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Convertible Issues and Warrants Stock-option warrants are long-term rights to buy common stocks at a specific price. Convertible issues are issues of a bond that can be converted into common stocks.  Convertible issues rank much more important than the warrants, as the investor receives the protection of a bond or preferred stock, plus the opportunity to participate in any rise in the value of the common stock. It is as well good for the issuing company, who may not need to pay back the bond if the investor exchanges them into common stocks. According to Graham, convertible securities a lways come out of the woodwork near the end of a bull market - largely because even poor-quality companies then have stock returns high enough to make the conversion feature seem attractive! The convertible preferred is safer than the common stock of the same company, i.e. the risk is smaller of an eventual loss. But if you expect an eventual loss, it would not be an intelligent

Stock Selection for the Enterprise Investor The previous post, defensive stock selection, was mainly based on the exclusion of poor performing companies. This aggressive or enterprise investor selects companies that are above average and profitable. If we remember from the previous post , to get the average, we would buy equally amount in each of the 30 DJIA companies or buy a mutual fund that buys the whole index. With a slightly moderate degree of skill, if you study enough have experience and ability - Graham mentions it should be possible to be substantially better than the DJIA! On the other hand, there are not many investment funds or investment managers, who beat the index or are above average. There are several theories why this happens, one is that Graham takes an example of equally skilled bridge players who will win the game through "breaks" of various sorts rather than superior skill! Another theory is that all the clever investment managers buy into th

Stock Selection for the Defensive Investor The investment policies and concept of investing have been discussed in previous posts here: General Portfolio Policy Defensive Investor and Common Stocks Portfolio Policy for the Enterprise Investor: Negative Approach Portfolio Policy for the Enterprise Investor: The Positive Side and gives us the basic thinking behind the Stock Investment policy - in this post, we will go more in detail about the specific stock selection criteria! Graham mentions two approaches Dow-Jones-Industrial-Average (DJIA) type portfolio Quantitatively tested portfolio (1) In the first approach, DJIA type portfolio,  you select all 30 companies in the Dow 30 and invest an equal amount into everyone, this would be your portfolio as of today! An alternative is to select a low-cost index fund or an Exchange Traded Fund (ETF) that replicates the index as is. Compare the cost of buying each individual stock with buying a fund or and

A Comparison of Four Listed Companies In this chapter, Graham compares four companies - so the question is what we can learn from the chapter!  The biggest conclusion as cited below is: " The most striking fact about the four companies is that the current price/earnings ratios vary much more widely than their operating performance or financial condition " So on which basis did he do the comparison - the following parts were analyzed: Profitability Stability Growth Financial Position Dividends Price History 1. Profitability - The first measurement mentioned was the earnings of the companies in relation to their book value. All companies showed >10% return on invested capital or as it is written in the book as  net per share/book value.  " A high rate on invested capital goes along with a high annual growth rate in earnings per share". All companies showed as well better earnings on book value compared to 8 years before, so grow

Things to Consider About Per-Share Earnings Directly at the start of the eleventh chapter two very important lessons are made: Don't take a single year's earning seriously If you do, pay attention to short-term earnings, look out for booby traps in the per-share earnings If you follow the first advice, normally the second advice is not needed - even though Wall Street pays great attention to the current earnings - and that is your chance! To be sure and avoid any surprises, the annual earnings figures of a company, need to be examined thoroughly, and you should find a lot of clues in the footnotes of a 10-k!  It can be everything from special charges, future tax savings, future reserves, or dilution of shares which will affect the per-share earnings. You need to adjust for these reservations and find the true earnings - or you find the average earnings. Use of Average Earnings Analysts and Investors paid before more time to the average earnings of

Security Analysis for the Lay Investor: General Approach Is there any difference between Financial Analysis and Security Analysis ? As we can read in the book security analysis is more limited than financial analysis in the way that financial analysis covers a big amount of general economic analysis, such as e.g. macroeconomics etc.! The work of a security analyst covers: Deals with the past, present, and future of any given security Describes the business, its operating results, and financial position Determines the strong and weak points, the possibilities and risks Estimates the future earning power under various assumptions Elaborate comparisons of several companies or within the same company at different times Formulates an opinion as to the safety of the bond, preferred or common-stock The security analyst may look at the calculations in the financial statements of a company differently than the reported numbers, and search for specific items in these repor

Investing in Investment Funds The market for different kinds of investment funds is large, wrong, it's huge!  Graham mentions some of these, open-end, closed-end, mutual funds, stock funds, bond funds, hedge funds, the list seems to be a never ending story! The Investor, especially the defensive Investor, should answer three main questions before selecting any of these offerings: How can the Investor choose a fund that assures better than the average result? How can the Investor choose a fund that avoids worse than the average result? Can the Investor make an intelligent choice of a fund? The first statement that is made is that the " average individual who put his money exclusively in investment fund has fared better than the average person who made his common-stock purchases directly. " That doesn't mean that the fund is better than the comparable index. And that is descriptive later, where Graham mentions that the mutual-fund industry do

The Investor and Market Fluctuations Both bonds (including high-grade) and common stocks will swing widely in price over a period. Every Investor has to be prepared for that both financially and psychologically. " The Investor want to benefit from changes in market levels " A big danger when you see these swings on the market is that it can lead you to speculate attitudes and activities.  It is easy to say that you do not want to speculate, but the hard thing is to take your hands off! Market Fluctuations as a Guide to Investment Decisions As common stocks fluctuate widely in their prices, an investor should take advantage of that. The book describes two ways to do it: The way of timing The way of pricing Timing means to anticipate the future and by that decide when to buy and when to sell. Pricing  is to buy common stocks when they trade below their intrinsic value (or fair value) and to sell them when they are priced above that value. Pricing is the

Portfolio Policy for the Enterprise Investor: The Positive Side Now that we learned in the previous chapter what we should not buy or be very careful with, this chapter covers the positive side or what we should focus our time on. There are four main areas where the Enterprise Investor should operate in: Buying in low markets and selling in high markets Buying carefully chosen "growth stocks" Buying bargain issues of various types Buying into "special situations" Buying in low markets and selling in high markets The next post, which will summarize the famous chapter 8 of the Intelligent Investor including Mr. Market will go more in detail about "market timing"!  So I leave room here to fill it up in the next post! Growth-Stock Approach First of all, what is a growth stock? Is it a stock that performs better than the average, so what is if the average is 2% per year, and your investment increase 3% per year!? A "growth s

Portfolio Policy for the Enterprising Investor: Negative Approach The starting point for an "Aggressive" or "Enterprise" investor should be the same as the Defensive Investor, i.e. high-grade bonds and high-grade common stocks. From this starting point, Graham starts what an Enterprise Investor should not invest in (negative approach): Leave High-grade preferred stock to corporate buyers Low-quality types of bonds (junk?) and preferred stocks, unless you but them at a big bargain, minimum 30% under par for high-coupon bonds (interest rate at least 8%)or high dividend-yielding preferred stocks (>10%) Foreign-government bonds New issues, such as convertible bonds, preferreds, and common stocks For standard bond investments, the Aggressive Investor does the same as the Defensive Investor, e.g. high-grade taxable bonds and/or good-quality tax-free bonds. Second-Grade Bonds and Preferred Stocks Second-Grade, or "lower quality bonds tha

General Portfolio Policy: The Defensive Investor Bond vs Stock allocation A defensive investor wants, first of all, to protect the downside, i.e. minimize the risk of losing money in the portfolio. According to Graham, the best way is to "divide" your portfolio between high-grade bonds and high-grade common stocks. The guiding rule is that the investor should never have less than 25% or more than 75% in common stocks or vice versa! So either 25% high-grade common stocks and 75% high-grade bonds, or 25% high-grade bonds and 75% high-grade common stocks or anything in between these ranges. The standard and probably simplest is, of course, doing 50-50, 50% high-grade common stocks and 50% high-grade bonds. In bear markets more leaning towards buying more "bargain-priced" common-stocks and in bull markets sell more of the high-grade common stocks for high-grade bonds! The Bond component There are two considerations to be made when it comes to buyi

The Investor and Inflation Inflation is when prices increase and you hereby lose purchasing power! Something that cost $100 dollar this year might cost $130 dollars next year. On this basis, many financial authorities have concluded that: bonds (or any other fix income security) are an undesirable form of investment common stocks are more desirable than bonds So the question that this chapter in the books is to shed light on this statement. The book uses past experiences to try to make some intelligent conclusions for the future. The world had a lot of inflation in the past and from the statistics, there have been times where bonds performed better than common stocks and vice versa! Inflation and Corporate Earnings How the rate of inflation affects corporate earnings is not clear, but the two important effects of inflation are: A rise in wages rates exceeding the gains in productivity Huge amounts of new capital (especially for companies with high capital need)

Intro and Chapter 1 "By far the best book on investing ever written" --Warren E. Buffett This is the quote of the front cover of the book, written by Benjamin Graham (born as Grossbaum in London). According to Warren Buffett , this is the best book on investing (especially if you follow the behavioral and business principles that Graham advocates in the book and if you pay special attention to the advice in Chapter 8 and 20)! Jason Zweig summarizes well in his note at the beginning of the book Graham's core principles : You are part owner of an actual business, not just owner of a stock The market is a pendulum, swinging from totally optimistic to totally pessimistic.  Optimistic market = Stocks expensive Pessimistic market = Stock cheap  The higher the price you pay, the lower your return will be. Shop only on discount! To minimize risk and your odds of being wrong, insist on a margin-of-safety Don't get carried away with your emotions, be

Francis Chou, his story and his approach 1979, Francis came along a copy of The Intelligent Investor by Benjamin Graham. Once he read it, he was sold into the world of value-investing and hunted for articles and other books on the subject. What he found out after a while is, to be successful in investing you need a good basic framework on making investing decisions. One of his pillars in his framework is to buy on discount and by that, beat the market - that is the easy part - especially when he started. One way to find bargains are Graham's Net-Net Working Capital , which is Current Assets minus Current Liabilities and all long-term Liabilities as well, including preferred shares ! In the year of 1991, they were plenty of those! And it worked out for him! (---I just ran a screen on companies with a market cap > $250 million on the 3 major US exchange excluding financial companies and I got that 0.4% or 11 companies out of around 4000 companies were Nets