The article focuses on the issues related to the predictability of investor cash return from historical income trends of common stocks. If a prospective shareholder is to utilize past income trends as an indicator of things to come, he must be able to do three things. The first is to predict the rankings of available investment alternatives with respect to future earnings. The second is to qualify this prediction by investment cost and be able to predict future earnings per dollar of investment cost. And, finally, he must be able to predict the rankings of available investment alternatives in terms of actual cash return. Of the hundreds of stocks included in Moody's Industrial Manual, three hundred and fifty are treated in comprehensive detail. Of these stocks, one hundred ninety-eight were reported in sufficient detail to allow appropriate adjustments for valid computational and statistical purposes. The sample, therefore, will represent a fairly good cross section of American industry, although it will not include all major stocks. The large sample size suggests some compensation for the lack of strict randomness in sampling technique.

The standard explanation of the LCM Rule does not stress the application of accounting concepts because the definition of loss implicit in the rule shifts as different valuation bases are selected under the rule. Cost may be compared with replacement cost, with net realizable value, or with net realizable value less normal profit. Without any singular concept of what is being measured as a loss under the rule, students are routinely presented with an inadequately explained rule. The objectives of the rule can become obscure when there is no clear understanding of what the rule is attempting to measure. This paper presents an analysis and critique of the LCM Rule through the use of a graphical approach. The critical relationship between input and output prices is illustrated and the application of a consistent loss concept is stressed.