According to Benjamin Graham, investors not to look too seriously at the company's trend in earnings because, while mathematical, it's really psychological and quite arbitrary. Nobody can judge how far the trend will continue but investors often try, leading to vastly over or undervalued stocks.
While the trend may not be a sound basis for valuation, the company's past track-record should be used as a rough guide to the firm's future. Benjamin Graham suggests that we place a lot of value on a stable past record when evaluating the earnings record since business stability suggests an ability to withstand external events to a greater degree, and this allows us to more easily assess what the firm could possibly earn going forward.
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