vicki Robin.  There's a really good summary of it on the authors' site.  The basic idea of the mechanical part of the book is that you figure out how much you're truly making per hour, and then evaluate your expenses based on how many hours of your ""life energy"" you are using for that expense.  Then you evaluate whether you think that's a fair trade or not.  There's a lot more to it than that, but it's an interesting way to get a different perspective on your spending habits, and may be enough to entice you to change those habits." "The other two folks here are right with the math and such, so I'll just throw some intuition out there for you.  The basis for this valuation model is really just tacking the Gordon growth model (which is really just a form of valuing a perpetuity) onto a couple of finite discounted cash flows. So that ending part is the Gordon growth model *at the future point* discounted back to the present.  The Gordon growth model uses a ""next period"" dividend for the very simple reason that it's the next one you'd get if you bought the stock.  Is that explanation clear enough, or were some of these points not adequately explained in your class? I'll help a bit more, if I can." "The raw question is as follows:  ""You will be recommending a purposed portfolio to an investment committee (my class). The committee runs a foundation that has an asset base of $4,000,000. The foundations' dual mandates are to (a) preserve capital and (b) to fund $200,000 worth of scholarships. The foundation has a third objective, which is to grow its asset base over time.""   The rest of the assignment lays out the format and headings for the sections of the presentation.  Thanks, by the way - it's an 8 week accelerated course and I've been out sick for two weeks. I've been trying to teach myself this stuff, including the excel calculations for the past few weeks." Very interesting. I would like to expand beyond just precious metals and stocks, but I am not ready just to jump in just yet (I am a relatively young investor, but have been playing around with stocks for 4 years on and off). The problem I often find is that the stock market is often too overvalued to play Ben Graham type strategy/ PE/B, so I would like to expand my knowledge of investing so I can invest in any market and still find value. After reading Jim Rogers, I was really interested in commodities as an alternative to stocks, but I like to play really conservative (generally). Thank you for your insight. If you don't mind, I would like to add you as a friend, since you seem quite above average in the strategy department. "Consultant, I commend you for thinking about your financial future at such an early age. Warren Buffet, arguably the most successful investor ever lived, and the best known student of Ben Graham has a very simple advice for non-professional investors:  ""Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.)"" This quote is from his 2013 letter to shareholders. Source: http://www.berkshirehathaway.com/letters/2013ltr.pdf Buffet's annual letters to shareholders are the wealth of useful and practical wisdom for building one's financial future. The logic behind his advice is that most investors cannot consistently pick stock ""winners"", additionally, they are not able to predict timing of the market; hence, one has to simply stay in the market, and win over in the long run."