Common Stocks and Uncommon Profits and Other Writings

 
What to Buy 
6 3 
occurring for reasons other than a temporarily expanded volume of 
business. In other words, the company would not be marginal in the 
true sense of the word, since the real reason for buying is that efficiency 
or new products developed within the company have taken it out of
the marginal category. When such internal changes are taking place
in a corporation which in other respects pretty well qualifies as the 
right type of long-range investment, it may be an unusually attractive 
purchase. 
So far as older and larger companies are concerned, most of the
really big investment gains have come from companies having relative- 
ly broad profit margins. Usually they have among the best such mar-
gins in their industry. In regard to young companies, and occasionally 
older ones, there is one important deviation from this rule—a deviation, 
however, that is generally more apparent than real. Such companies will 
at times deliberately elect to speed up growth by spending all or a very
large part of the profits they would otherwise have earned on even 
more research or on even more sales promotion than they would oth- 
erwise be doing. What is important in such instances is to make 
absolutely certain that it is actually still further research, still further
sales promotion, or still more of any other activity which is being 
financed today so as to build for the future, that is the real cause of the 
narrow or non-existent profit margin. 
The greatest care should be used to be sure that the volume of the 
activities being credited with reducing the profit margin is not merely 
the volume of these activities needed for a good rate of growth, but 
actually represents even more research, sales promotion, etc., than this. 
When this happens, the research company with an apparently poor
profit margin may be an unusually attractive investment. However, with 
the exception of companies of this type in which the low profit margin 
is being deliberately engineered in order to further accelerate the
growth rate, investors desiring maximum gains over the years had best 
stay away from low-profit-margin or marginal companies.