Classification of Securities: Chapter 5

Hello friends, in today’s article we see the classification of securities from chapter 5 of the Security Analysis book. In this chapter, the author explains how people classify securities and how they wrong and the author gives the specific reason and accurate classification.

The Previous chapter 4

Classification of Securities from chapter 5 of Security Analysis book:

Classification of Securities

In this, the author gives the how the grouping of securities is mention by people

let’s see

Conventional Grouping of Securities:

So these securities grouped in two parts i.e. Bond and Stocks

In stocks contain two stocks one is preferred stocks and the other are common stocks.
Classification of Securities

So we all know those are bonds and the bondholder has the first claim on the company.

If they don’t get the interest on that bond then they have the first claim on the company Asset.

But those are stocks holders they assume that whatever the profits go on that basis they get the maximum profits on shares. (Classification of Securities)

If the shares go down or the company files for bankrupt then they lose the all money because those are bondholders who take the first claim on the company asset.

So the author says, this conventional grouping of securities is not in the right way.

So for the above conventional groups, the author gives the three objections.

  1. Preferred Stocks is grouped with common stocks (diagram image) instead that they have to group with bond.

Because Preferred stocks get the fixed income, so they one side they are a technical legal partner of a company but actually, they are like bondholder, then that type of results they got also.

This means they can not participate in the profits of the company (dividends), which means they get what is fixed, on that preferred stocks, that much amount only get them. (Classification of Securities)

2. Another problem is people compare the Bond with safety, but this is a big mistake.

So you can say, bond as a whole instrument because they have the first claim on company asset.

Safety does not depend on because they are bonds, it depends on this  the comapanies asset that defeats the obligation of the company ( means beat the bond interest payment and other companies problems)

so this point includes the real safety not on this to buy the bond and stay safe is not happen.

Because, if companies don’t have earnings and their asset not capable to pay the bond interest so without that bond is not a safe investment.

3. Title is not used rightly for accuracy purposes, saying anything to any securities just like the following example.

Preferred stocks look like stocks but actually, they work like bond and other deviation also present in financial instrument list like Convertible bond, purchase margin, Warrant, Participant preferred stocks, Non Voting stocks. so this all deviation and also other no voting stocks not we are put in this list that above mentions image, and they put in common stocks but they don’t work like that. (Classification of Securities)

Participant preferred stocks, so these are preferred stocks but we can’t put in preferred stocks, because they are participants.

So the author says, ” this all above classification is not the right way.”

So whatever the characteristics of financial instruments, they are not divided on their characterists.

then the author gives their own Classification.

So they divide them into three classes:

1. Class I (Fixed-value type)

2. Class II (Variable-Value type)

3. Class III ( Common Stock type)

 

  1. Class I ( Fixed-Value type): In this class, include the high-grade bond and preferred stocks.
  2. Class II ( Variable-Value type): In this class includes two types A) Well Protected issues with profit possibilities B) Inadequately protected issues.

A) Well Protected issues with profit possibilities: in this, the issue is well protected but has profit possibilities.

so that’s why they are variable values, e.g. High-Grade bond, Convertable bond.

B) Inadequately Protected Issues: In this have the profit, but they are not fully protected they have Inadequately protection issues, for example, lower-grade bonds or preferred stocks. (Classification of Securities)

So they have the profits chance because they are very cheap in price.

3. Common Stocks type: In this include share (stocks) that we talk about almost every time.

So now let’s talk about the advantages and disadvantages of these all classes.

  • Class I, in this the owner’s main purpose is the principle of safety and interest safety and we want steady income from these securities.
  • In Class II, the principle value changes regularly, so that why they have significance. so let’s see type A: in this, you get the safety and you have another possibility is conversion so that you can make a profit in that. let’s see type B: In this, your loss may be happening, in lots of forms and you also get lots of gain on principle.
  • In class III, In this compare with Class 2 type B

so in this difference is those are class II type B have the priority as compare to Class III and they have some protection in class II type B.

Another difference is those are Class II and type B have the profit possibilities, and in this, you get the substantial profit, so but class II type B have the limits so but in Class III in common stocks there is no limit on profits as compare to the class II type B.

So other says, ” those securities that have the characteristics of the common stock, they include in class three, whatever they name are, whatever those are like, common stocks or bonds or convertible bonds or any other financial instruments. (Classification of Securities)

lastly, the author says,” Do not classify securities on the basis of the title of the issue, but the practical significance of its specific terms, and status to the owner.”

So this is all about the classification of securities from chapter 5 of the security analysis book.

Difference between Investment and Speculation

Hello friends, in today’s article we see the difference between Investment and Speculation from chapter 4 of the security analysis book. so let’s see the Benjamin Graham point of view.

The Previous Chapter 3: Sources of Information

Difference between Investment and Speculation
What People think about It:-Difference between Investment and Speculation

Difference Investment and speculation

Bonds and stocks

so people say, ” Invest in bonds is an investment, and invest in stocks is called speculation.”

Outright purchase and purchase on margin( taking loan and buy security)

Some people say, ” We buy the outright purchases that investment and speculation when you purchase on margin ( means taking borrowed money and buy the stocks).

People say, ” Investment is permanent holdings and Speculation is for a quick return.”

other people say, ” Investment is for income and speculation is for profits”

Investment is in safe securities and speculation in risky issues. (Difference between Investment and Speculation)

so authors say, ” this all is bullshit whatever above peoples think.”

So Author starts with the first point and say,

” If you buy bonds that secure but companies earning is not sufficient, so those interest payment not fully paid by the companies, so this is also the speculation.”

so go on to the second point from the above table i.e. Outright Purchases and purchases on Margin

If you want to purchase security and this security is shit, so then this is not a good opportunity so whatever you buy on outright purchases, this also speculation.

or

If you get the wonderful stocks and you get the maximum discount and margin of safety but you buy on purchase on margin this is also Investment and this maybe becomes a good investment.

Temporary and permanent points

This is only the intention of purchase so If someone says, ” I buy this security and keep it so what is the benefit of that if they keep that security. so you have a purpose in buying that whatever your purpose i.e. Profits or income.

So in this, not any temporary or permanent,  If they reach at purpose in a short time or long term time, this doesn’t matter, the matter is that purpose is accomplished, whatever the time frame.

Income and Profits

Suppose you get the return whatever is 10, 20%

from where it comes, it doesn’t matter

they come in form of income or profits this all depends on your fundamental circumstance, which means you need every month money for maintaining your lifestyle or you need profits for long terms.

So we can’t say, ” income is investment and speculation is profits”

because of the above fundamental circumstances. (Difference between Investment and Speculation)

Safety and risky point

so safety and risky is dependent on the different points of view of people.

So if one man puts money on a racehorse and he thinks they will win the racing then in his point of view they think it’s a good investment and safe money.

so some people think in 1929, investors think to put money stocks is a safe investment and they think this stock has never gone down because now a new era is beginning and the stock goes high.

so whatever they pay the price, they are justifiable for that stocks in 1929.

This depends on the perspective to perspective so we can’t separate the investment and speculation.

So all this statement neglect by the author and they give his own point of view of definition of Investment and Speculation.

Definition of  Investment:

An investment operation is one which upon thorough analysis, promises safety of the principle and a satisfactory return.

If operators not meeting these requirements are speculations.

Thorough Analysis means studying the facts while applying standards of safety and value.

Safety of Principles means, Your principles are not going anywhere in normal circumstances.

Like lite situation happen in the market, except the stream events like recession, depression, etc so then there is no safety in this situation on investment principle, this told by the Benjamin Graham

Satisfactory Returns may be in any form like capital appreciation, dividends returns, or interest payments.

Lastly, investment operation called an investment instead of securities operation as investment operation.

Because any type of securities is an investment or any type of security is speculation. so this only depends on how much price you pay. (Difference between Investment and Speculation)

the author also define another form of Investment

An investment operation is one that can be justified on both qualitative and quantitative grounds.

after this author gives  Examples of Speculation.

In Dec 1934, General Electrics stocks were sold at 12 3/4 dollar and paid 6% on $10 pay.

It has one difficulty was they are callable on any dividend date at $11.

So the author says, ” Buying these preferred stocks at 12 3/4 is speculating and we put the 10% of our principal.

so how this happen explain below

Suppose if the issue is called on the very first date i.e. 15 April 1935, then you will get the $11 as call price plus a Dividend.

so how much dividends? for this
Annual dividend = 6% of $10 = $0.6

so for 4 month dividend = 0.6/3 = 0.2.

 

so, you will get $11 as call price and dividend is 0.2 means $11.02 which could result in a loss of 12%.

so now you think, this is a very simple calculation, so who do like this stupidity.

so, guys, everyone wants to become rich in the stock market and no one wants to do work for that that why we all do stupid things.

So the author says, ” buying these preferred stocks, you are doing speculations.”

You were wagering that issue would not be called for some years to come, therefore it is speculation.

so the author gives the Example of Investment:

In real-time, the same stocks of General Electrics, the issue was called that every month at $11 per share on 15 April 1935. so from this announcement. (Difference between Investment and Speculation)

The price promptly decreased to $11 so the author says, ” this is the investment opportunity.”

So let’s see how?

Now you have the opportunity for profitable short-term investment on margin investors buying.

Suppose, you buy the $11 stocks at on 15 Jan 1935 and you get the $10 per share borrowed money at 2% per annum interest.

so you buy the 1000 shares.

at $11  so net money = $11,000

On April, 15, 1935, you get the $11 plus dividend = $11,150

so this time you have to call the price and get dividends of $150. ( $0.6 per annum and 3 month dividend is 0.15 multiply by 1000 = $150)

so gross profits = $150

so you invest $11,000 and you get the $11,150, but on this, you have to pay borrowed money whatever their interest rates.

so for 3 month interest rat 2% per annum on $10,000 = $50

your net profits were = $100

so you invest $1000 and you take $10,000 as a loan (borrowed money).

The net profit of $100 on $1000 investment, in 3 months is equivalent to = 10% * 4

= 40% Annual return

so this type of return is very much best for an annual year.

Peoples say, that ” investment depends on the past and speculation is depends on the future.”

So after this example, the author gives the four types of investment

Types of  Investment:-(Difference between Investment and Speculation)

1) Business Investment: Your money put in any business

2) financial Investment: Your money put in any securities like bonds, stocks, etc.

3) sheltered Investment: In this, you buy those securities that have minimum risk and they have the first claim on company asset.

4) Analysis Investment: Analysis investment is that investment operation that going through the analysis and they give the promise statement about principle safety and also adequate returns.

So this is the list of types of investment, so this is not an exotic investment list, and about them not other any investment is not like that. and this put randomly without any relations. (Difference between Investment and Speculation)

Types of Speculation:

1) Intelligent Speculation

2) Unintelligent Speculation

1) Intelligent Speculation: Those are intelligent speculation, you only get those risks, you are justifiable on that because you do good studies and whatever your prose and cause on your decision.

So this called Intelligent Speculation

2) Unintelligent Speculation:

In this, you take the risk, without reading that situation you just doing this, because you think these stocks going high.

Because you listen this is a popular company and lots of people talk about this company so this is all are bullshit.

Those are stocks price, and you are paying for that stocks, so we can divide them into two components.

Investment and Speculative components of Price:

e.g. In 1939, General Electric stocks $38

so analyst judgement says that the investment of that stocks price is $25.

and other remains $13 is that speculation price.

so they represent the stocks market appraisal and long term prospects may be good and peoples bias is that this company is very good and they include the other factor of specular component.

So any investor/buyers pay more than the $25, then they have to recognise, they are paying for speculative possible so the author doesn’t say that this is wrong thinking or right thinking.

they have to just recognise that they are paying for speculation price also and they have to remember this fact then only your mind is set

If you think this is justifiable to pay more than the $25 then, this is Bullshit Think.

and your brain is not set for investing.

lastly, the author gives the relationship between intrinsic value, investment value and speculative value

Relation: Intrinsic value, Investment Value and Speculative Value:

So those are intrinsic value they can include in the speculative value also, but only for Intelligent Speculation.

So Intrinsic value has two components

  1. Investment Value
  2. Intelligent speculation value

If stocks price is equal to Intrinsic value and If they have more than then they include the unintelligent Speculation Value.

so this is all about the Difference between Investment and Speculation from the Security analysis book, chapter 4.

Annual Reports of the company: Security Analysis

Hello friends, in today’s article we see chapter 3 of the security analysis book. this chapter depends on sources of information. in these sources include the Annual reports of the company also. so let’s see which type of source of information available.

Previous Chapter 2: Problems of stocks Analysis

Annual Reports of The company: Security Analysis
So where we get the information about the company, before that you have to know which type of information we need to analyze the company.

So the author says, ” Analysts required three types of information”

What is Information Required:-Annual Reports of the company: security analysis

I) Terms of Issue

II) Data of Company

III) Data of Industry

so whose try to buy securities what is his terms and what condition they are buying the security? this all question come in this. (Annual Reports of the company)

so let’s starts with the terms of the issue

I) Terms of Issue:- (Annual Reports of the company)

Regarding Bonds, for this, you have to read the Bond indenture ( Bond Indenture is the type of contract and on that, all each and every terms and condition is written.)

Regarding Stocks, Consult the Charter ( In this charter the articles of incorporation present together with by-law)

Those documents are available with the SEC and proper stocks exchange like NYSE

II) Data on Company:

in these, we see the different types of sources that give the information about the company

so let’s see one by one

1) monthly Statement:

In this, some companies show the monthly statement, some not show, so those show, let’s see what the logic behind that of publishing the monthly statement.

we have some problems, If some company performance is improved then they show the monthly statements and those company performance going bad then they close the monthly statement means they discontinuous with these monthly statements reports.

So very few companies only publish the monthly statement

2) Quarterly Statement:

The quarterly statement you can get easily on the stock exchange, In India, you can get on the BSE and NSE stocks exchange websites. (Annual Reports of the company)

So each and every company issues the Quarterly statements, but some businesses like the Sugar business, chemical industry, fertilizers, and agriculture. so this type of company issue the moving figure of 12 months.

Because in four months earning is going high, and in next four-month, the earning comes to zero so if you read this quarterly statements then you get confused with this earnings so for this they issue the moving average figure of 12 months. The Quarterly statement is issued every 3 months later.

3) Semi-Annual Reports:

in this, the semi-annual reports are not the standard procedure to issue every company.

But some company publish the semi-annual reports, in this also have to detail knowledge of half fiscal year.

4) Annual Reports of Company:

Annual reports, so this report is mandatory and you get the more knowledge about the company in this reports.

So in this reports also present the remarks of President of company and vicechairman of the company about how the company does well in past and how to do well in future also means, the outlook of future of the company.

In 1940, some companies only show income statements and some companies show the balance sheet, and some companies show both.

so those show the income statement they don’t show the sales figure of the company in the income statement.

In the balance sheet, tangible and intangible assets are put together and nothing is separate in that time to distinguish. (Annual Reports of the company)

So they don’t show the sales figure because they say, competitors know about their sales figure and their competitor harm the company or business.

But nowadays, this type of problem does not remain.

 

5) Periodic reports to Public Agencies:

The Railroad and Public Utility companies send the reports to the central and state commission.

So in this reports the data is very much detailed as much as they don’t give the detail to the shareholders also.

So those are commission they publish the report regularly and data discloses.

So The author gives some examples of Companies’ commissions that publish the reports on it.

Cram Auto Service, This company give the weekly figure of motor car companies

Vilatant and Gray, This company gives the reports of sugar companies and how much production happens in crop year. (Annual Reports of the company)

The Oil and Gas General, This company show the reports on how much oil and gas is produced.

The Welvag, this company give the detail reports on how much equipment is ordered by companies.

The Dow Jon’s Company, This company give the reports on how much production of steel in weekly basis.

6) Listing Application:

Those are stocks exchange and those are securities exchange, in that so many things are disclosed when the company is going listed.

Or This is not disclosed detailed to the investors and this listing is happening irregularly.

But nowadays this information gets easily.

7) Registration Statement And Prospectuses:

The Registration Statement is bulky and those are the prospectuses they also more than 100 pages.

so this material has some value, you can see them.

8) Miscellaneous Official Reports:

This government division includes like US coal Commission.

This division gives the reports on the coal company.

so this type of division discloses the data that the own company never disclose data before.

Because the company discloses the data. (Annual Reports of the company)

Just like trade commission, that include natural gas pipeline or whatever come in that commission.

9) Statistical and Financial Publications:

An agency like Standard and poor, Moodys

So they issue reports on the company and whatever the data in this they are accurate, but we can’t fully rely on that we have to see the Annual reports of the company.

10) Request for Direct Information from Company:

In this, you can take the direct information from the company.

In this, you have to visit companies website and see their about pages and call them and ask what information you want. (Annual Reports of the company)
So Benjamin Graham says, ” you are the owner of the company, this never forgot. So whatever the big officer are there, you are the employer of them. so act like that”

The authors say, ” If you force the company legally to know about information, sometimes it’s gone expensive or you have to face the Courts.”

But you can ask him about the information that other companies are giving and why not this company is not giving, then you can ask this, so most of the time you get the information.

so lastly we have to see the Which type of industry is

III) Data on Industry:

so what you need to know about the industry, following are some points that help to clarify the which type of industry is.

  1. Histroy Of Industry: IN this you can see the how much old are industry, like now tech industry, this industry is 20 years old, like that you know the history of that and also know the DoT Com bubble. This type of history you have to find.
  2. Current State of Industry: At this point, you have to see what now the industry is doing and what the current status. (Annual Reports of the company)
  3. The prospective state of Industry: At this point, you can see what the perspective of the industry means what is the outlook of the future of this industry, how well do in the future.
  4. Problems of the industry: In this, you have to see the current problem and also the future coming problems in the industry.
  5. Data regarding output, consumption, stocks unfilled order, etc.

so above all types of questions answer, you have to know.

so this is good points to known about industry and you can take the good decision because you know the basics of the industry.

This is all about the Security analysis book, chapter 3 sources of Information.

Benjamin Graham Security Analysis: Chapter 2

Hello friends, in today’s article we see chapter 2 of Benjamin Graham and David dodd book Security Analysis. Chapter 2 is all about the Fundamental Elements in the problem of analysis. Quantitative and qualitative Factors. So let’s see what is the problem of analysis from Benjamin Graham and David Dodd’s book i.e. Security Analysis chapter 2.

In Previous Chapter 1, we talk about the what is the analysis.

Benjamin Graham Security Analysis: #Chapter 2
Now Imagine, analysts start the work and how they approach the particular problem, and what is that?

The objective of Security Analysis of stocks:-

There are two objectives of security analysis, this objective has to be answered by the analyst.

1) What securities should be bought for a given Purpose?

Because in this we have to focus on what we need, and what is your purpose and also what result you expect on that basis you can buy the securities.

2) Should the issue of Security Be bought, Sold, or retained?

To find these two objectives, we have to consider four factors.

1) The Security

2) The Price

3) The Time

4) The Person

In account taking the above four-factor, we can rephrase the second objective just like

A particular Individual at Particular Security can buy, sell or Hold for a particular price and a Particular time.

So let’s go reverse the Sequence of Four factors to make security analysis simple.

I) The Person:-

The person to person what they want, like they want tax assumption upon that they can buy Security.

For Tax assumption, they can buy the Low yield Securities. (Benjamin Graham Security Analysis: Chapter 2)

Or If they can pay Tax, then they can be the High yield Securities.

So this determines the needs of that person’s decision on securities and your decision also depends on time.

So the question that comes to your mind is how on time, so let’s see

How on time, In 1931, the Average return on bonds was 4.3% and, the railroad companies’ high-grade bonds give the 5% yield, so this was an attractive opportunity at that time.

But this same bond becomes Unattractive after 6 months and yield increases up to 5.86% from 4.3%.

When in 1931. the yield of the bond was 4.3% at that time the bond is given 5.2% from the Railroad company. And this was fixed, Whatever the year of maturity of that bond in five years or 10 years.

But in the Market, we get the 5.86% and you get only 5.2%. you get the loss as compared to market rates is 5.86% so this same bond is one time is Attractive and other time is Unattractive.

So your decision also depends on Time.

II) The Price:-

The High-grade bond price was not important when you select high-grade bonds.

Because, their price was rarely high, this happen in 1940 by the author.

So the Most attention was given to this the bond was more Secure or not.

If a bond price was high and then the bond adequately secure then also you have a maximum chance of lose, and also in common stocks have more chance of losing. (Benjamin Graham Security Analysis: Chapter 2)

if you paid the wrong price then you got the loss. This like following quote,

” Buying at wrong price stocks is as much as risky as buying wrong stocks.”

III) The Security:-

The Security and price both are going together.

the Author said, ” Aking this, Which security we have to invest and how much price were we pay for that, Instead that, you have to ask this was what enterprise, we have to invest and in which term we had to invest.”

In terms, not only price come, but they also include, stocks provision of issues and its status issues.

to understand these terms author given two examples,

(1) Commitment On Unattractive Term:-

In this we see, Before 1929, the Urban realistic value constantly increasing for a long time and this investment people think, it was safe, But those terms of issues were disadvantaged able.

Preferred stocks of New York Cities real estate, this provision of issue, was this ranking was junior and unqualified right is not available on dividends payment and status of issues is the New Building was constructing, for that this bond issued for raise money. (Benjamin Graham Security Analysis: Chapter 2)

This was so high-cost construction and there was no reserve for facing a hard time of the company.

Now let’s talk about the price. The price was that the dividend return was 6% and this return was very less than second mortgages but for taking this, there were plenty of advantages

so think these preferred stocks buy or not.

Let’s discuss the second commitment on Attractive terms.

(2) Commitment on Attractive Terms:

In 1932, Brooklyn railroad company sold the 5% yield bonds at $60 and 9.8% Yield of majority.

and the Railway industry is a takeover by the automobile industry.

So unattractive industry was, so let’s see what is the provision

the value of an investment for that this company was raising money, that value is more than that money was raised.

so this company stocks has stable and adequate earning power to pay interest payment and principle and this power is more time than this.

So let’s see the price so this companies bond price was very less than the other companies of subordinate bonds.

But this company price has to be high, generally, those are high-quality bonds, which has high price and yield is minimum, but

In this case, the price is low and the yield is high.

So this company yield was 9.3% and another company yield was 9% and this Brooklyn railroad companies bond also low quality. (Benjamin Graham Security Analysis: Chapter 2)

So author said, ” tell me which security, we have to buy or not”

So from these two examples, the main question was What was more beneficial and profitable.

In the Attractive company buy the security at unattractive terms.

in the unattractive company buy the security at attractive terms.

So the Attractive term was more important than the attractive company (enterprises) and Author also said, ” those were untrained buyers who don’t know how to buy for them, Buy the best and high-quality securities of reputable companies.

Because they don’t know about other things and they don’t have knowledge of other things.

But Those are expert buyers, this people sacrifice some quality because they don’t need that much quality. They buy that much quality for what they need and don’t need more quality.

just like that when you buy a watch, shoes or clothes. If this thing is looking good on you and have adequate quality then why you need the branded and expensive shoes just for looking good and for showing off for this you don’t need maximum quality, and also this is not like that every after the three-day watch is going stop and every time required the watchmaker, then this type of quality doesn’t need. we just need the adequate quality and look goods on us. Same like that those who need the maximum security then they can buy the expensive or high-grade bond of a popular company.

From this, we get the two principles

I) Untrained Security Buyer:

In this those are a weak company or unpopular, then untrained buyer can’t put money in this, because they do, they lose the money. So this is only for the untrained buyer.

II) Security Analysts:

In This point, the author says, ” Nearly every issue might be conceivably cheap in one price range and dear in another.”

So untrained buyers have to stick with that principle, which is the highest quality principle because they have a maximum risk for another place because they don’t have much knowledge of other places. so for those that are popular, that’s awesome good.

But for Analysts, this is not

If analysts think he is right in his judgment, then all world against him, they don’t have to leave that judgment. If their judgment is right, not like an egoist person and says my thinking is right.

Your thinking is wrong and you say, ” this is right so this type of behavior not expect. this like foolishness or stupidity. (Benjamin Graham Security Analysis: Chapter 2)

# Extent of Analysis:

How much we have to do analysis.

In this author says, ” Your practical judgment and your commonsense, how much you have to search deep.”

This author gives the examples

” One bond was that give 3% yield and other was those give 6% yield. So in a 3% yield bond, you have to do less analysis and in a 6% yield bond, you have to see this bond was well secure or not that gives a double return as compared to a 3% bond. so the most probability is that in maximum return the maximum risk in bonds.”

Then Author again says, ” What you do analysis depends on company to company and industry to industry, Like you see five years record of the railroad company and other company like chain store of Walmart. so you see in this company earning for five years, so that ok because this give the reasonable base of Safety.”

But you see oil Producing company and this company is not giving the reasonable bases of safety because this company business depends on external factor like the price of oil when they sell, and how much production in this year or future required this all depends on the external factor.

So they don’t produce maximum they have to produce whatever the demand of oil. If they do more, then the price is fall of that oil. (Benjamin Graham Security Analysis: Chapter 2)

So for this, you have to see which type of industry is also.

so the author says, there are two types of analysis

Types of Analysis:

I) Quantitative Analysis

II) Qualitative  Analysis

so let’s see Quantitative Analysis

I) Quantitative Analysis:

In this analysis, you have to see companies statistical data like ( Income statement, Balance sheet, Cashflow, etc)

For this analysis, the author gives the four things about quantitative Analysis

A) Capitalization

B) Earnings and Dividends

C) Assets and Liabilities

D) Operating Statistics

This four-point we see in another chapter because this book is all about the quantitative basis.

so let’s see the qualitative analysis

II) Qualitative Analysis:

In this, the author gives the five things in this analysis

A) Nature of Business

B) Relative position of the company in Industry

C) Geographical and Operating characteristics

D) Character of Management

E) Outlook for company, industry, business in General

so in this chapter, we see some factors of qualitative analysis.

so let’s see one by one

A) Nature of Business:

In this factor, some businesses perform well at some time, and at that same time, some businesses perform badly.

Like that, In 1923-1929, the Generous prosperity time was going on and there is no crash or anything.

Cans manufacture, Cigarette manufacture and chain stores, and also motion picture company, these four company do the well in this period of 1923-1929. (Benjamin Graham Security Analysis: Chapter 2)

But at that same time other companies of the Cotton industry, plumber, paper industry perform badly in this time.

so thinking like that Those companies perform badly at that time and they also perform badly in future also, and those companies perform well in past and also perform well in future, so this thinking is very wrong.

Those companies perform very well or those companies perform very badly in the past so understand that Now time is come to change.

For this, the author gives examples of company

The Public Utility

this company is Unpopular in 1919 when boom happen.

that time, bu tin 1927-1929, this public utility company become speculative

In 1933 the Cotton Industry, which are depressed for a long time, in this time grow very fast.

So you have to see the Nature of the Business factor.

 

B) Factor of Management:

This factor is double count by the Stock market.

Let’s see how ” those stocks price are earning increases that reflect the stocks, and those companies management is good they also consider in a stocks price.

so this double counting is this for those companies have high earning as compared to the other companies because they are high because they have good management. (Benjamin Graham Security Analysis: Chapter 2)

so management is good than the earning is high and that why we say, stock market double count the Management.

 

C) Future Earnings Trend:

So in past the earning record is good and increases in past; then this is a good sign but this is not like that in past perform good and they also perform well in future.

So in this what happen in past is fact and what happens in future is pure Assumptions

So we don’t know, what is the trend in the future.

But, we say, in past the average of earning in that may be near in future.

So that much we can say

We can’t say that these are trends that remain the same.

So in this, you are absolutely right or absolutely wrong.

for this author give the two examples

a) In 1929, those railroad companies’ earnings were 5 times more than the interest rate charges for the past 7 years.

So we can make sound judgment in this bond is this investment is good on this bond, but something happen like economic collapse and recession come or any other stream event happens so in this period also company may handle his problem.

In reality, the depression comes after 1929, this company performs well in this situation also.

b) In 1929, the Public Utility company show continuous growth in earnings but fixed charges were so heavy that they consumed nearly all net Income. (Benjamin Graham Security Analysis: Chapter 2)

But people think, This earning also continuous in future. so this prediction goes wrong and they got serious losses.

So people try to quantified the trends, often but it actually is a qualitative factor.

For this, The author says, ” Analysts have to consider future changes, this types of changes happen in future, but from that change, analysts don’t have to do profits from that

Instead of that, they have to guard the future changes

If you try to profits from that changes happen in the future, then you become optimistic, If you think to guard against changes, then you will become more alert.

 

D) Inherent Stability:

Inherent Stability is like Resistance to the change, which means They can resist the change.

If resist well then stability is good, which means those result in past, we can depend that result may be in future.

But stability is like a trend, People also do with this is quantified it.

but this is also the qualitative factor.

So this qualitative factor is derived by business nature, not a seeing statistical record, this is quantifiable.

So for this, the author gives the examples

E.g In 1932 the preferred stock issues of two companies one is Studebaker( this company sells the motors or manufactures them) and the other is First National Stores ( Grocery company). (Benjamin Graham Security Analysis: Chapter 2)

for previous 8 years

The earnings covered dividends of Studebaker by 26.2 times and that of first National stores by 6.3 times.

So tell me which is better

.

.

.

 

so obviously Studebaker is good because this company was stable and earnings was 26.6 times than Fixed charges.

But the answer is BiG NO

You are saying by just seeing the data and you quantified them.

Groceries business is more stable because they have stable demand and diversified location and inventory turnover are Rapid.

Those companies that making the Motor, in this has the maximum variation because this depends on popular trends, and also people can buy, in that situation, so we have to adjust as their demand is.

so the company doesn’t have any immunity to those things for this problem.

So many times in quantitative we have to see them from a qualitative point of view to get the proper sense.

and qualitative things, if we try to quantify them and then you don’t have to depend on that

So lastly author says for decision making.

A statistical exhibit is a necessary though by no means a sufficient condition for a favorable decision by the analysts.

So this is all about chapter 2 of benjamin Graham and David Dodd’s book of security analysis.

Benjamin Graham Security Analysis: Chapter 1

hello friend, in today’s article we see chapter 1 of Benjamin Graham’s book is Security analysis. In chapter 1 Benjamin Graham explains the scope and limitations of Security Analysis and the concept of intrinsic value. so let’s start chapter 1 of Benjamin Graham Security analysis book.

Previous Chapter: Introduction of Security Analysis book

Benjamin Graham Security Analysis: Chapter 1
Part -I: Survey and Approach:-benjamin graham security analysis

In this book, this is divided into five parts, in this first part include the five chapter,

then let’s start with the first chapter

Chapter 1: The scope and limitations of Security Analysis. The Concept of Intrinsic Value:

Firstly Benjamin Graham define the Analysis

What is Analysis: Careful study of available facts with the attempt to draw conclusions therefrom based on established principles and sound logic behind that.

Some part of Security Analysis is Scientific and another part is Art and Chance.

In the stock market, you will be successful on the basis is decided by the Scientific method and your art and your destiny also.

So Benjamin Graham develops this method and warren Buffett uses this method and use their own art and become the world’s richest person and greatest investor of all time.

This means this method is also dependent on Art. How people handle this method artfully is also important.

These three things of combination decide you fail or succeed in the market. (benjamin graham security analysis)

The author says, ” People do analysis up to the 1927 year after that New Era starts and people don’t do any analysis.

the author also says, ” If they do proper analysis, then people know in 1937, the price of stocks is high and in 1938 the price of stocks is low of GEneral Electrics company. ( we talk in the previous Chapter)

The author says, ” There are three functions of Analysis.”

1) Descriptive

2) Critical

3) Selectives

1) Descriptive functions:

In this function, we study the companies’ important information, and we present this information in a very sensible way.

From this, we know, the company’s strong point and weak point and we compare this point to other companies’ points.

2) Critical Functions:

The critical function is, those investment finance principles and corporate finance methods, both are used to analysis of securities analysis.

We take analytical judgement on Security analysis, which is applied on both principles and method of corporate, so that why this is a critical function of analysis.

3) Selective Functions:

Express specific judgments of its own determination in this function.

Whether an issue should be bought, sold, retained, or exchanged for some other.

so author give some examples for judgments

let’s see one by one (benjamin graham security analysis)

1) In 1928, the company was Louis-San Francisco Railway. this company issued 6% Non-cumulative preferred stocks, but from the company record, we know that there was in the companies history, companies earnings, never go 1.5 times of Fixed charges.

Fixed charges are those charges we have to pay, whatever happens in the company in the form of Interest payment or lease payment.

So the author asks us, this company we have to buy or not.

the answer is Not to buy

So this judgment was just like that not to use the brain, just apply common sense.

2) In 1932, The company name was Owens-Illinois Glass company. this company bonds at 5% trade at $70 in market place and 11% yield to maturity in 1939.

This companies earnings were much time more than the fixed charges.

Up to in depression in this also the earning is more than the fixed charges.

The bond issue was well covered by companies asset. (benjamin graham security analysis)

This means the Current asset Value is secure in the bond issue.

This means this is more than sufficient for paying fixed charges.

So this company, we have to buy or not

Answer: In this company, we get the security we can buy this company, and we are benefited from this company.

3) In 1922, the company Wright Aeronautical corporation, this company stock trade at $8 in the market place and $1 is paying a dividend.

And earning per share is $2 and company cash asset is more than $8 per share.

So this company we have to buy or not.

Answer: Definitely buy,

Because $8 was the cash asset and they trade also at $8 and their earning also $2. so in this we know don’t have to do anything, just buy this company.

4) In 1928, Wright Aeronautical corporation, this companies stocks goes to $280 in just 6 years. means (35X) the companies earning were $9 per share and Dividends were $2 per share.

NAV( Net Asset Value) was less than $50 per share.

So this company, we have to buy or not?

Answer: Not to Buy

Because suppose $50 was Net Asset Value and Earnings is 8, so take P/E ratio 20 the highest ratio.

The $160 form earings, and $50 form NAV and both get $210 and we assume the highest P/E ratio. So this stock price is $280, so we required more than $70. So this is maximum so don’t have to buy this company. (benjamin graham security analysis)

5) In 1933, Interborough Rapid Transport selling 5% and 7% notes of two types at the same price.

So those were each 7% note was secured by $1736 face amount than 5% notes.

Individually both were $1,000 whatever that was 5% notes or 7% notes.

So those Were 5% which had a Price was $1000 and they are secured at a %1736 face amount.

Obviously in these 7% notes is better than 5% and the rate is the same, so buying 7% notes is more beneficial than 5%.

6) In 1936, Paramount Picture, this company sells the Convertibles preferred stocks at $113, and Common stock was selling at 15 7/8 dollar.

So in past, there was a share price shown in a fraction and people can buy this fraction amount of share.

So this companies preferred stock was can be converted into 7 common shares and they had accumulated dividends of $1 per share.

Common stocks holder could have exchanged their shares for 1/7th as many preferred stocks, and they gain in both dividends and principal value also.

then the author says, ” so many people think book value was intrinsic value, so they were very wrong on this point. (benjamin graham security analysis)

Because not a companies earning value or not companies stocks. the market price is not related in any way.

So after this, the new thinking born. ” those are intrinsic value is determined by earning power.

so from this also intrinsic value have a definite figure. so this is also no a reliable way to find intrinsic value.

Because, the intrinsic value is not anyone known or not anyone finds, but we can take the range( between two points) of whatever the intrinsic price range, this is the highest maximum work for finding intrinsic value.

7) J. I company, this case, in 1933, selling at %80 and Asset value per share $176 and not paying any dividend.

And the average earnings for the past 10 years were equaled to $9.5 per share so this is in 1933, happening and the author talks about this timeline of 1933.

But the result of the previous year in 1932, the loss of $17 per share. so those we take the average earning of previous 10 past years is $9.5 found.

In these 10 years, the recently previous 3 years having losses continuously and those last 3 years of 10 years, also have loses but only good profit at in a middle year.

So the author says, tell me these stocks buy or not.

Answer: So in this author give the explanation is those we figure out the $9.5 average per share, is not reliable, this is because Earning is maximumly fluctuated so this average not represent company condition.

Instead, that 10 years was positive returns continuously, but this not happen. this company’s first 3 past years is negative and last three years of 10 years in past also the negative returns, and in middle, they give the positive returns. so from this, we can not conclude that what will happen in the future would positive or negative. (benjamin graham security analysis)

So from this, we can not find anything so this makes us confuse and doubtful about the future.

If companies price is $10 per share, then this company is showing a buy indication.

But we were not sure to buy at $30 because this earning is not gives a reliable estimate.

Benjamin Graham says, ” we don’t have to find out the exact value of intrinsic value.”

We just have to find out the intrinsic value is adequate. Because this just justify to buy and they are considered high or not on the market price of stocks.

So the author says, ‘ this is very simple.’

because, we can easily say, which women are eligible for the vote or not only just seeing that women. so whatever the age of that women, we don’t need to know that women’s exact age.

or for Man

We can easily say, which man has overweight than his actual weight, so we don’t need to find out the exact weight of that man.

we don’t need to find out the BMI

So just like that, we can find out the intrinsic value is more than the market price or minimum than market price.

after this author says, ” there are three obstacles to face analyst”

Three Obstacles to Success of Analyst:

1) Inadequacy or Incorrectness of data:

This means, the information has the analyst they are not accurate, they are wrong, then the analysis also goes wrong.

So authors say, ” Very few companies are that give the wrong data or mistake data, they can miss a change or hide so one data but or not give mistake data. so those are very few companies. (benjamin graham security analysis)

Because nowadays, the rules, and regulation is more and analyst can also find by simply applying their skill.

2) Uncertainties of Future:

so the author says, ” Future is uncertain and unpredictable in this there is no doubt?”

But, some companies are like that we can predict past and future also, like some stable companies business in normal condition. but in depression or recession time this companies we can’t predict.

So then all future prediction is meaningless.

3) Irrational behavior of Market:

In this we have problem is the company is staying undervalued for a long time and we buy that stocks at undervalued and these stocks never come at a fair price.

So we trapped in there, so this can happen, or most time happen in past. (benjamin graham security analysis)

Or like this may be happening is the stock is overvalued and never come in their fairvalue.

In Value Investing We take the two assumptions

  1. The market price of stocks is misaligned with the actual price.
  2. So Market have inheritance Tendencies to do the right things. ( those desperate in market price and actual value stocks between them)

So this corrects by the market and it has an inheritance quality of the market.

So this may happen tomorrow, next month, or next year, but happen definately correct.

So these two assumption we take, the author then says, ” The relation is between intrinsic value and market stock price is

A market is a Voting machine in the Short term and a Weighting machine in the Long run.

So those who do speculation and those who do analysis in speculation are also the stupidity things.

Because in speculation, the most important factor is luck or chance, and that why the analysis value is minimum this also the same in r00lay games there are odds is opposite to you.

So we have to treat analysis as Auxillary and additional things, not a guide while doing speculation in time.

This is all about Chapter 1 of Benjamin Graham’s security analysis book. The scope and limitation of security analysis and the basic concept of intrinsic value.

Security Analysis Book Introduction

Hello friends, in today’s article we see the introduction of the Security analysis book written by Benjamin Graham and David Dodd. This book also called as Bible of Value Investing. If you want to do an analysis of stocks individually then read this book. According to warren buffet, this is the best ever written on value investing, this line is written by Warren Buffett on the book cover. If you want to buy this book then click on the below image.

Security Analysis Book Introduction
Security Analysis Book Introduction:

The author gives advice about this book while you are reading this book

About this book(security analysis):-

  • This book is intended for those who have a serious interest in Security Analysis.
  • Not Addressed to complete Novice you should know about basic financial terms to understand this book.
  • So that those are nothing know about financial terms, then this is a book not for you.
  • In this book, we learn, how to analyze stock individually and general principles and standards to select companies.

In the introduction, part author talks about three timelines i.e. 1911-1913, 1923-25, and 1936-38.

Authors say about 1911-1913, this time is normal but market time also changes and shows volatility.

In 1911-13, this timeline the market very less fluctuates.

In 1923-25, this timeline the market is less fluctuated.

In 1936-38, in this timeline, the market is more fluctuation

So in this book whatever we talk about is in the past in 1940, so imagine yourself in 1940.

so let’s start,

The author says, ” Whenever the time is changing, with that market also changing and bring the new problem to the investors.”

This all discussion we see in the introduction part, let’s start with step-by-step which type of problem actually we face in different securities. (Security Analysis Book Introduction)

  1. High-Grade bonds and preferred stocks
  2. Speculative bonds and preferred stocks
  3. Common Stocks

so let’s start with first

1) high-Grade bonds and Preferred stocks:

The author says, ” in past people is buying the securities blindly and keep them in a safe place and forget about that securities and after some(year) time they see that securities are doing well, and this strategy is working good.”

But in today’s ( means 1940) Investors have to face three major problems.

A) Safety of principal and interest

B) Future of Interest rates and bond price

C) Value of a dollar

let’s start with the first problem

A) Safety of principal and Interest:

in these we see, in past old idea is to buy securities and say this is the permanent investment and nothing happen this security we buy and keep this safe and then also strategy is working, but these things do not happen yet now.

Now time, nothing is a permanent investment, no one a single thing in which you can put money and forget about that things. (Security Analysis Book Introduction)

Principal and interest safety, if you apply very strict standard to buy this security. so this mistake does not happen. (Security Analysis Book Introduction)

B) Future of interest rates and Bond prices:

In the past, bond yield is very high, but before 1940, the yield of bonds is going low.

So the author is now in two situations, is that yield is permanent or temporary.

If yield is temporary, then the yield is going to increase so 20-25 bond prices are falling, then we have to be ready for this.

If yield is permanent then this investment is in high-grade bonds and preferred stocks, then this investment is not good enough, Because you get very low on that investment.

The authors say, to be safe from this then you can buy medium-term bonds, those that have 15 years maturity, so those not more longer or not shorter in the year. so the investment is also going in cash as compared to longer periods bonds. (Security Analysis Book Introduction)

let’s see the third problem,

C) Value of a Dollar:

If the value of a dollar is down then people buy the common stocks.

this is because, for example, if you buy bonds for five years and you get the time to time got payment.

Let’s suppose you get $20 each after 6 months for long five years

so you get 10 time $2o if the value of the dollar is minimum (means that earning power is going less)

So you earn $20 earnings from bonds, but you can not buy some value of things, before $20 then after $20 means

In the future, you get $20 dollars then work less than past $20 and buy the minimum things as compare to the past $20.

So this is because of dollar price is going down, so this investment is not benefited because your payment is fixed.

When the dollar price goes down, your earning power has to increase to buy some amount of the same things in past and future also.

For this, there is only one solution, which is that put your surplus money in both, bonds as well as stocks.

2) Speculative Bonds and Preferred stocks

In this, we see some problems, lets stats

A) Risk of principal loss, not offset by a higher yield done:

This author says, Losing of principal is not offset by a higher yield, because this type of bond is very risky.

In this bond, we can lose our principal so, that’s why they give maximum yield than before we discussed ( High-grade bonds)

Because High-grade bonds have minimum yield and this has a maximum yield.

So in this bond, only a high yield is not benefited because we required the chance to profit our principal means then we have the advantage of invest in this bond. (Security Analysis Book Introduction)

B) Approach them as common stocks with limited claims:

Think like this, this is not senior security of inferior type.

 

3) Common Stocks:

The author defines firstly, which are the good stocks? the good stocks who called those are leading company in their industry and those have good records and in future also have good prospects, and thinking is doing good in future also as like in past. and they are in a leading company.

The author gives for this an example of General Electrics

Other good stocks of those company which is rightly financed and there is future prospects very attractive means past record is not good but future is bright and does a better performance in future. e.g. Abert Laboratories

the author says, ” people are neglecting the quantitative standards nowadays and mostly depends on future and future and says future earning is going high.

if suddenly earning increases then people don’t take average earning, they take high earning points and forget about the past earning and they find out the P/E ratio. (Security Analysis Book Introduction)

suppose companies earning is same as first not big much change, then you can take previous year earnings, and take the P/E ratio.

But earning first is very less and suddenly increases, then and you take the same previous ratio this is not the right way.

And some people buy stocks on the only basis of P/E and they think the P/E ratio is standard.

So the authors say, ” P/E ratio is not any standard.”

The P/E ratio is not controlled by your investment. your investment and other people’s investment control the P/E RATIO.

The authors say, ” those are investment trust, they make the speculation in strong company, and by the strong and leading company shares.

You can see nowadays also many famous mutual funds, everyone is doing same and everyone has the same leading company shares.

you can go to any industry that company is leading company, then this investment trust has that company shares.

So those people don’t do any analysis and some people almost forget about analysis they only do speculation in a good and leading company.

the author then gives examples of General Electrics. In 1937 the General Electrics value is about 1.87 billion dollars and after one year in 1938, this company value going to is about 0.78 billion dollar

Means in one year this company lose their value almost 50 %.

So the author says, what happened in 12 months this big company value go down up to 50% destroyed.

The author says, ” This is only happening because in 1937 people are optimistic about the company and those people also pessimistic in 1938 on the company. (Security Analysis Book Introduction)

So the company is doing the same as the previous year and now also doing the same, so the company doesn’t to any better in the year and not any do badly in this year to say the reason for that in the year 1938.

Then the author says, “people speak like in 1937, whatever the price of that company is really the price and in 1938 whatever the price of the company is as real like in 1937 of our investment. So this value is going down and people say this is the reality of this company.

If you speak like this, its means, you understand the language or you are stupid.

you don’t have the common sense

In common stocks, there will be four major problems, let’s see one by one

A) General future of Corporate Profits:

the author says, ” No one predicts the future, and people say, ‘ railway stocks are safe and sometime after automobiles company come and compete with daily company and perform well than daily stocks.

so nothing is sure about the future.

So about this, The author says, ” You can pay for only past and current earning and don’t pay for the future earning, try to get future earning in free.”

 

B) Quality differential between companies:

In this problem, Those are good stocks ( leading company stocks) these stocks trade very high multiple in the marketplace, then the secondary companies stocks. (that company is smaller than the leading company)

People think that companies are big, they are going bigger and those companies are small they go vanish or disappear in the coming future.

the author says, ” this company has two problems, the first problem is that their size is big so growth is not increased by the company and another second problem is this return on invested capital they get a minimum return.

Those companies are big, so there are so many companies that try to compete, and get the advantage from that come of leading company if any competitor doesn’t do anything to collapse them then the government does with that leading company. ( understand with examples of Apple and Microsoft, Microsoft company know that government is a mess with us when apple company goes bankrupt, that why Bill gates, buy the non-voting shares of the company and save the apple company while dealing with the Steve jobs. This is the most time happen with the company, so those are leading company that has to be competitive or government will mesh with them.)

C) Interest Rates:

We firstly talk about the bond yield, in the above point in the past there is a high yield, but now the day yield is low.

If this is permanent then the stocks yield average go also minimum. (Security Analysis Book Introduction)

Because, people also invest in stocks, instead of a bond, and then crowd increase and common stocks yield also come.

 

D) Factor of Timing:

The author says, according to him, time the market with successfully is the impossible thing.

Until that right time has come, and when we get the attractive price, the author says, this Is a good time to market.

If this is not happening, then there is no right time to buying the stocks.

The author says, ” timing principles is when the market shows the uptrend means, from now market goes high and they decide now the uptrend, like people to do technical analysis.”

this philosophy of timing is opposite to the investment nature.

This philosophy says, that, ” investor has to be patient until the market is encouraging himself too says, now I am going high and you now do investment in me.

The author says in the conclusion part of the Introduction of security analysis.

Investors should wait for periods of depressed business and market levels to buy representative common stocks. otherwise, he will have to acquire them at prices that the future may cause him to regret.

and Secondary companies offer great opportunities except in the overall bull market. then the leading company in the industry.

Common Stocks and Uncommon Profits book review

Hello friends, In today’s article we see chapter 11 of the common stocks and uncommon profits book review. chapter 11 is about the summary and conclusion of common stocks and uncommon profits book review. So let’s start summaries the whole book in simple words.

Previous Chapter 10

Common Stocks and Uncommon Profits: Chapter 11- Summary and Conclusion
Summary and conclusion:-common stocks and uncommon profits book review

In chapter 11 The author explains the whole book in a simple format or we say summary and conclusion. so let’s start with them.

This book has attempted to show

  • What are the basic principles of Common Stocks investment: In this author explain which point we have to consider while coming to common stocks and also explain how people make money while using the two techniques in past, and we know in the stocks market we can make a tonne of money just finding the outstanding company.
  • What type of stock to buy: In this point, the author explains the outstanding company stocks. How to find them, while using the Scuttlebutt method and applying the 15 points of principles of outstanding company. So this type of stocks we have to buy. (common stocks and uncommon profits book review)
  • When to buy it: When you find out the outstanding company, then there is some time we have to buy while seeing the scenario of buying principles, this point explains in the whole format, you can see it by click here.
  • When to Sell it (Never): In this point, the author explains the philosophy of selling stocks, and why you have to sell stocks when you required very much emergency, but if there is no emergency then don’t sell stocks. The author explains the Never sell stocks ever philosophy and behind that reason. you can see in detail click here.

The author says, ” if you don’t have patience and self-disciple, so you can not do anything good in the stock market while knowing all this above method strategy.

In the stocks market, having the mind or cleaver ness is not sufficient to do good in the stocks market, you have to right mindset then you do better than those people who say themselves professional.

Shakespeare unintentionally summarized the process of successful common stocks investment: ” There’s a tide in the affairs of men, which taken at the flood, leads on to fortune.”

It means, to grab opportunities whenever they arise before you lose them by delaying.

Doing this can make you a fortune.

This is all about chapter 11: summary and Conclusion.

I hope you love this book summary of all chapters that explain.

How to find growth stocks

Hello friends, in today’s article we see how to find growth stocks from chapter 10 how I go about finding growth stock of book common stocks and uncommon profits. In chapter 10 Philip A. Fisher explains, how they find the growth stocks. so let’s see step by step

Previous Chapter 9

How to find growth stocks
The step-by-step process for find a growth stock:

Philip A. Fisher says finding growth stocks and doing these things take a great deal of Time, Skill, and Alertness.

Philip A. Fisher says, ” This is what it is, there is no easy way to find growth stocks.”

So there are thousands, of stocks in dozens of industries that could qualify as worthy of more intensive study.

How do decide which stocks to investigate further? given these question answers, Philip A. Fisher gives the following points:

a) you can decide stock to investigate further by talking to business executives and scientists. Philip A. Fisher says, ” 20% of ideas and 16% of purchases come from this source of people.

b) You can also decide stock investigate further by talking to able investment men across the country with impressive records. Philip A. Fisher says, ” 80% ideas and 84% purchases come from this source of peoples.

 

The Authors( Philip A. Fisher) looks for some key matters while talking to these people in order to decide whether to investigate further or not.

for example any company

  • Is this company being steered towards the line of business having opportunities for unusual growth in sales?
  • would it be easy for newcomers to enter these business lines and displace leading units?

If sales growth easily growing and new companies easily not enter this business line.

Then the author ( Philip A. Fisher) investigate further this company. If this company is not true on the above question then the author rejects that company. (How to find growth stocks)

When Mohnish Pabrai meets charlie Munger then charlie says, to successful investing you have to see what able investor doing and what to buy and then you can investigate further of that stocks. the same author also does before this great investor.

from this your work is simple and then you can not have to investigate 1000 of the company for one idea and this is not easy to investigate 1000 of the company. so use this method.

The Author decides by talking about these two types of people, which the company has to investigate. after this  author gives

What to Do Next:-How to find growth stocks

After deciding which companies to investigate further, the next step is following:

A) What The author doesn’t do this:

  1. The author doesn’t approach management at this stage.
  2. He doesn’t go over part annual reports for hours and hours and making minute studies of minor year-by-year changes in the balance sheet of the compnay.
  3. The author doesn’t ask every broker about the broker’s opinion on the stock of the company.

So what to do author give below:

B) What The author does do this:

  1. The author does a Glance over the balance sheet to determine the general nature of capitalization structure and financial position.
  2. And they also Read SEC prospects for the breakdown of sales by product lines, competition degree of promoter ownership, profits margins, the extent of research activity, the abnormal or non-recurring cost in prior year operations. (How to find growth stocks)

Then the author uses the scuttlebutt method as best as he can use this method.

In this, The author meets every key customer and supplier, competitors, ex-employee, and scientists to find answers to the 15 points.

the author meets him with common friends and if they can’t meet them, then they reject the company.

If you want to meet these key people so don’t meet general call or direct meeting, for this purpose you have to call them officially and assure them their name never come anywhere, then you get 15 points solutions.

Some people think, how management meet me, so for author says,” Management doesn’t see how much you can invest in a company, they only see the how much confidence you have about this stocks.”

after meetings key peoples then the author gives what to do next as following:

What Next:

Then author approaches the management to fill the gaps in 15 points they get information from the key peoples.

The author says, ” Scuttlebutt method helps to you know the strengths and weakness of a company, so you can ask to meet specific officers of the company.”

For example, if Scuttlebutt’s method tells you there is some trouble in the marketing division, you can ask to meet people from the marketing division to find out whether they are doing something to improve the situation or not.

the author gives advice to us, say ” never meet the management of any company until you have first gathered together at least 50% of all the knowledge you need to make the investment.

The amount of time management will give you depends on the company is an estimate of your competence than the size of your financial interest. (How to find growth stocks)

It is wise to be introduced to management by the right people.

  1. The companies considered as idea bought from 250 ideas, then choose one
  2. Those companies investigated actually bought from 40 to 50 ideas, then choose one.
  3. the companies visited  to meet management actually bought from 2 to 2.5 idea, then choose one

This is because the Scuttlebutt method gives a completely accurate picture of a company on 15 points. If the author decides to meet the mangement. so there is a high chance is to buy that stocks.

 

from the above deep process, the author choose the company or find the growth stocks

In the shot above process, I make the summary process format of finding growth stocks

Summary of Process:-

  1. 20% of ideas come from friends who are business executives and scientists, and 80% of ideas come from a small number of able investment men.
  2. Brief scrutiny of few point in SEC prospectus, scuttlebutt method aggressively for 15 points.
  3. Contact the management only in occasional cases when 15 points are qualified by the company reasonably.
  4. If hopes confirmed as fear cases after meetings with the management, then buy that stocks. (How to find growth stocks)

Now people ask others and say’,” How can someone be expected to spend so much time finding just one investment.”

So answering these questions the author give, ” In what other line of activity, you put $ 10,000 in one year and then years later it becomes $ 40,000 to $ 150,000.”

So reading this you get the mindset of following Philip A. Fisher’s method of finding growth stocks.

So this is all about chapter 10 of the common stocks and uncommon profits book.