Investing

Security Analysis: Chapter 12

September 30, 2021 by Laxman Sonale Leave a Comment

Hello friends in today’s article, we see chapter 12 of the Security analysis book. In this chapter, we see a special factor in the Analysis of Railroad and Public-Utility companies. so let’s start with Railroad Bond analysis.

Previous Chapter

Railroad Bond Analysis:-Security Analysis: Chapter 12

so let’s, in this

The authors said, ” those are railroad companies they have maximum data. so those are individuals who have the competency to analyze data correctly.

The author also, says, ” if we have to do high-grade bond analysis, then why we invest in this bond, instead of a bond.

we can invest in stocks, with that much analysis, which means, there are no more benefits of analysis when we invest in the high-grade bond.

Just we have to keep remember is that those are income generating, they are more above the interest charges means good interest coverage ratios. (Security Analysis: Chapter 12)

so another thing, is that those are stock value ratio is also high.

Then the author talks about the railroad industry general things like

those are light traffic, they go in the truck, and those are passenger traffic they go in their own car.

so only heavy traffic remains for Railroad, traffic like, Coal, iron steal, mineral transport.

so railroad success, depends on this thing also, that much increases then profit increases.

and another also quantitative part is an available book, if you want to learn, more about the railroad, then buy the book from the following link

so let’s start with Public Utility company bond analysis

Public Utility Bond Analysis:-Security Analysis: Chapter 12

In public utility bond analysis have three problems, they are as follows

1 ) People think, the application of the term of the public utility to on industrial operations.

so this is not the right thing, for the right things, we have to define and understand the public utility definition.

Public utilities are those types of companies that are providing essential services under government regulation and the most important thing is on public utility is ‘ they are stable and have legal right to charge that much to be a profitable and good return on capital investment.

stability means,

They are relatively stable with other companies in the same industry.

then the author says,” Nowadays, pseudo Utility comes more like, selling ice, operating taxi cabs, owning cold storage plant. so people also called, then also public utility.

So this is the first problem,

so these are actually industrial operations but they mean people called them a public utility.

Nowadays their combination come( 1933)(author talk in 1933, don’t forget that)

like, Natural gas is combined with Ice Plant. (Security Analysis: Chapter 12)

2) the second problem is that this one bond issue whatever their prospective they use the prior-deductions method to calculate interest coverage ratio.

we lastly talk about this method, is they are a useless method, we have to use total method.

This problem is that those are junior bond issues, they are more covered properly as compare to senior bond issues.

If you apply common sense, you see these are nonsense things.

3) the third problem is that companies do not include the depression charges, while considered or finding interest coverage ratio. if they may be understated depression or not include then.

If someone says, your depreciation is the only bookkeeping thing concept, then your money is not spent properly.

then it means, that if you listen then or agree with them, that means they make you fools or you become a fool by them.

Depression is important and you have to subtract them, because, your instruments use daily, and their value becomes less sometimes later they become obsolete.

So that instruments losing their power by using daily, for that we have to subtract depreciation and other problem is unstable in this problem, the author says,

minimum 10% of gross revenue and 4% of total profit value, that much have to subtract.

If you want to be more conservative, then you can take 12% of gross revenue as a minimum.

4) there is the fourth problem is that

those are Federal taxes are imposed after deduction interest.

How you can find, = EBIT/interest expenses

But most of the time, those are corporate people, in their reports, they deduct the tax first, and then show the earning, and then coverage ratio is found. (Security Analysis: Chapter 12)

So you don’t give the tax paid first, so in this, you don’t worry about from where I am and add tax and earning the become minimum.

So this is a good thing, you have become more conservative and you take past then actual earning, so this is no problem.

because they don’t give any big difference by adding tax.

But if you analysis of a Holding company bond, then, you have to worry about some

So those are holding company they have to pay subsidiaries and their subsidiaries bond issues and preferred stocks payments.

So holding company, first have to pay their subsidiaries preferred stocks or bond issues, and after that holding companies bond issues charges.

so in this, we have to consider the tax.

Those are preferred dividends, you have to pay to subsidiaries and tax on them and after whatever earnings come, you can use it. (Security Analysis: Chapter 12)

Then the author gives the Example, How a company fools the Investor.

How a company Fools the Investor:

The companies debenture Issues, they have price is about $3,000,000

and companies business is, this company operate 20 telephone companies and 4 ice companies.

Value of property = $12,500,000

After depreciation, this value is equal to $1650 per $1000 bond issues after deduction of prior obligations.

so following are the income account.

Gross earnings – $3,361,000

Net Before Depreciation – $969,000

Prior Deductions – $441,000

Balance for Debentures – $528,000

interest on Debentures – $195,000

Balance for Stocks – $ 333,000

the Balace is above 2.71 X(times) interest on this issues.

so how they found this,

so Coverage ratio= Debentures balance / Interest of debentures

coverage ratio = $528,000 / $195,000

coverage ratio = 2.71X

the question arises

What is the problem with these ratios

so the first problem in this is as follows

1) Business combined means, the actual utility is mixed with industrial operations but they are ice plants. (Security Analysis: Chapter 12)

and they don’t give the gross and net income of ice plants

we don’t know how much percentage from the ice plant and how much percent from the telephone company.

so they don’t give us

if we assume ice business give maximum percentage income, that’s why they try to hide this.

second problem

2) the second problem is Depreciation is not subtracted.

Those are other telephone companies whose 15% of gross revenue is the depreciation.

so,

If we take 15% of depreciation = 15% of $3,361,000

depreciation = $ 500,000

If we take Net income after depreciation = $969,000 – $500,000

Net Income = $ 469,000

and then we take calculations as follows, we get the result

Balance for debentures = $ 469,000 – $441,000

Balnce for debentures = $ 28,000

and Interest on debentures = $ 195,000

so they are not equal to the debentures

this is the trick

so if we can not assume $500,000 depreciation, Because, those are ICE plants, their depreciation is very less.

so we can assume depreciation as $300,000 ( i.e. 9th 1/2 % of Gross revenue.)

third problem

3) Third Problem is that they used the prior- Deductions method.

In this we get the debentures safety

Debentures safety = $ 528,000 / $195,000

Debenture safety= 2.71X

and If we see for the senior bond issue, we get as follows

Senior bond safety= $969,000 / $441,000

Means Senior Issue is less secured and Debenture issues is more secure(junior bond issues)

So this is not a logical thing, as compared to the seniority (Security Analysis: Chapter 12)

If we make the right income account is as follows

Restating property:

Gross Earnings – $3,361,000

Net before Depreciation – $969,000

Depreciation – $ 300,000

Balance for Interest – $669,000

Total Interest Charges – $441,000 + $195,000

Total Interest charges – $636,000

Coverage Ratio – $669,000 / $636,000

Coverage Ratio – 1.05X

so forth problem

4) So fourth problem is that,

they say, $1650 of property value behind each $1000 debentures

so given,

Property Value – $12.5 million

Total Debt – $ 10.5 Million

Senior debt – $7.5 Million

Debentures – $ 3 million

so how much actual coverage ratio, we get

let’s find it out

for that,

Calculations:

property Value / Total Debt = $ 12.5 M / $10.5 M = 1.19

( M denote here – Millions)

It means only, i.e. $1190 of property value behind $1000 of total Debt.

so what companies say, How they get see following calculations

where they misguided ( mistake) (Security Analysis: Chapter 12)

Property Value for Debentures = $ 12.5 M – $ 7.5 M

Property Value for debentures:- $ 5 M

Debentures = $ 3 M

Property / total Debt = $ 5 M / $ 3 M

so that why come $ 1650

so in this time, they used the prior deductions method ( that method secure junior) to fool investor

if we apply for senior, then they are $ 1400 of property value behind each $1000 of senior debt.

Means Senior is less safe if we see the only a number

so this type, Companies make fool to investor

How to Become a Millionaire before 30

August 30, 2021 by Laxman Sonale Leave a Comment

Hello friends, in today’s article, we see how to become a millionaire before age of 30. In this, we see the simple process. so let’s start the process of becoming a Millionaire.

Process of Becoming a Millionaire Before 30:

so let’s understand step by step

Understand how the business world works.

In today the world is of the 21st-century world, in this, anyone become the millionaire before age of 30. or some people become the millionaire in at age of 18 or before age of 20.

so If you want to become a millionaire before age of 30, then you have to do your own business.

or become the partner of business, so for this Warren Buffett give the very simple rule, everyone listens to that quote but no one establishes, and those are established that rule, they become the millionaire or also billionaire.

so those quote warren Buffett told if you follow this quote, then you forgot the number of money, that you earning every month or year, that quote is

” If you want to be rich or millionaire, then close your door, and Be fearful when others are greedy and be greedy when others are fearful.”

so let’s understand the meaning of this quote

its simple meaning is that, Buy when everyone is selling and sell when everyone is buying.

so everyone no the rule of demand and supply

When demand increases then the price of a thing ( for example share) increases, and when supply increase then the price of share decreases.

so in the world, business is all about the supply and demand of products.

so in that what can we do to become the millionaire before 30?

What can we do to become a millionaire:

In the first point, you know how the business world works, in that you learn the all money depends on supply and demand.

If we follow the rule of the quote, then understand with an example,

If Apple price is 100 rupees per kilogram, then suddenly news spread

if anyone eats the apple, they die within the 10 days, so then all people or crowd, next day, they don’t buy the apply, instead of that they can buy any other fruits like banana, etc.

In this scenario, we have to understand the real reason behind that news and in this time everyone is trying to sell the apple, and you get that apple 10 rupees per kg, because, people think, the apple is the very dangerous fruits, they don’t buy the apple, and you get the apple at under intrinsic value of that apple.

In this scenario, you just do the only one thing is that you make the money about 90% while, just buying when others are selling, so we know that the news come and go in the market,

In the next case, what happened when news come, let’s see

If you eat the only apple then you live a health-free life, or you can say good buy to the doctor, while eating Apple a day keep the doctor away, as this quote.

so After listing this news all people of the crowd, then try to buy the apple as much as they can, so in this action, those are selling the apple, you also selling apple, because, in the last news, you buy the apples, and now the time, come, the price of all increase up to 1000 rupees, because, demand increases, and all crowd of people the apples, so

In that scenario, you make the 100X times money from that a kg of apple, that you buy the only of the 10 rupees and sell for 1000 rupees.

so now you understand the power of that quote, so suppose take some scenario of buying you apple, when first news come,

1st Scenario: If you buy the 10,000 rupees apple and you get the 1000 kg apple, and you sell them 1000 rupees, let’s take simple equition= 1000kg * 1000 rupees = 10,00,000 rupees.

Suppose in

2nd Scenario: If you buy the 1,00,000 rupes apple and you get the 10,000 kg apple and you sell them 1000 rupee per kg, and then you make, the = 1,00,00,000 rupees means, you make 1 crore ruppes.

so you can take whatever you think, as your mind limitation, and imagine them with this quote and you become a millionaire as well as multi-millionaire also.

so, the most important thing is that the money is not in the bank or not in the reserve bank or not in any business, the real, money stays within the people, you just to make the process to take from them while giving them any service or take the benefit of their stupidity.

so In this instead of apple, you can buy any other thing like bonds, shares, real estate, or any other business.

just you have to follow this quote.

so this looks simple, but not an easy thing, you have to develop the emotional disciple and stand against the crowd when you thought and facts are right.

so this is a simple process, just you have to develop the Entrepreneur mindset.

so many of people things, how we know the when just see surround people and then you know the what to buy.

Different Types of Way to Become Millionaire Before 30:

so there are so many ways to become a millionaire before 30, in between that some of them are as follows:

1) Internet:

so we know today’s most powerful thing is the internet, with the help of the internet, you can sell your product worldwide, and also get the payment instantly.

So On the internet, we should have to see the demand of things, like teaching, web designing knowledge of any other thing, that brings the help to lots of people while solving their problems.

In this area, you can do marketing, affiliate marketing, repositioning, etc.

2) ShareMarket:

lots of people, think, share market is gambling, and most people, don’t invest in the share market.

But the Share market can also help you to become a millionaire before 30.

and this proved by the Share Market greatest Investor Warren Buffett.

But share market is very volatile in short term. but for this first, you need the Money or you can help other people to manage their finance, you can become a millionaire, because, managing money is the best way to make money.

3) Real Estate:

this is also the most wonderful way to become a millionaire and earn passive income, while you sleeping.

but this thing also takes the money, but in this, you have to learn first, of above two methods, first of all, you have to learn and become the expert in that field.

In Real estate, you have to learn, about Tax, and Debt, and also financial knowledge, like accounting, rules of real estate, etc.

4) Teaching:

In this, you have to reach people, and you can become a millionaire, so for this, you have to found out your passion and in that passion what the problem people facing.

New York time besting selling book Secrets of the Millionaire Mind author says( T. Harv Eker) the easiest way to become rich is teaching, and you also enjoy while helping others.

so you just have to see the demand or you can also see or supply what the people demanding.

so this is a simple way to become a millionaire before age of 30.

so this is all about becoming a millionaire before 30.

Security Analysis chapter 11

August 19, 2021 by Laxman Sonale 2 Comments

In this article we see the Security Analysis chapter 11 summary, In this summary, the author explains Criteria 7 of the Specific standard for bond investment, ( continued) so let’s talk about his criteria 7 i.e. Relation of Stock Capitalization to bonded debt.

Previous Chapter

Criteria- 7: Relation of Stock Capitalization to bonded debt:-Security Analysis chapter 11

so the question comes which thing of this criteria?

so this criterion is of principle 4 or principle 4 is of Bond selection, why do we talk about bond selection?

because we talk about Class-I security in this whole Part-II of this security analysis book.

so this above picture, you don’t have to be forgotten. (Security Analysis chapter 11)

so don’t go as deep as much that you forgot, what about we talk, and which part we talk.

Let’s start criteria -7

In this criteria, we found the ratio i.e. Stock Value ratio

Stock Value Ratio = Stock Equity / Bonded debt

so for this criteria, New York Status says:

This ratio is about 0.67 or 2/3rd of bonded debt or 67%

This means is, the capital stocks is minimum that of the bonded debt of 67% is minimum ( Capital Stock at least 2/3rd of bonded debt

so the question comes, like, should we use book value or Market Value of Capital stock?

for This, the Author says, ” Those are balance sheet figures, they are not dependable and they don’t give the right value of the property.”

In this ratio we use the Market Value of Capital stocks, but in this, the question is the Market Value is not stable, they depend on optimism and pessimism and they may be overvalued undervalued so this is our right doubt, but this market value is better than the book value and you get the rough index. (Security Analysis chapter 11)

And this is a supplement test but this is an important supplement test so interest coverage is not even you have to attach this one is also very important.

If this stock value ratio is more means the market value of equity is more than total debt, so this means this is a strong assurance the bond issue is safe. i.e. you want to buy that bond.

If stock Equity Market value is less, then you have to come with a question in your head i.e. why people are not ready to pay for that company and what problem in that company.

so the author gives some final requirement ratio for these three type companies like Public utilities, Railroad, Industrials

Bond Investment Interest coverage ratio Stock Value Ratio

1 ) Public Utility 1.75 1/2 or 50%

2) Railroads 2 2/3 or 66.67%

3) Industrials 3 1/1 or 100%

Another thing is The bonded debt is we have to buy on Par-value rather than Market Value.

Income bonds, we don’t have to be considered into bonded debt, or not in the interest coverage ratio, why this, because, Income bond is like preferred stocks, so on this, we can talk in the future chapter( when we talk about preferred stocks.)

Another thing is that those are jr. bonds for long-maturity they are like preferred stocks so there valvu you can include in stocks equity value.

so in these two situations come

The earning coverage ratio of the company is not fulfilled by the minimum requirement but the stock value ratio fulfilled
Another situation is the minimum requirement is fulfilled for interest coverage ratio and the stocks value ratio is not fulfilled.

The author gives examples,

In 1932, 33, they compare the two companies, Inland Steel and Crucible Steel.

some of their prices are as follows

ratios Inland Steel Crucible Steel

Coupon 4.5% 5%

Price 82 60

Yield 5.6% 13.6%

Coverage ratio 4.6X 7.1X

Stock Value Ratio 0.57 1.12

So Crucible Steel Company passes the interest coverage ratio and stock value ratios.

and failed by Inland Steel Company because 1 is required in the stock value ratio.

so Inland Steel is one of the best companies of their time, before the depression. (Security Analysis chapter 11)

In 1932, their earning goes down, but crucible steel, their earnings increases in depression also, the joking part is.

Crucible Steel, have both two ratios is more and the minimum requirement pass test or this yield is also high.

These are high-quality steel and they satisfy the interest coverage ratio and they provide more than double.

But actually, those companies are good and high-quality companies, so they provide the minimum yield because, in that the risk is less, and they are safe for bond investment in the senior bonds.

So in this Crucible Steel is safe and they provide the High Yield.

If Any investor buys the Inland Steel Instead of Crucible Steel, so the investor Assumes that

the first thing is they assume, this condition is temporary.

second thing is, they assume that the stock value ratio is less because the stock price is trading very fewer means in undervalued. (Security Analysis chapter 11)

another thing is they assume that crucible steel Value is Overvalued.

If you invest in any company don’t assume the above things.

Because, if you assume and you are not sure, then you don’t have to buy the bond.

Because you know that stock is undervalued then why do you buy bonds, you can directly buy the stocks, and make unlimited profits, and bonds have a limited return.

But, If this is just an assumption of the investor, so money is going wrong, then you have the loss of risk.

so Author is not speaking that Inland Steel is a bad Investment, at that time.

The author’s point of view is that The alternative means, Crucible is better than the Inland Steel.

so then you have to invest in that what the turnaround both of the result show you the right and wrong.

So the Actual result comes, after the depression,

is Inland Steel they repay the bond on 20 points of earning and their stocks are 4X.

so those authors talk about that stocks are undervalued, after depression, they prove.

Because, their stocks become 4X, so this type of investment is not just on the assumption, and not having your assumption is best. (Security Analysis chapter 11)

If you assume this company go high, they buy stocks,

In that time duration, Crucible steel bonds, and on 60 to 102, so this is also principle profits on buying bonds.

then the author says, the stocks Value ratio of industrial find out the easily but public utility and railroad is more complicated.

Like, those are bonded debt or other thing line or property of subsidiary, their ranking come first.

so those things of ranking come first then the company bond, then we have to these take expenses and add to them in bonded debt while finding out the ratio of Stock Value.

So on this, we can talk in the next Chapter on the railroad and Public utility

then the author says,” don’t modify the ratio to reflect changes in market condition.”

like the normal Market

Then for Industry Stock Equity Bonded debt

Normal $1 $1

Bull Market $2 $1

Bearish Market $0.5 $1

so for this reason, you don’t have to do this.

Because, the first reason is, those are bond buyers they don’t have the guts to tell high level or low level of Stock prices. (Security Analysis chapter 11)

If they are say higher level or lower level of stocks, then they have to invest in stock instead of bonds.

Other things, we assume, that those are bondholders, they give special attention on booming Market and When depression comes to their confidence increases.

So these are stupid things.

Because those are bond buyer, they are also human and when the booming time come, they also addict with booming and don’t leave that bullish craziness. and those are fear time comes, i.e. bearish

so no one escapes that also.

so this is human nature, not other things, but the difference, is that those are intelligent investors, they control this.

then the author says, ” This is stringent instead of relaxing or more stringent instead, you get the always any other security, so you just have to find out and they satisfy the normal test also.

and they don’t have to More strangest or not relax whatever the condition.

lastly, the author gives some stock value ratio, that image is posted on the telegram.

so this is all about the Security analysis chapter 11

Warren Buffett Books Recommandations

August 12, 2021 by Laxman Sonale 1 Comment

Hello friends, in today’s article we see Warren Buffett Favorite books on investing, and they recommend everyone who wants to build a fortune in common stocks. This book is recommended by Warren Buffett in public speech and the Annual Meeting of Berkshire Hathaway. If you really want to learn about investing and want to get rich like Warren Buffett, then you should mus read this warren Buffett’s best books on Investing.

Warren Buffett best books on investing:-

let’s start one by one

1) The Intelligent Investor by Benjamin Graham:-Warren Buffett Books

In many interviews so many times asked Warren Buffett about his favorite book, and that book is The Intelligent Investor book. This book he gets in the Omaha Public library, and then they started to read this book, then he realizes that buying stocks and selling stocks have to be reasonable. (Warren Buffett Books)

When he reading this book, then forgot about the time and read very clearly and then he understands the Benjamin Graham quote on investment is “ The best investment is done when they have done like a business.”

This means if you invest in any stocks, consider as invest in the piece of Business. Warren Buffett also says about this books is that this book is all about the mindset of investing, and you required three things

Patience
Self-discipline
Eager to learn attitude

From this book, warren Buffett learn the two basic principles is that 1) Mr. Market 2) Margin of safety principle

Chapter 8 is about the Mr. market and chapter 20 is about the Margin of safety principle. These two chapters is a most favorite subject of Warren Buffett.

This book also explains the Defensive investor and Enterprising investor.

If you have time to do an analysis of stocks then you should have to become an Enterprising investor, and you don’t have so much time, then you should become a defensive investor by investing in Index funds.

From me, this book is the best best best of all-time Value Investing book. if this book is not written by benjamin graham, then there is no one like Warren Buffett and another value investor that doing badass in now market. they all are scattered with stocks and no one makes the fortune in the stock market. (Warren Buffett Books)

This is the best book on investing and those are beginners, that don’t understand the quantitative part, but they understand the Investment philosophy by benjamin graham.

Everyone should buy this book: click on the book image

Let’s talk about the second book of Warren Buffett’s best books on investing.

2) Common Stocks and Uncommon Profits by Philip A. Fisher:-Warren Buffett Books

Warren Buffett another favorite book from the other authors is Philip A. fisher.

One is meeting Warren Buffett says about his book is, ” I am the 85% of Benjamin Graham and 15% of Philip A. Fisher.”

Do some people say why warren Buffett only says about the 15% percent? the answer is in this book

This book is about growth investing and how to find growth stocks.

In this book, Philip A. Fisher explains the Scuttlebutt method. this method helps you to find a great company and develop the 15 points of an outstanding company that help you find a great company. (Warren Buffett Books)

3) Business Adventure by John Brooks:- Warren Buffett books

4) Where are the Customers Yachts by Fred Schwed’s:-Warren Buffett books

5) The Little books of common sense investing by John C. Bogle:

6) Poor charlie Almanack: Charles T. Munger biography book

7) the Most Important Thing by Howard Marks:

8) The Clash of the Culture (Investment vs. Speculation) by JOHN C. BOGLE:

9) Security Analysis by Benjamin Graham and David Dodd’s:

Security Analysis is the book on Value Investing, in this book, you learn how businessmen buy bonds, stocks, or any other instruments, with the help of the real meaning of investing. (Warren Buffett Books)

So This is not for the beginner. this book is only for those people, they are very serious about investing and Value Investing.

So I am very serious about Value investing for this reason I write each and

every chapter books summary you can read by the following click

10) The Conservative Investor Sleep well by Philip A. fisher:

this is all about the warren buffet favorites books, that help them to become 100 billion dollar man. Warren Buffett always, says, ” I love reading whatever Philip A. fisher wrote.” (Warren Buffett Books)

this type of sentence you also say, while reading their books, because, they are not magical books, they are Logical books.

If you want to read this book, you can buy this book by clicking this book image from the world-famous site Amazon.com

Some of the books show a cheap price, and those are real hard copies, that book is on this link, I hope you should buy this book only.

So this is all about the Warren Buffett books.

Bond real estate : Relation Value of Property to the Funded Debt

August 9, 2021 by Laxman Sonale Leave a Comment

hello friends, today, article we see the bond real estate from Security analysis book chapter 10, Specific standard for bond Investment ( continued). In this chapter, we see Criteria 6: Relation of the Value of property to the funded debt. so let’s see the bond of real estate.

Previous Chapter 9

Criteria 6:- Relation of the value of property to the funded debt (bond real estate)

As discussed soundness of bond investment depends on the oblique corporation to take the core of its depts, rather than the value of the property on which the bond has a lien.

so we say before that if a company fails, then their properties value also decreases.

so New York Statutes Recommend that the properties value is more than the 66.67% of bond issues.

let’s see an example to understand it

if Bond issued $100 million of any company, then properties value is about $167 million dollars.

so the author explains some special cases in that we have to consider the value of properties.

Some Special Cases:-bond real estate

1 ) Equipment Trust Obligations:

These issues issued by the railroad and also called as equipment trust certificate

In this case, we kept some mortgage for this valuation so railroad companies kept the locomotive like the engine of the railway and their parts as a mortage.

this type of investment company kept and then, they issue the debt.

so in this, we have to consider the Value Because, this instrument, that companies kept as a mortgage, and they are movable and they have their sellable price ( value) because any other companies railway use this type of assets.

If company fail, then does affect on that, because we can see this to other company and get the money.

2) Collateral-Trust Obligation:-bond real estate

In this, company issue, the debt and kept as mortgage as a security purpose, that company, buy that security

means, those are investment trusts, that trust company buy the security of other company and kept their security as mortgage and issue the debt for himself.

In this companies portfolio, we know the market value of the company and we can give them loans while considering their value.

3) Real- Estate bond:

In this case, the main criteria is that how much properties value.

The company gives loans, only 66.67% of the Properties value.

so property fair value matters

so let’s see how we get the property fair value from earning power.

For this, the author gives simple examples, how do we give the loan on properties?

Example,

A home cost is about = $10,000

Rental Value is about = $1200

On the rent, you have to pay the Tax and whatever operation cost, you have to pay

so after this by paying tax and operation cost from $1200

your net income is about = $800

5% mortage, you get on that house, up to 60% of the value of properties, i.e. $6000

so 5% of $6000 = $300

so your coverage ratio is = $800 / $300 = 2.67 X

but any industrial plant they want to issue debt by they want from us

for this, we have to keep more coverage ratio, because, on that plant, this much rental value does not get us.

so after these special cases, the author gives the 7 things on Real Estate bond

Things to consider when dealing with these bonds:

1 ) Properties value increases, then rental value Increases:

If properties value decreases, then rental value also decreases

if this does not happen, then people directly buy the house instead of staying in rent, because properties value decrease but rental value increases

so Properties value increases, then rental value Increases.

2) Misleading character of Appraisals:

If sometimes, the real-Estate boom comes, then properties prices ( value) Increases.

so you have to consider those values of experienced buyers and lenders instead of the booming price of properties.

That experienced buyer wants to buy on the price, that price we have to consider instead that, we can think that if that much price is on booming time is have, then we can buy this property or not if the answer is no then don’t buy on that price.

or you can ask your friends, that price of booming time and they are comfortable to buy that price.

so let’s understand with examples

e.g. the building making cost is about $1 million and in boom time, their price increases after building full develop up to $1.5 million,

so 50% profit on making time of that building.

so let’s see a third thing or bond real-estate

3) Abnormal rental, used as a basis for Valuation:-bond real estate

let’s understand this thing, from previous examples, so property value increases 50% means, Original value is $ 1 million and in boom time is about $1.5 million

so your properties rental is abnormally high, so you have to correct them and adjust to the downside.

so in this problem is

If you get a high return i.e. 50% increase so people, try to make the building. and more and more building is developed then supply increases then all building prices suddenly goes down,

so abnormal rental, used as a basis for valuation.

4) Debt based on excessive construction cost:

in boom time, the company can issue more debt, in this boom time

because, properties construction cost is higher because, the demand for making houses is increased, so construction suppliers also increase the rate.

suppose, a cost increase of making houses is about $100 million

so now boom time, their cost is about $200 million

so you can give a loan as per the 60% rule, which is about $130 million

while properties value in boom time is $200 million but their actual price is about $100 million

so $100 million is 60% is about $60 million and you give the loan on that properties is about $130 million means your debt given that properties are not safe, and logically they did not come in 60% rule of properties.

Because, when the value of properties comes to their original fair price, then you are already paying more loan than their fair price of whole properties and loan criteria is up to 60% but you give the $130 million means more 113% of properties.

so debt is based on excessive construction costs, you have to consider this.

5) Weakness of specialized buildings:

In this people make the mistake is that the apartment house, office, storehouse, clubs, the church building

so in this people make the mistake is, they don’t differentiate between them but they have different values.

so in this, you have to treat differently because in this we can not dispose of easily while considering same value

this value depends on those companies they have it and they become successful, or not depends on their own value.

those are apartment buildings, they do not depend on that company, because this any can use.

for this, you have to ask for the maximum margin of safety

so for this is good that 50% margin of safety on properties on the loan amount,

in this, you have to ask for a 100% margin of safety.

so this is important is that you have to consider the weakness of specialized buildings.

6) Value-Based on initial rental misleading:

At some time, we take the initial rent for valuing properties, but those are new building their rental obviously is more

so instead of that we have to think like that while considering the new building rent instead that we have to consider after this building is old, what are the rent of this building and that rent we have to consider.

and we can approve.

because initial rent is not for the long term.

7) Lack of financial Information:

In real estate financing, the main character is, they sell the bond to the public but, they hold the stocks privately.

so companies issue, the bond, then they forgot about the bond and bondholders.

and they do not offer any financial data to the bondholder.

so this end some exception and some special case

after that author give their own suggestions

The Author suggestion:

The amount of loan is never over 66.675 of the value of the property (2/3)
Value of property must not reflect recent speculative inflation ( booming value consideration not allowed, what come after long term that only allowed)

or you can see, how much you pay for buying that or any other experience buyer and lender, how much pay for that

the property value is more than 50% of the loan value.
Income account you have to see in that you know when vacancy is available and what is losses or rental rate decline what happen building when they become old.
The income coverage ratio is twice and income is after consideration depression.
You have to consider depression, because, the property becomes depressed or not any reason like this does not charge or they firstly spend on that so this is not considered the reason. so this type of stupidity doesn’t do.
buy when bond, then borrower must agree to supply bondholder with regular operating and financial statement.

If those are company that deals with the hotel, garage

so for this, you have to provide loan when this hotel is running well. if they are new so don’t make the deal

if they have a successful record then only give.

Investor should be satisfied with the location and type of building

These are the most important things, the large loss probability in unfavorable conditions.

for this point, understanding the author gives the example

In 1933 after conditions going to improve, but those are a financial district of new york, their activity is less and that reason people gets loses and rental rate also decline so location matters most.

the author also talks about financial instruments i.e. first leasehold Mortage

In this, the land has another owner and we build the building on that land.

but we pay regular payment to the landowner

so those companies build the building on that land, this land is the first mortage bond for that company.

but this is not actually the first mortage for you because first mortage of ground to the company is not for you and ground rent this company have to pay

interest coverage ratio = ground rent + interest expenses of the building increases the cost

so this is all bout the bond real estate and also chapter 10 of the security analysis book.

Investment Grade Corporate Bonds

July 20, 2021 by Laxman Sonale Leave a Comment

Hello friends, in today’s article we see Investment Grade Corporate Bonds and their specific standard for bond investment ( criteria 3, 4 & 5) from chapter 9 of the Security Analysis book. so let’s see one by one criterion

Previous Chapter 8

Specific Standard for Bond Investment continued ( criteria 3, 4, and 5):-Investment Grade Corporate Bonds

In this chapter we see the three types of criteria and what told by the New York statute and Benjamin Graham what advice us. so let’s start with this

Criteria 3: Provision of Issues :-Investment Grade Corporate Bonds

In these provision means, what are the Characteristics of Bonds, and what condition that affect the interest rate and what happens effect of maturity on bond character and their price.

so those things come in bond Indenture that come also inn this means provision of issues

and What is the seniority of bond, and what are their mortgage debenture, so this all comes in the provision of issues.

Those are the New York Statute, that we talk earlier,

so they only allow mortgage secure bonds from public utility groups and not allowed debentures.

so debentures are allowed only for railways but not a public utility.

On this point, the author says, ” Unsecured bond issues of any groups without any reason, reject them is not right, whatever the lien on the company, so nothing happen.”

The debenture is also one type of liens like unsecured debt, and junior lien, and above this, the mortgage bond is also present. (Investment Grade Corporate Bonds)

then the author says, ” those are investors they are more attachment with maturity debt. so those are short maturity”

they are safer Because your maturity comes near, and those are long maturity people they are a risky bond investment.

but the author says, ” this type of thinking is very wrong”

Because, of that, so those are short maturity, they have to refinance and the company needs good cash to repay for those are short maturity that comes as an obligation to the company.

or if they have strong financial and good earning power, then they can issue new bonds and raise the fund.

so some companies do issue short maturity because they don’t have a good credit rating to issue long-term maturity bonds. (Investment Grade Corporate Bonds)

so this type of company, most of the time gets the trouble for investors.

then author discusses some examples in that author takes the short and long issue of the same bond.

For Examples.

In 1932,

the Bond is First 5s, this bond short maturity in 1934 and long term maturity in 1944.

so in this bond, only maturity difference occurs all rating and coupon rates are the same.

First 5s means, they are first in seniority of bonds, and 5s means 5% coupon rate, if 5s instead that 6s means 6% coupon rate.

Debenture means, they are unsecured

So Due to 1934 means, maturity in 1934

Due to 1944 means, maturity in 1944

I hope basic terminology you understand

let’s come with examples

so those short bonds which mature in 1934, their price is $96.5, and those 1944 long term mature bond price is $35.

means those are mature in 1934, they, you can buy on $96.5 and those are mature in 1944 their price, so you can buy is $35. (Investment Grade Corporate Bonds)

so what happened in 1934, the company pay off the short-term maturity bonds by the company.

so those issue of 1944, their price increases up to $91.

so this long-term bond ( 1944) is a good opportunity because in this principle profit we get.

the author gives another example

Secured 6.5s, and their maturity in 1933 and secured 6.5s, their maturity for the long term in 1935.

The price of the short-maturity bond is $94 and

Long maturity bond price is $43

so this both issues, company payoff at maturity

so in this also long term issue is a good opportunity to investment

because you get the cheap price of a long-term maturity bond.

Other issues

In 1938 First 5s bond, price is $99.88 and they mature in 1944

First 5s bond, for long term maturity in 1954 bond price is $45

so both are default in 1939, before his maturity. (Investment Grade Corporate Bonds)

those are price is $99.88 decrease to $36

and the price of long term maturity bonds decreases to $20

so those are very expensive and short term maturity bonds, their price is highly falling than long term maturity bonds.

so like this author gives the two and three examples

the author also says, ” Is this is not meaning to buy maturity bond that is cheap and long term bond, just because they are cheap.”

so seeing Safety is important, if safety standards, we have to satisfy, if the company does not satisfy with the safety standard, then we don’t have to buy that bond, because we are not benefiting and taking the risk of losing principal.

this is all come in criteria 3

so let’s see criteria 4

Criteria 4: Record of interest and Dividend payments :-Investment Grade Corporate Bonds

so start with as per the New York Statutes

The bonds of state say, ” those are bond, they don’t have to be default in a single year of a 10-year lifespan
The Municipalities says, ” Not default for previous 25 years.”
The bond of Railroads says, ” Not defaulted for previous 6 years”
The bond of Public Utilities says, ” not defaulted for previous 8 years”

So after this new york statute rules, then the author says, ” suppose there are new municipalities establish, then according to them then, don’t get the finance, and they can’t wait for 25 years, so those are new states, they can’t wait for 10 years if they follow the rules of New York statutes. means, they don’t get finance.”

So those default in 10 years or 25 years, then they don’t get the finance if we follow the new york statutes.

Then for this, The author says, ” This is the different stringent rule, so what is a solution or so for this, buy the high coupon rate bond, then you have the risk of principal loss. (Investment Grade Corporate Bonds)

So the author says, “this is not a good idea just like before say so many times”

so right way is the author says, ” you have to stringent your own standard because those happen failure in 25 years of companies part to compensate with them your stringent standard.”

Like see this thing,

the city or state what if they rehabilitate, their and reduce the expenditure and increases the Tax rate to collect maximum revenue and also minimize the debt and reorganization of corporate in companies.

so this thing you have to see to invest in their bonds,

So then you ask for a higher yield is not because you have a loss of principle instead that to satisfy yourself.

So before is bad, and I take high yield, so this listening looks, weird.

but the author says, that

so let’s talk about dividend Record

Dividend Record:

Dividend record is company pay the dividend record before 5 years, in past.

so the myth is that those are companies that pay the dividend, they are strong companies

so this looks logically good, because if the company has money, then only they pay the dividend.

So the company has money and they issue a bond, and bond investment is also good.

so then the author says, ” company pays the dividend regularly, then we only know that companies financial strength is good, but those are bondholder,

they don’t have any direct benefit instead that they got the loss because, companies resources are used by the common stockholder, and companies cash is payable to the stockholder,

so in future, some difficulties come, then companies don’t have the cash to pay for bondholders.

so this thing, you can know from companies balance sheet that company is sound, so that necessary to pay a dividend, so they have money to pay dividend bu they not paying, so this thing is better than paying a dividend.

so in dividend-paying companies have this advantage is, if company cancel the dividend, then we know companies in the future have some difficulties so that line company concern the dividend because, their problem in future performance. (Investment Grade Corporate Bonds)

But, in this have difficulty is if some company perform bad and condition is weak bu they pay the dividend because, their credit rating is going low so this is very dangerous things, we have to stay attentive on that.

so summary of dividend criteria is those companies pay the dividend, they have some condition, we have to see that condition, and what benefited to the bondholder, then only you have to invest in that companies bond.

so let’s talk about criteria 5

Criteria 5: Relation of Earnings to interest requirement

This is also, interest coverage ratio, and this is also interest earing multiple)

to this is important, so this called as Margin of safety.

So what say New York Statutes

Railroad ( Mortage bonds):

on this, the New York Statute says, 1.5X of earning interest charges in past 6 years out 5 individuals year.

so means, In the past 6 years, in 5 years the interest coverage ratio is 1.5X

The recent year is important and there are the first year and remaining 5 years in that any 4 years.

so those are debentures or income bonds of railroads. (Investment Grade Corporate Bonds)
(on income bond we can talk later when we talk about the preferred stock)

so in this multiple is 2X in the latest year ( previous first year) and in past 5 years in that 4 years of any four years.

Those are Public utilities:- their earning is 2X in past 5 years average of interest charges

so we talk about in railroads of individuals year of past years,

but in public utility, we take an average of years.

So get the value of interest coverage ratio, you have to know about three things

* 3 things to consider for interest coverage ratio:

so for this author give the three things that help you to consider interest coverage ratio, so let’s see

Methods of computation of interest coverage ratio
amount of courage required
The period required for the test ( time period)

so let’s see the Method of computation of interest coverage ratio: in this author give three methods that people used in previous past time, and also suggest which is best

a) Prior deduction method

b) Commutative deduction method

c) Total deductions method aka. Overall methods

so all methods discussed while taking examples

a) Prior deduction Method

Suppose A company, $10 million worth of First Mortage 5% bond, and Debentures worth $5 million.

and companies average earning is $1,400,000

so the company have to pay interest on the first mortgage is 5% of $10 million is equal to $500,000

so coverage ratio is = $1,400,000/$500,000 = 2.8X

and remain is = $1,400,000 – $500,000 = $900,000

so those are junior debentures for this they have to pay 6% on $ 5 million of debenture

so interest on 6% = $300,000

so coverage ratio = $900,000 / $300,000 = 3X

The stupid thing is

those are senior bonds their coverage ratio is 2.8X and those are junior bonds and their coverage ratio is 3X

it means that junior issue is more protected than senior issues. (Investment Grade Corporate Bonds)

So these things are very stupid,

Because obviously those are senior bonds they have more protection than the junior bond and they got first money when the company is failing. but in that not happen like that so

this method is a useless method and misleading method, but so many companies use this ratio in past and they fool the investor and investors also do stupid things and don’t think about this and they only see quantitative but not see qualitative.

So people forgot the figure and people go in calculation and say, this value is original whatever they come.

They forget also, whatever value comes, they are not checked for is sensible or not.

b) Commutative Deduction method:

In these, those are the first mortgage, and they are the same as above mentioned

because, on that method, no one is superior

so the ratio is for the First 5s = 2.8X is coverage ratio ( calculate above)

so come for a debenture,

for debenture, in this method, First of all, you have to pay first mortgages

so $800,000 , total interest charges

so debenture 6% ratio = $1,400,000/ $500,000 + $300,000 =1.75X

so this method is good, than the first method, because, it looks sensible

but the author says, ” we have to use the third method i.e. Over all method or total reduction method.”

This means whatever, you buy ( senior or junior) total debt safety is required.

so for both ( first and debenture 6s also)

for this, you have to add junior and senior interest charged i.e. $500,000 + $300,000

then ratio is = $1,400,000/ 800,000 = 1.75X

for both

because, if junior lien default, then, his effect also happens on senior in coming future.

If you buy senior issues ( mortgage bonds), they can also use this method

Add junior and senior interest charge for ratio

if you consider your own interest expense then you get more than good things and have added in advantage

but don’t use that rule. (Investment Grade Corporate Bonds)

so for total, this rule and added advantages

now let’s talk about other points

2) Amount of coverage required:

in this author give the specif coverage ratio for each and every category

for public utility ratio is = 1.75X
for railroads ratio is = 2X
for industrials ratio is = 3X

so this ratio author gives from his experience and their practices and also see companies history in depression also.

3) Period Required for Test:

So New York Statutes says, you have to take a period of five years and also says, for utility take an average of five years and for railroads take an independent year of 4 in past and immediate precious year not in taht.

so for this author says, 7 years period is better than 5 years period

and we can also modify it by increasing or decreasing year by seeing previous year performance

Suppose, we invest in 1940, in that time you can take 7 years, but year 1933 is in depression so for this, you can take only 6 years, by modifying according to the situation and that is very helpful.

If you invest in 1934 or 1935, so in this time, you can’t help with 7 years period, because in that 3 years in the depression, so for this you have to take 10 or 12 years of the time period to unusual things is average out the depression time freme. (Investment Grade Corporate Bonds)

so in this, you have two kind situation

in the first situation, you can take the actual earning in depression(whatever come -ve) year for interest coverage ratio, but interest coverage ratio is come very less, so for this author says, ” take the Zero earning of those years that are in a depression instead that taking whatever is coming.

and consider time period for 12 years and take their average and after that found the ratio ( coverage ratio)

so this author recommends, instead of separate,

the author says, after this all, we have to see other points also

” We have to see what are the average trends and minimum figure and also the current figure.”

so suppose earning profit increases means, a rising trend is going, then this is good and current showing figure is also good, then better and you get the good margin on that then also better in a rising trend.

If earning Trend is Unfavorable ( downward trend,) then you don’t have to accept until the first thing is the earning ratio is required maximum.

The second thing is the earning trend is downward, then you have to confirm that this trend is temporary ( instead is not only I think so it’s not like this reason) you have to good conviction reason why goes high this trend.

so these are all things we have to conclude while investing in bonds.

What is a bond? and their specific standard for bond

July 17, 2021 by Laxman Sonale Leave a Comment

hello friends, in today’s, article, we see the specific standard for bond investment from chapter 8 of the security analysis book and also what is a bond, how we invest in them, and what are the problems come while investing in bonds.

Previous Chapter 7

Principle 4: Definite standard of safety must be applied:-What is a bond

In principle 4, we talk about those states, they have their own laws and rules on those that are saving banks that can invest in specific areas.

they have to satisfy their criteria of states

So the author (Benjamin graham and David dodd’s) use the New York Status, because, he thinks it’s a good point to start.

After that, whatever its criteria, the author criticism them and if need to neglect them or reject them also and they modified them if required.

So there are 7 criteria prescribed by New York Statutes:

In the Coming 4 chapters we explain the 7 criteria in this, we see only two criteria.

So firstly the author explains, what the new york statute says, and what author explains his own view if they are right or wrong

General criteria prescribed by New York Statute:-(what is a bond)

Nature and location of business or government business
Size of enterprise, or the Issues
Terms of the issues
Record of solvency and dividend payments
Relation of earnings to interest requirement
Relation of the value of property to funded debt
Relation of stock capitalization to funded debt.

Criteria 1: Nature and Location

1 ) New York Statute says, ” You can invest in U.S. government bond, state bonds, municipal bond”

but You can not invest in foreign government and foreign corporation bonds.

2) You can invest in Railroad, gas, and telephone industry, b

but you can not invest in street railway and water companies and also in debentures of public utilities.

3) You can invest in the first mortgage on a real estate bond,

but you can not invest in all industrial bonds and also financial companies’ bonds, investment trust, and credit concern companies also.

so for this author give some problems with New York statutes

Problems with New York Statute on Criteria 1:

1 ) In any industry, we can’t invest, so this is not talking about practically way because, in the industry also, there are some companies that perform well in bad times also and we can select them.

If we neglect whole industry segment then, what remain only railroads and public utility and government bond according to the New York Statutes.

So it’s happening, if we can’t find good then don’t go for bad.

so this is like we are doing narrow and it’s not right, so we can include the industrial also.

2) Water companies neglect the public utility by the New York Statutes and don’t give a good reason and other states include the water company and we also include them.

3) In 1938, One commitment that happens in the banking sector is in that they do the consortium of banks can waive as many rules as it sees fit, and they decide which criteria can remain and eliminate and also do modifications according to them by doing a simple variation.

so for this, the author says, ” Until now there is not any problem of consortium bank, but happen problem in future.”

so we don’t have to take tension because, nowadays, no consortium bank, that told us to do this or that.

4) Foreign government restriction is a good restriction according to the author, because, the foreign government pays or does not pay. If they don’t pay you, so you can’t force them to pay and you can’t take their asset, and revenue source,

the author gives examples of some countries that full fill the obligation and some more countries that don’t fulfill the obligations.

like those fulfill obligation country are Canada, Holland, and Switzerland, etc.

after that, the author talks about foreign company bond investment.

So many cases, present there, those fulfill the obligation by a foreign company but not that time government doesn’t fulfill it.

but sometimes the company is able to pay but the government restricts them.

So sometimes exchange is restricted on the company by the government.

so the foreign company has the ability to pay but they can’t pay, because the government does not allow it.

Criteria 2: Size of company

The author says those are a small company that is very much vulnerable at unexpected changes.

so those are big companies, they can go easily and unexpected harsh condition goes easily. means, they can pass easily in dangerous situations also.

Because, they have good relation with bank and they have lots of resources, that deals with that situation.

so New York statute, what say, about this criterion is

In railroad, in that much amount of mine is spread over the area, and in municipal bonds, that much amount of population is required and in public utility, they say different types of criteria, but in this point that much is not important, if you want to know about them then, buy a book by clicking above image of book.

So come here directly and what author reconnects

The author says, ” buy municipality bonds when the population is 10 thousand or by public utility when gross revenue is about $2 million and on the railroad, the gross revenue is $3 million

and lastly, in the industrial, the gross revenue is $5 million.

Industrial is not included in New York statute, because they don’t say, to b buy or avoid them

and author says, ” invest in industrial also.”

So large size does not mean to have safety

so it’s may happen those are the largest companies that are the weakest company.

if they have maximum debt.

So large size criteria are not affected in this municipality, railroad, and public utility,

so small and large both are the same.

but in industrial, have an effect, those are large size, they are more stable than small size.

So this is all about the two criteria for specific standards for bond investment.

How to invest in bonds from security analysis book

July 11, 2021 by Laxman Sonale 2 Comments

Hello friends, in today’s, article, we see how to invest in bonds, from chapter 7 of Security analysis. while investing in bonds, you can consider some principles of that, in we see the two principles( second and third) of investing in bonds, from chapter 7 of security analysis.

so let’s see one by one steps of investing in bonds.

Previous Chapter 6 on Investment bonds

The Selection of Fixed-Value Investments Second and Third principles:-How to invest in bonds

This explains the two principles of investing in bonds.

so let’s see one by one

Principle 2: Bonds should be bought on a depression basis.

In Good conditions, every bond performs the great, but when depression comes, then we know which bond is strong or weak.

So in depression, the bond will be safe or not

on these two views come forwards

Two Views:

The character of Industry e.g. Water, electricity
Amount of protection e.g. Steel, automobiles companies

so you have a question What is the means of Character of the industry?

it means, Company comes in those industries, that industry has some immunity in depression condition.

for example, Light companies, Water supply companies, the telephone company. (How to invest in bonds)

and another question, What are the means of Amount of Protection?

it means, having a good Margin of Safety

means, Margin of Safety is high as much as that can not affect depression also.

In bond Context, the Margin of Safety is the Interest Coverage ratio ( times interest earned, Earning multiples)

so in this chapter whenever word comes coverage ratio, that means earning multiple, interest coverage ratio.

The Amount of Protection required those companies like steel companies, Automobiles, etc.

You need a maximum amount of protection because they fluctuate more.

So The author ay,s ” Those companies are good companies that perform well in depression also.”

The author says, ” Character of Industry is more important than the Amount of Protection because those companies perform good in depression, then minimum safety is considered as good.

Because In depression Maximum safety is also eroded.

So the author also, says, ” Not any industry is resistance to the depression, so the quest on is how much difference occurs in that industry’s company.”

That much percentage of the company is stable in depression as compared to competitors, then we can get maximum protection also. (How to invest in bonds)

This means the Minimum coverage ratio is sufficient for us

So if Maximum unstable company, then that much amount of earning multiple then, we ask for a good margin of safety.

If in some companies the Instability is more then, don’t buy this companies bond, whatever the maximum coverage ratio.

so Coverage ratio calculated formulae are

Coverage ratio = Earning before interest Tax / Interest expense ( interest charges)

Suppose a company pays $1 interest on a bond, and company earnings are $10 so then the coverage ratio is 10.

or Earning multiple 10.

Means, How much multiple companies generate the earning on an interest basis. so the company does a maximum coverage ratio then the company is safe and they give the regular payment of bonds.

The character of Industry reflects the difference in stability and required coverage ratio.

so the author says, there are three types of company, we can classify

Public Utility
Railroads
Industrials

These are different, because, these companies have different stability

1 ) Public utility is stable, and the railroad is less stable than public utility and Industrials is very less stable than Railroads.

So in these three types, we required different coverage ratios, that much minimum required to buy that company, so that’s why they are different. (How to invest in bonds)

So Public Utilityis more stable, so for this less Coverage ratio is sufficient

The railroad is only stable, then they required more coverage ratio, than a public utility.

Industrial companies required a maximum coverage ratio than railroad companies because they are unstable.

Then, The author talks about industries, why bonds collapse in depression

so which companies bond collapse in depression,

so let’s talk about public utility.

Reasons for bond Collapses during the depression:

Public Utility was failed not because earnings disappeared, but because of Excessive debt on companies. so Interest charges were maximum and the coverage ratio is very less, that debt was not handled the small fluctuations, those companies do not have maximum debt, and their coverage ratio is maximum and they perform well in depression also.
Railroads: In railroad stability of Earning was overrated and margin of safety also decreases because insufficient in depression. So the author says, ” People have to observe before, for example, Country grow in 1920 but railroad, companies did not increase the earnings, so this is clear that industry was weak. so this reason, Investors have to increases the margin of safety criteria minimum requirements. In railroads cases, those people getting the same minimum requirement criteria of margin of safety and they know after they failed in depression.
Industrial: in industries, the sudden disappearance of earnings even for companies with a high Margin of Safety and also doubt on business survive or not in this depression. so in this, the author says, How much margin of safety whatever let’s consider 50, then in depression companies have problem with operation cost, then all are going erode. (How to invest in bonds)

the author observed that the large size companies, that do a good deal in depression time, then small companies so small and mediocre companies do very bad in depression.

so in big companies in their problem is, large-size companies present very little. and their debt outstanding is not more because they retire the bond issues.

So is that not means, if you don’t get the good company, then buy bad companies bonds.

Public says, ” those are secondary companies, how they get capital, if you only buy large companies bonds and finance them, so this activity affect the small and mid-size companies.”

so for this, the author says, ” We don’t take their responsibility and save them while sacrificing our capital, so in this type of securities not take in this type of securities not come in Class I of Fixed-value type investment.

If they want funds from us, then they have to give us a good chance of making profits on principal money, if we have principle loss risk.

So on bond financing, people view as following

Bond issues, when supposing as weakness of the company and that’s why bond issued.
The company doesn’t issue stocks, that why issues bonds.

that’s both are generally accepted views of people.

so from this, we get the message is only weak companies have to issue the bond.

so for this message, the author says, ” If only a weak company issues the bond, then we don’t have to buy that bond.”

then the author told, their view on Bond Financing

if a Business is profitable, then they get the profits while issuing bonds, because business profits give an infinite percentage and only little percentage have to pay on bonds, means fixed payment and whole profit of that company. If we are stockholders, then only we can participate in profits.
So bond issues, the benefit is very cheaply you raise the capital

so let’s understand with examples, (How to invest in bonds)

Suppose loan is 2, 3% and you make the 20 and 30%, then you can easily ready to take a loan, so just like that of the company also.

the company gets the bond for 4,5% and they make 50 or 60% profits.

After that, the author talks about unsound practices that are followed in the industry.

1 ) Railroad company issues bonds because their earning is poor and then stock, sales fluctuate, then the author says,” don’t buy this type of Bonds.

2) Some strong companies, issue bonds to pay the debt. so during this activity management problem is solved, but shareholders’ problems increases and their dilution starts, and companies free from debt.

So from this principle 2

we learn two things

If we don’t get good companies bond, then don’t go for bad companies bond so this is no good reason then don’t buy, if not available.
The industrial segment buys the bond of those that have the dominant size and have a good margin of safety ( means earning multiple has maximum.)

so let’s talk about principles 3

Principle 3: Unsound to sacrifice for yield

means, if some companies bonds, have risk to lose principle, but company give you high coupon rate and give you high yield but you can lose principal money.

so buying this type of bond is not good.

Because there is no relation between yield and risk.

Because, that the risk of loss is indefinite and no one is predicting and you can’t says, while seeing that past to handle risk. (How to invest in bonds)

Just like Life insurance, fire insurance in that you can see the previous data and people’s mortality rate and doing actual computation and from that, we can say, about the relation of risk and yeild.

but in this we can’t says about risk and yeild relation.

because in this the loss is not defined uniformly they are concentrated at particular intervals, like depression everyone gets lost.

And the author says, ” while accepting principle lose, instead of high coupon rate just like become an insurance company.

In an insurance company, you pay the premium and if you have lost like, fire in the house some life-death, so then you get the payment from another side.

you can say like principles because you pay the premium on that.

so if lose events happen then only you get the money.

So in this situation, you become the insurance company and the company pays you a premium on a risky bond, and they take your principle money first, and then they give you a premium on each 6 month interval time.

and if you have lost, then forgot the principles money.

so the author says, ” this is not a good idea, because those are individual then, can’t distribute money like an insurance company. if they distribute like an insurance company but when college, they lose everything in depression. (How to invest in bonds)

so that’ why not good idea

then the author says, ” If you have to take the principle to lose risk, then you can’t offset by the high coupon rate instead of that, offset of risk, you have to get a good chance on that principles to get good profits.

For example, ‘ if you buy bond then buy very much at a discount of par value.

so in this, you have profits possibility and also have lost possibility.

both have a chance or instead that but the conversion bond that converts in stocks, in future.

For example, if you invest $100, and you can lose $100, so in this situation, you have to be possible is that $100 becomes $1000, then only benefited, if not benefited.

Then the author says, ” while selecting bond how people select and how we have to select.

How people select bonds:

So they start with a first-lien bond( senior security) and they think, this is very safe and after that, they see the taking risk of the percentage that increases yield.

so this is not the right way

because the first lien, you think it’s safe.

so the author says, ” The right way to select”

The company has to satisfy the minimum standard of safety, after that, we consider which have to choose.

If the lowest seniority (highest yield) bond is not secure and the minimum required of safety not satisfy, then you don’t have to see that company bond and issues failing to meet the minimum required should be disqualified.

means don’t buy that company bonds.

so you have to see from the bottom of the bonds hierarchy and overall debt of the company are satisfy the minimum requirement. (How to invest in bonds)

if they do, then you have to see above of bond seniority for additional safety and you have sacarifying yield.

so we have to do like this, not like people way.

so this is all about how to invest in bonds from chapter 7 of the security analysis book

Investment bonds from security analysis chapter 6

July 6, 2021 by Laxman Sonale 1 Comment

Hello friends, in today’s, article we see the investment bond from chapter 6 of the security analysis book is The Selection of Fixed-value Investment. In this chapter, the authors give the perfect theory of The selection of investment bonds ( Fixed-value).

In the previous chapter, we see the classification of securities, so there are three classes of Securities. let’s recap, Class I, has the safety on principle money and has a steady income. Class II, they are divided into two types.

Type A: is have principle safety and has the conversion feature to make the possibility of profit.

Type B: In this, you can lose principle and you get lots of profits on Principles.

Class III, is about Common stocks.

so from this Part-2 of this book is begin, in this part-2 also have the five chapter so let’s start

So Part-2 is whole about the Class I securities ( fixed-value investment)

The Selection of Fixed-Value Investment: (Investment bonds)

So we talked about in the previous chapter is that we should classify securities on the basis of characters rather than on the basis of title.

In Fixed-Value type Include: (Investment bonds)

1) High-Grade straight bonds and Preferred stocks

2) High-Grade Privileged Issues.

3) Common Stocks having guarantee or Preferred status.

So It’s not fixed is that the fixed value type is only investment bonds as financial instruments.

This whole thing depends on its characteristic for they qualify for Fixed-Value Issues.

So most of the bonds are frequently associated with safety by the peoples, but they have to say like that Instead of safety is Associated with Limited return.

there was safe or not is the whole thing depends on company strength and earning power.

So let’s see what difference between bonds and preferred stocks.

Bondholders have the first claim on companies earnings and company make them promises of payment in regular interval of time. (Investment bonds)
So Preferred stocks also have claims but don’t have any promised with regular interest payments. So director decides to give dividends or not to the preferred stocks. there is neither priority nor Promise is assurance that of the safety of Principles.
this depends on the company’s strength to fulfill the company obligation., so this thing is only known from the Balance sheet of companies previous year records and his execution plan and future perspective about the company.
so from them, you know your issue is safe or not.

so the bond selection is just not like search and acceptance, it’s like a process of exclusion and rejection.

The author gives the four Principles of Selection of Fixed Value-type Securities (Investment bonds)

4 principles for selection of Fixed-Value Types Securities:

1) Safety does not depend on how many senior issues, means not by Specific lien, so lien like are the seniority of bond-like 1,2,3,4, preferred stocks and lastly common stocks.

So just like that those who hire high seniority, they have a maximum priority claim on companies asset.

The author here, try to say, ” Safety does not depend on seniority (whatever their rank) but they depend on those companies ae issue this bonds, that company have the strength to defeat their obligation.”

2) This Ability of the company to pay the interest payment. for checking this, we have to consider depression time, instead of that good time(prosperity time).

Because any mediocre company do well in prosperity time and fulfill the obligation of the company

3) If there is no safety of bonds, then given them a high coupon rate and compensation is not possible (worth it)

4) The selection of all bonds for investment purposes should be subject to rules of Exclusion and to specific quantitative tests corresponding to those prescribed by status to govern investment of saving bonds.

means the bond selection is like the government make the investment like that we have to make and our purpose is simply to make the interval of time regular income. (Investment bonds)

So in this chapter, we see only Principle 1

Principle I: Safety is not Measured by Lien, but by the ability to Pay.

So in these, there are two views on safety points.

Two views:

1) character and supposed value of the property on which bonds hold a lien,( First people think like safety

is measure by how much asset is a mortgage against that issue. so depends on seniority, so those who have the first lien against him, keep mortgage of asset means if the company is not paying their interest of first-lien seniority bond, this first lien seniority bondholder take the asset of the company under him.

so whatever is property value on that we have to buy,

So this type of people thinking on bond or senior lien

2) Strength and Soundness of obligor Enterprises ( means the safety depends on enterprises strength, so the company can pay their bills not depends on asset value.)

So in the first view, we think, they are claiming against on property.

In the Second view bond is a claim against the business. (Investment bonds)

So in this which is right,

Now you think, if the company can’t pay, then bondholders take over the companies assets and sell them and pay for themselves.

but this is not happening, so in this, there are three types of problems.

Three problems with the first view:

1 ) When businesses fail, then properties values also shrink. so companies value depends on companies earning power. If a company fails then fixed asset value also goes down.

so understanding this point the author gives the examples

Cardboard all Florida railway company, this company first mortgage is going down from 25 million to 250K dollar when the company is failing.

so the value of companies is going down when businesses fail.

the second problem is

2) You(bondholder) get the legal right with bonds, legal like You can sell the property of company, but you can’t enforce them when the company failed.

Because Court does not allow you for this.

So those are a junior lien, what they get if first lien holder sells the property and distribute themself because, the business value goes down, that why only first-lien can get money, so no money for second or third lien holder, so that’s why the court does not allow for this. (Investment bonds)

the third problem is

3) If you are allowed to take over the property by the court, so in this situation also take the lots of time and spend much money for advocate and other expense, and takes lots of delays occurred to solve the problem.

Bondholders’ motive is to avoid trouble not to found in trouble and how to goes from that troubles.

So from these principles what we learn

the first thing we learn is

Corollaries from Principle-I:

1) So there is no difference between senior or junior lien: If a company is strong then its debentures(unsecured debt) also strongs.

This debenture is a junior form of debt.

If the company strong then, their debenture also wonderful as like a first-lien bond.

So the author says, ” Strong companies debenture is better than the weak companies first lien.”

The second thing we learn is

2) Buy the highest yield: means those are a sound company or strong company, this type of company bonds, we can buy the junior bond for highest yield and you get the highest yield on that bond.

so regarding safety is all of them, not only for the first-lien bond and not for the last one lien.

This thinking present only in theory but not in practice mode, people only buy the low yield bond with the first-lien category.

The author tries to say, ” If companies junior bond is not safe then, their senior bond is also not safe so we don’t need to buy their first-lien bond.”

If a company is weak so its high-grade bond is also not safe, means if their high-grade bond is also like the low-grade bond value. (Investment bonds)

The third thing we learn is

3) If junior bonds yield and senior bond yield have the maximum difference then buy the Junior bond, If there is no difference in senior bond and junior bond, this type buy the senior bond, without taking any risk.

So buying senior bonds, they have to the protection but the yield is same, just use common sense.

What to buy in any situation, for this author give the examples

Suppose a junior lien of company X and the First mortgage bond of Company Y.

So in these two cases come forward, if we prefer the junior lien bond than the senior lien mortgage bond.

Company X has adequate protection of total debt and the yield of junior lien bond is substantially higher than that of company Y senior lien bond.
Buy junior lien not a senior lien, If suppose, there is not any difference between junior yield and senior yield, but the total debt protection company is more than company Y, so we can buy the junior lien.

so protection is more than those are fixed charged on bonds, which means, the Interest coverage ratio of Company X is more than the Company Y.

We can prefer the junior lien of Company X whatever not have the maximum difference between in yield.

so lastly the author says for the understanding bond. so this is the exception to the above-mentioned rules)

lastly, says the author, “Investors are not involved in this issues because they are far beyond the competence of investors and investors have to stick with this rules is the strong company has strong bonds.”

whatever we learn and use common sense to buy the junior and senior bond.

So this is all about the Investment bond from chapter 6 of security analysis.

Classification of Securities: Chapter 5

June 29, 2021 by Laxman Sonale Leave a Comment

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:

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.

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.

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)

Class I ( Fixed-Value type): In this class, include the high-grade bond and preferred stocks.
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.