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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 intelli...

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 ...

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...