A former drama critic who plots the action on Wall Street

Arnold Bernhard's journey through the fine print of life began between the heady heights of the 1929 stock market and its abysmal bottom in 1932. What he discovered, after many years, is contained in the Value Line Investment Survey, an extremely complex system of plotting the timeliness and safety of investments in the stock market. Value Line, published weekly on a thick sheaf of newsprint, appears to work. Some 120,000 subscribers think so, paying $365 a year and making it the most widely circulated investment advisory service in the country.

What does the Value Line founder predict for the current bull market? It will move even higher next year. The Dow Jones industrial average will range between 1,300 and 1,400 in 1984 and even higher thereafter.

A one-time drama critic-turned-investment adviser, the gentle-humored Mr. Bernhard recently told the Monitor that the 1929 stock market crash shook him severely and made him search for a scientific means of calculating a stock's current worth and future propects.

''I must say,'' he recalls, ''the crash of the market shook my faith in capitalism. A lot of my friends became communists. But I took a different route.''

That route involved intense, sustained research into the technical behavior of the stock market. For 50 years, Mr. Bernhard and various colleagues - most trained as statisticians - sought to do what stock market theorists consider impossible: find a method of beating the market consistently. Most analysts now agree that Value Line does, in its own complex way, consistently beat the market average.

Current top performers (Nov. 4 issue of Value Line) are mostly in consumer goods, specifically retailing (Ames Department Stores, Stop & Shop, etc.). IBM is the most expensive, top-rated Value Line stock.

But Value Line is not always right, Mr. Bernhard admits. If there has been a wide advance in a particular industry sector and the market drops suddenly - before earnings reports are issued that ''justify'' a drop - the Value Line technique would not take note of it.

For example, Value Line missed the first phase of the bust in oil and oil-service stocks in 1981, just as the worldwide oil glut - and price drop - was making itself known. And Value Line's reliance on past performance caused it to miss the rebound earlier this year in heavy industrial stocks, Bernhard notes. These stocks were picked up by contrarians who had faith that the industrials would strengthen as they usually do in an economic recovery. Today those stocks - automobiles, utilities, aluminum - are doing well.

''We do tend to lag the market at a cyclical turn in the economy,'' he says. ''That's where our greatest disadvantage is.'' But as soon as earnings are issued, the Value Line method takes them into account and corrects the problem, he says.

Bernhard's first attempts to fathom the market's pricing system entailed plotting the previous 15-year performance of stocks to determine a normal price for various issues. It was a naive approach, he admits, but he stuck with it for 15 years. In 1946, he teamed up with statistician Samuel Eisenstadt and began measuring the price/earnings ratios, dividends, and book values of individual stocks. That was better, but still not good enough to beat the market consistently.

Then in the 1960s, cross-sectional analysis was introduced. That is the current Value Line system. Some 1,700 stocks - some of them obscure, some well known - are examined on a rotating basis and their price and earnings projected into the next year through a complex mathematical system. Stocks are rated from 1 to 5 based on their timeliness (No. 1 is most timely as an investment) and safety (No. 5 is the safest).

Although the outpouring of information from the Value Line is daunting, an individual investor can best make use of it by taking the top Value Line prospects at any point and holding them for a year. Jeffrey Weiss, an E.F. Hutton technical analyst, thinks overall the service is a better tool for individual investors than for institutions like Hutton. Says Mr. Weiss: ''We get gobs of information already.''

All of Value Line's calculations are done against a hypothesized 3- to 5-year economic environment. That in itself makes interesting reading. At present it predicts that 1986-88 will look like this: 7.8 percent unemployment; no major war in progress; productivity up 2 percent a year; inflation at 5 percent a year; corporate income tax at 45 percent.

Following the Value Line technique, the company runs two mutual funds (two more are coming) that consistently perform at the top of their industry, although this year their performance has been worse than the Dow. Mr. Bernhard attributes this to staying in bonds too long and then moving into high-tech stocks too late. In general, the mutual funds' strategy is to buy No. 1-rated stocks and sell them as soon as they dip to No. 3. The company also manages and advises pension funds.

Ernest G. Wiggins Jr., manager of two mutual funds at Boston's Fidelity Group , notes that Value Line's inherent weakness, especially in its mutual funds, is that it is based on past stock performance. Nonetheless, Mr. Wiggins, who tends to buy lower-performing Value Line choices (Nos. 3-5) in his contrarian investment strategy, describes it as ''dollar for dollar the best investment service in the world.'' He cautions, however, that in certain stocks ranked high for performance ''you can get clobbered,'' because, while they may have a strong past, their immediate future may be weak.

The Value Line method shouldn't work as well as it does, says Fischer Black, a Massachusetts Institute of Technology finance professor. Dr. Black and other analysts believe that the stock market is inherently efficient, always reflecting the counterbalanced thinking of thousands of investors.

''The market,'' Black says, ''is just as likely to go down as up, except over the long term, where we know it is going up historically.'' Because the market is a ''random walk'' in the future, it is ''surprising'' that Bernhard's system can be successful, Black says. He prefers to call Value Line ''an aberration.'' Even so, he reckons that one of the best ways for an investment firm to pilot a portfolio through the vicissitudes of the market would be to fire all the financial analysts, save one, and make that one read Value Line.

Black says one would think that Value Line's effectiveness as an investment tool would have diminished by now, since its success should have prompted many more investors to use it - and therefore the stock market would have a built-in discount for Value Line. E.F. Hutton's Mr. Weiss notes that a top pick by Value Line does tend to give a stock's price weight for a day or two on the market, but this subsides.

The founder says the key to Value Line is that it is based only on statistical, public information. There is no inside scoop by a technical analyst with a pet theory - at least not with a pet theory that differs from the elaborate Bernhard/Eisenstadt theory. No stock is emphasized simply because an industry specialist took a tour of a new factory and became enchanted with what he saw. Instead, 1,700 stocks are measured by past performance, and price is projected a year into the future.

Mr. Bernhard says simply: ''We depend only on facts and only on the past.''

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