…It must be remembered that the automatic or normal economic forces militate against the indefinite continuance of a given trend…
…diminishing returns, etc., are powerful foes to unlimited expansion, and in smaller degree opposite elements may operate to check a continued decline. Hence instead of taking the maintenance of a favorable trend for granted—as the stock market is wont to do—the analyst must approach the matter with caution, seeking to determine the causes of the superior showing and to weigh the specific elements of strength in the company’s position against the general obstacles in the way of continued growth.
In particular here was an interesting line by Graham & Dodd about PE Ratio:
...As we shall point out in the next chapter, this assumed earning power may properly be capitalized more liberally when the prospects appear excellent than in the ordinary case, but we shall also suggest that the maximum multiplier be held to a conservative figure (say, 20, under the conditions of 1940) if the valuation reached is to be kept within strictly investment limits. On this basis, assuming that general business conditions in the current year are not unusually good, the earning power of Company A might be taken at $7 per share, and its investment value might be set as high as[…]
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