Stocks to Riches Chapter 1 Summary

In this article, we see chapter 1 summary of the book Stocks to Riches by Parag Parikh. This is one of the books regarding the psychology of investing. Guy’s if you are haven’t read this book, then I highly recommend to you, order this book from the following link and read it. this is my all-time favorite book, and this book has only  110 pages. If you want to succeed in investing.

What is investing:-Stocks to Riches Chapter 1

Stocks to Riches Chapter 1

let’s start, chapter 1 investing, before that let’s talk about the author

Author’s profile:- Parag Parikh is the Founder Chairman of Parag Parikh Financial advisory services limited (PPFAS), Mumbai. Mr. Parikh Has over 25 years of experience in investing, broking, and advisory business. he regularly shares his insights through guest contributions in many of India’s leading financial publications such as the Economic Times, Business Standard, and DNA, through appearances on CNBC, NDTV Profit, Aaj Tak, and Star News, as well as by undertaking lectures at various investor and educational forums.

Mr. Parikh has a Masters in Commence from Mumbai University and is a Certified Financial Planner ( CFP) from the Financial Planning Standards Board Of India. He is an alumni of the Harvard Business School having successfully completed the prestigious Owner President Management Program. He has also attended the program on Investment Decisions and Behavioral Finance at the John F. Kennedy School of Government at Harvard. (Stocks to Riches Chapter 1)

A keen Believer in nurturing one’s physical, mental, emotional, and spiritual side, Mr. Parikh engages in Physical activities such as golf, reads extensively, and practices Vipassana regularly.

so this is the profile of the author

let’s start, chapter 1 investing.

The author ( Parag Parikh ) says, ” Investing is a challenging game and we were all into it at some time or the other the clearer we are about it, the more successful we will be at mastering it.”

Son:- Dad, give me some money, I want to invest in the stock market. All my college friends go to this broker who provides terminals where one can invest.

Dad:- Invest?

Son:- Yes, My friends make a lot of the money they buy stocks on the broker’s advice and when the prices rise, they sell and make a clean profit. (Stocks to Riches Chapter 1)

Dad:- Well, this is the age for you to study, get good grades so that you can get a good job that will secure your future, I don’t want you to get into speculating in stocks.

Daughter:- Dad, you have to give me some extra money this month, as I need to buy some gold jewellery. I will be getting married in a couple of years and I need to start building my jewellery collection now.

Mother:- Baby, look at yourself in the mirror. you are putting on so much weight if you want to look good wearing gold jewelry you require a good body. Why don’t you go to the gym for a regular workout instead of wasting your time watching Tv? it’s high time you start watching your figure if you want to get a good husband and settle down in life.

Daughter:- Oh mom, my boyfriend is a big investor he buys and sells commodities. he knows how to make money. We have decided to get married. you need not worry about my future.

Son:- Oh, So he is a commodity investor? Great! Dad, I talk to you it’s a great business. I want to be a stock investor. you don’t understand what a big thing investing is you can make a lot of money through it, See dad, you slag the whole day at your factor, become an investor and we will become rich.

Mother:- Children, your dad works, so hard at his factory, which is why we have a comfortable life. it’s wrong to run down your father, he choose to set up this factory, so what if he did not get into investing.

Son and Daughter:- But we can make big money through investing. Why should dad work so hard at the factory when this is a better option?

Mom:- I don’t want to get into this debate but I am happy to have inherited from my father some stocks and a real estate property. I get my regular dividends from my stocks and the rent from the property. why should I bother about investing?

Dad:- Well, I think I will go to sleep. I am really confused about this. Investing is a difficult subject good night.”

Then the author explains the above conversation. (Stocks to Riches Chapter 1)

the author says, ” In the above conversion no one understands ‘ Investing ‘. The son and the daughter talk about it but do not know what it exactly is.

Father has invested in the factory and asked his son to invest in his education, but he does not know about investing means either. the mother asks her daughter to invest in her body by exercising regularly. the daughter does not real investing Not commodity trading. the mother is a real investor in stocks and real estate. yet she does not know about it.”

After this, the author explains, what is investing?

the author says, ” Investing is a very exhaustive subject. It means different things to different people. At some point in time well all are investing in something. It may be relationships, It may be a marriage or a career.

Life is all about doing something to reap benefits in the future. so all of us are in the investment game. However, it means different things to different people.”

then the author gives examples of Investment.

People Invest in.

  • Large families so that when they grow old, their children can take care of them.
  • Land and crops, in order to fend for themselves and their families.
  • Small families, to provide a good standard of education ad living for their child.
  • their health, by exercising regularly and eating a balanced diet.
  • Charitable works, to serve the poor and the needy, and
  • An external asset like real estate, shares in listed companies, gold silver, etc, so that they can fall back upon them in tough times. (Stocks to Riches Chapter 1)

after this, the author says,” thus we have a lot of people doing different things in the name of investing. this makes the subject of investing very complex.”

then the author explains the different types of investment products.

Investment Products:-

the author says, ” these come in the form of stocks, bonds, mutual funds, real estate, precious metals, insurance, commodities, etc.”

then author explains how these products fulfill their purpose.

the author says,” the reason people choose one form or another is distinct as each is designed to satisfy a particular need.

  • Stocks offer dividends and capital appreciation.
  • Bonds are much safer than stocks and offer a safe return on the money invested.
  • Mutual funds may be seen as less risky than stocks.
  • Investment in real estate could be for capital appreciation, to earn rent, or for self-accommodation.
  • Insurance is used as security.
  • Precious metals like gold and silver appreciate over time and are therefore a good hedge against unforeseen political uncertainties.

thus, each investment product has different distinct characteristics and each is designed to satisfy a peculiar need. Each is designed to do something different. (Stocks to Riches Chapter 1)

After this long list of investment products. the author gives the investment procedure.

Investment procedure:-

the author says, ” there are three-technique methods or formulae for dealing the various investment products.

  • If one were to buy an investment product and hold it, then the procedure adopted is called going long.
  • If one were to sell an investment product and then buy it, the procedure adopted is called Going Short.
  • If one buys and then sells, the procedure adopted is called trading.

There have been various innovations in investment procedures by the introduction of the future and options market.l we have thus different procedures to speculate and hedge in the form of call options, put options, and futures. all these different types of procedures make the interactions of the financial market.”

After this procedure, the author explains Investor Classification.

Investor Classification:-

the author says, ”

  • A stock trader is one who uses the product stock and the procedure trading.
  • A long-term investor, on the other hand, used the product stock and the procedure of buying and holding long.
  • A short-sellers uses the same product stock and the procedure of selling and then buying back.
  • Similarly, a real estate speculator whose product is real estate adopts the procedure of speculation.
  • A collector of rare coins buys and holds long the product of rare coins. (Stocks to Riches Chapter 1)
  • A commodities futures trader adopts the procedure of the futures market to trade in commodities.
  • A stock options trader adopts the procedure of the futures market to trade in commodities.
  • A stock options trader adopts the procedure of hedging in the product of stocks.
  • A day trader uses the product stocks and the procedure of speculation.
  • A square is one who wants to hold over a long term by putting his money in the bank.

so thus, there are different types of people doing different things with the same investment products. Under the banner of Investing are people who are really gamblers, speculators, traders, hedgers, savers, dreamers, and losers.

after this, the author gives the wonderful investing plan and the difference between trading and investment.

If you want to read it, then buy this book from the following link.

Security Analysis: Chapter 15

Hello friends, in today’s article, we see a summary of chapter 15 of the Security Analysis book by Benjamin Graham and David Dodd. Chapter 15 is about the Technique of Selecting Preferred Stocks for Investment. so let’s see

Previous Chapter 14

The technique of Selecting Preferred Stocks for Investment:-Security Analysis: Chapter 15

In this chapter, the author explains, if we decide to buy the preferred stocks while seeing their disadvantages, so author gives some techniques to select preferred stocks.

The Author Says, ” For preferred stocks, we required to stringent the minimum requirement as compared to bond. So what is the minimum requirement for interest coverage ratio, this given in the following table (image)

Security Analysis Chapter 15

Now you can see, in three industry Segments

So for preferred stocks required more high multiple like in public utility is 1.75 of Fixed charges and for preferred stocks earning is 2 times of Fixed charges and Preferred stocks dividend.

Now Come for minimum stock Value requirement, in this also as compare bond and preferred stocks.

In this, you can see for preferred stocks required more. (Security Analysis: Chapter 15)

In public utilities, required 50% more than bond means 1/2 and for preferred stocks, 66.67% means 2/3 ( Bond + Preferred stocks equal)

So in this chapter 15, we discuss both tables and how to calculate this value.

 

How to calculate Rations?

The first thing is to use the method name is ” Total Deductions method“, for interest coverage ratio to compare with minimum coverage ratio.

So in this method, we have to divide earning by Bond interest + Preferred dividend.

In Bond, we only divide by bond interest but in this, we use both ( bond interest + Preferred dividend)

so some of you say, why not we use the prior deduction method,

Because, we know that, by using the prior deduction method

the result looks like Preferred stocks are more secure than Bond. so that’s why the author uses the total deduction method.

Let’s come in Stock Value Ratios

Security Analysis Chapter 15

For Bond, we use in the numerator, stocks equity( common stocks) and divided by funded debt( bonded debt).

For the preferred Stocks case, in the Numerator, We take only common stocks and in the denominator, we take bonded debt + Preferred stocks.

If Suppose You want the stock value ratio, for this preferred stocks are two type

1st Seniority preferred stocks

2nd Seniority preferred stocks

so for this type of preferred stock using the following method

  • If we want to calculate for 1st seniority preferred stocks Value ratio. so In 1st seniority of preferred stocks in the Nenomenator of equation presents 2nd seniority preferred stocks + common stocks and in the denominator, we can use Bonded debt + 1st preferred stocks. (Security Analysis: Chapter 15)

In Bond, we have to take face value, and 1st preferred stocks we have to take market value.

1st preferred stocks face value we can’t take, because, preferred stocks’ actual par value is different than the stated value.

for this, the author gives example to understand the above statement

e.g, The preferred stocks and this stated par value is $1 but those are preferred stocks holders, they have to get $100 for liquidating preferred stocks.

so the actual par value of that stock is $100, not $1. so for this, we have to use Market Value.

We can see tables(for referring above note page image) in that we say, for Preferred stocks the minimum requirement is more as compared to bonds.

So for seeing this formula, we know that, let’s take

The interest coverage ratio, in the numerator same ( EBIT- earning before interest tax) but in the bond case, we divided by fixed charges, and in the case of the preferred stock, we divided by fixed charges + preferred stocks dividend.

so those are preferred stock coverage is found less, because, we required maximum, as the author gives us

Let’s see in Public utility examples, for the preferred stocks the interest coverage ratio is 2 times. (as given in table by author)

Means, Interest coverage ratio = EBIT / Bond interest + preferred dividend.

            Interest Coverage ratio = 2

so, for Bond ( Interest coverage ratio = EBIT / Interest charges )

Now we surprise

so its value is more than 2 times because the denominator is small

If for preferred stocks is 2, so then bond interest coverage ratio is more than 2. obviously by math

So then the author says, ” Yes, the interest coverage ratio for the bond is more than 2, but people thinks, for preferred stocks coverage ratio is have to be lenient or less stringent, (Security Analysis: Chapter 15)

Because, preferred stocks coverage ratios denominator is more, so the value may be small,”

then Author says, This type of thinking is wrong.

Because, in any company have a bond and preferred stocks, and in this company preferred stocks is when safe, then this company bond is safer, with a good margin of safety.

If the bond is less safe then how are preferred stocks safe? ( common sense)

If the coverage ratio is minimum then this is only limited to bond coverage ratio, not for preferred stocks.

that’s why the author takes 2 times the interest coverage ratio for preferred stocks and for bonds only 1.75.

then the author talks about cumulative Issues and Non Cumulative issues

 

Non-cumulative stocks Issues/ cumulative Stock issues:-

Cumulative Stock issues:- Cumulative preferred stocks are those, in them, the dividend is suspended by the director, so this dividend is accumulated and this dividend is paid later.

But in Non-Cumulative Stock Issues:- In this, if the dividend is suspended, then they are not be recovered or accumulated. So those are new continued dividends, that are only given by the company.

That dividend is missed by the director, that dividend is gone forever.

Then the author says, ” Buying cumulative stocks is better than the Non-cumulative stocks.

Because, in non-cumulative stock problem is, those are common stockholder, they taking advantage, because, the director can suspend, your dividend. in those years also when companies earning is good, and this money is used by the director to improve the company. By this activity, the direct benefit to the common stockholder.

And Your dividend is missed by the company is not given in the next dividend time.

so there is not any benefit for non-cumulative stocks means full loss

On this Non-cumulative Preferred stocks lose, taking benefit by a company means on your expense, taking other profits. (Security Analysis: Chapter 15)

So those are company directors they play in trick, is that

Firstly they suspend your dividend and when they give a dividend to common stocks holder before some time that they give the dividend to the non-cumulative stockholder.

When a company wants to suspend its dividend, so for this they stop the first dividend of the common stockholder and some time after they stop the dividend of preferred stockholders also.

after this difference, the author talks about, ” those 21 preferred stocks, that do good in depression also.

Out of 440 listed stocks on NYSE in 1932, that on 21 stocks is doing good and perform well in depression with any loss.

So those are 440 listed stocks on NYSE in them only 40 (9%) are Non-cumulative preferred stocks.

By knowing this, you may be surprised, those are 21 stocks, that do good in depression, so in them,

the author gives 3 observations, they are as follows.

  1. The number of Non-cumulative issues was higher than cumulative issues, in those 21.
  2. No. of preferred stocks proceeded by bonds were higher than without bonds in those 21. ( as we discussed, in those company, that have only preferred stocks, that’s is good for the preferred stockholder.)
  3. The industry best represented is the snuff business, with three companies.”

(snuff business is a type of business of Tobacco)

So, the author says, ” Buy seeing the only result, we can’t say, non-cumulative stocks is superior.

or we can’t have to say, preferred stocks with the bond is better than, only preferred stocks companies.

or we can’t say, Snuff business is the safe business”

Logically the author says, ” This reverse is best means, the cumulative issue is better and preferred stocks without bond is better. (Security Analysis: Chapter 15)

But this result occurs, it only proves that if this thing does not matter most and maybe desirable but you become successful or not on this things, this observation not affect.

Then the author says, In conclusion

What matters most to success.

  1. Outstanding record of the company for a long period in past
  2. The strong inherent stability of the company
  3. Absence of concrete reason to expect substantial change for worse in the future.

so this is all about chapter 15 of the security Analysis book by Benjamin Graham and David Dodd.

Security Analysis:- Chapter 14

Hello friends, in this article, we see the chapter 14 summary of the book Security Analysis. Chapter 14 is all about the What is Preferred stocks, and their origin story, and also their advantage and disadvantage.

Previous Chapter 13

Preferred Stocks Analysis:-Security Analysis:- Chapter 14

Security Analysis Chapter 14

So, from this chapter, we discuss the only preferred stocks, and their Analysis based on the Advantages and Disadvantages of the Investor to buy that preferred stocks. let’s start

The author told, In The Intelligent Book also is that Preferred stocks are not Attractive Investment, it is Unattractive Investment.

The author says, ” Preferred stocks represent an Unattractive form of investment.”

so let’s find out why

Because 1st reason is that the Preferred stocks Principle and their income return is limited. whatever they told first is that amount only paid by the company.

and Second Reason the author told, is that Those are Preferred stocks holder, they don’t have any Claim on company. or in the author’s words is that ” Interest payment gets at any cost.”

and also Author says, ” Preferred stocks are the Limitations of Bond and Stocks Mixers, and Preferred stocks are more vulnerable than bond at the worst Condition of company.” (Security Analysis Chapter 14)

Because preferred stocks have a claim after Bond Holder.

 

What is the difference Between Bond and Preferred Stocks? (Security Analysis Chapter 14)

Ans:

The difference is that those are bond interest is compulsory to pay by the company, if the company is not paying, this type of company called a Defaulter.

Those are preferred stocks Dividend payment depends on the Board of directors of the Company, they pay or not pay.

If a company’s earnings are good and also make more than the preferred stock’s dividend, so usually preferred stock payment is done, but in this claiming point of preferred stocks looks unusefulness ( no benefited ).

If Companies Perform Bad and they generate very low earning, so bondholders have a claim on the Asset of the company, but they don’t have Practical value of that asset just like, we discussed in the bond Analysis series in all previous chapters. (Security Analysis Chapter 14)

Because, If the business fails, then properties value also fail, means decreases

so Investor think and they make the general rule, ” Bond instruments form is not have the special advantage as compare to preferred stocks. If the company is good then preferred stocks and bonds are also good. If the company is bad, then the bond is also bad.”

Read this again and think above two lines.

But the author says, ” this type of investor thinking is not good. Preferred stocks are weaker than Bonds.”

Because, bondholders get the money but those are directors of the company, they stop preferred stocks dividends.

why this happen

Because, if the company is capable, but they don’t pay preferred stocks dividend, and they give a reason like, that the Company has the good time in future, for that purpose they suspend the dividends of the preferred stocks. and say if the company grows, then you get the benefit also. for example, like, the company wants to expand.

that’s why they try to collect cash and save cash or in future any emergencies come, for that emergencies, they save the cash to deal with that problem. (Security Analysis Chapter 14)

so this happens with preferred stocks dividends.

so those are preferred stocks holder have the following types of conflict problem

Conflict of Interest come to Preferred stocks Holder:- Security Analysis Chapter 14

1 ) first is that what happens in the company I don’t care, I just want the continuous income.

2) Second is, If Company suspends the dividend, in the future, the company will perform well and become a great company.

and If the company uses the proper money of the holder of the preferred stock, then they get a good return on that money in the future.

so these two types of conflict of interest come to preferred stocks holder, and also a conflict of interest come between preferred stocks holder and commons stocks holder

Because, if companies director stops payment of preferred stocks dividend, then this money helps to build a company or grow the company.

so Because of this activity, common stocks holder get more benefits than the holder of the preferred stock

how this when, let’s see

When a company grows, then earing grows and share price is also growing so that’s benefit goes to the Common Stocks holder.

Preferred Stocks holders, not get the benefit of the company growth, because they get regular, whatever the dividend payment. This payment depends on what decides when we buy that preferred stocks.

So being great company, they don’t get benefit or advantage of that great company, as much as we see one side.

On the Other Side, The common Stocks Holder gets a benefit on earning and the preferred stockholder gets a benefit on companies expenses.

And also Board of Director of companies have also the conflict of Interest

Many times, they favor Common stocks holder, more than preferred stockholders, because they give the vote for the selection of companies’ board of directors. (Security Analysis Chapter 14)

Or In many times, the board of directors is not favored for common stocks holders, instead of that, they favor Management people.

Because, they get the salary, from the management. so many times, they don’t see the best interest of the common stockholder or preferred stocks holder, instead of that, they only see their own best interest.

Then the author says, ” this is the weakness of preferred stocks holder as compared to the bondholder.”

there is only one solution is that Preferred stocks holder has to be voting rights on the enterprise when the dividend is suspended by the director, then preferred stocks holder have to be immediately voting control to put money in the right place.

But practically is not happening. If in any company happen like this then preferred stockholder not take good advantage of that voting right.

So this thing of control also becomes useless.

Then after this author says, ” Yield or risk is not Commensurable.”

High Yield is not offset High risk

If you buy preferred stocks, and you have fear is that you will lose your principal amount and for this offer company give you a high dividend yield. so for this, they don’t offset.

What thing is offset is the thing is you have to get a good chance of principle profits, without losing it.

let’s see some qualifications of preferred stocks

Qualification of Preferred Stocks:

Here is one question come is that what criteria to buy preferred stocks

The author says, ” there are Three criteria for buying preferred stocks.”

1) Preferred stocks, have to fulfill the Minimum requirement of bonds

2) Exceed these minimum requirements by a margin to offset discretionary Feature of Dividend payment ( means those bonds minimum requirements, they have to exceed well with good margin)

Because we have those risks ( which risk) is the board of directors of the company can suspend our dividend payment, because, they have the power for this.

then author show, the 21 companies list, in those company have preferred stocks that were listed on New York Stock Exchange in 1932.

Between 21 companies only 5 companies perform well in depression also.

then, the author says, ” Sound Preferred stocks are not impossible things, but it is exceptional phenomena.”

exceptional because sound preferred stocks are the mistakes of the company. (Security Analysis Chapter 14)

Why mistake,

The mistake is, because, the company can issue bonds but they issue preferred stocks.

If they issued the bond, they get the Tax benefit, but on preferred stocks, they don’t get that benefit.

If preferred stocks perform well, then the company don’t get benefit from them, because the preferred stockholder is only benefited.

and on dividend company have to pay tax.

The author says, ” Issuing preferred stocks only benefits the company, because, they can stop any time dividend of preferred stocks.”

If the company is not suspending the dividend of preferred stocks, then the benefit is going to the holder of the preferred stock, because, company issues bonds but they issue preferred stocks and they don’t get tax benefits also.

Now some Investor says, Like that, We don’t agree with this, because the company is giving limited income to the preferred stocks and the company can invest properly money, that comes from by issuing preferred stocks and can get the better return on their investment ( that money come from by issuing preferred stocks). Whatever company pay to preferred stockholder on that basis company earn double profit. so this benefit gets the company.

But, the author tries to say is that ” the main purpose of preferred stocks is that company can suspend dividend at any time.”

So in this case, then the author is right.

Because in this case the only company is benefited

If the dividend suspends the loss goes to the preferred stockholder and if the dividend payments, then the company gets lost. (Security Analysis Chapter 14)

So if this type of Problem happen in preferred stocks, then why this is very much popular ( in 1940 before)

then the author says, ” just before the first world war, the majority preferred stocks is the industrial issues and they have speculative natures.”

Because they get discounted price than the par value. so profit possibility is moe and after that continue for 15 years got prosperity in the USA in 1920 on this basis preferred stocks give the awesome return.

On this basis, preferred stocks perform better than bonds, but actually, that is not.

Then the author talks about the study of the University of Michigan.

The University recently study ( 1940) and then, the author observes and prove that

Preferred stocks are without bond is better than preferred stocks with bond.

This means, If a company issue bond and preferred stocks and you buy preferred stocks of this company so this is not a wonderful idea, instead of that you can buy the preferred stocks of those company that don’t issue bonds.

When adverse development happens means depression/ recession comes, then company earnings decrease, so in that, if the company has issued the bond, then this bond gets benefited, than preferred stocks. so buy only those companies’ preferred stocks, they are not issued the bonds.

The other thing, the author observe from the Michigan university’s study is that preferred stocks stability depends on common stocks stability.

If common stocks decline then preferred stocks also decline.

then Author says,” is like, if Head’s come win common stocks, and if tail comes, preferred stocks lose.”

Why do common stocks holder win?

Because Heads means the good performance of the company and common stocks holder get unlimited capital gain.

And tail means, Company perform badly then preferred stocks also decline in values, as same as common stocks holder.

If Investor Analysis is good and they think in the future company give a multi-bagger return, then why do you buy preferred stocks instead that buying common stocks and participating in profit.

If the Investor is doubtful then buy the preferred stocks, why this doing is good

because they have to take risk of principle by buying Common stocks.

so they get lost, so they don’t have to do, at that point they get the good opportunity to principle profit.

so this is all about Chapter 14 of the Security Analysis book by Benjamin Graham and David Dodd.

Security Analysis: Chapter 12

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

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

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

How to Become a Millionaire before 30

 

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

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…

Warren Buffett Books Recommandations

Hello friends, in today’s article we see Warren Buffett Favorite books on investing, and they recommend to everyone who wants to build a fortune in common stocks. This book is recommended by Warren Buffett in public speech and at 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’s best books on investing:-

let’s start one by one

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

Warren Buffett Books Recommandations

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

This means if you invest in any stocks, consider investing 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

  1. Patience
  2. Self-discipline
  3. Eager to learn attitude

From this book, warren Buffett learn the two basic principles is that 1) Mr. Market and 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 are most favorite subjects 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.

For me, this book is the best best best of all-time Value Investing books. 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 Books Recommandations

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’s books

Warren Buffett Books Recommandations

I don’t read this book, but this book, warren Buffett recommends in many speeches, this book warren Buffett recommend to Bill Gates.

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

Warren Buffett Books Recommandations

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

Warren Buffett Books Recommandations

This is one of my favorite books, this book is on the Index investing strategy, this strategy beat the top 10 fund managers.

On Index, warren Buffett owns the Million dollar bet, click here to see that bet.

so this strategy works well.

learn this strategy, and this strategy for those people who don’t know much about investing, this strategy makes them very wealthy.

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

Warren Buffett Books Recommandations

this book, definitely changes your life, This biography of Charlie Munger, ( vice-chairman of Berkshire Hathaway company). In one interview, Vishal Khandelwal ( value Investing teacher) asks Mohnish Pabrai ( Pabrai fund Manager, founder of Dhakshana foundation) , if you have the choice to keep one book, which book you keep for your lifetime, then he says, poor charlie’s Almanack.

7) the Most Important Thing by Howard Marks:

Warren Buffett Books Recommandations

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

Warren Buffett Books Recommandations

9) Security Analysis by Benjamin Graham and David Dodd:

Warren Buffett Books Recommandations

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, who 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

  1. Security Analysis book Introduction
  2. Security Analysis Chapter 1
  3. Security Analysis Chapter 2
  4. Security Analysis Chapter 3
  5. Security Analysis Chapter 4
  6. Security Analysis Chapter 5
  7. Security Analysis Chapter 6
  8. Security Analysis Chapter 7
  9. Security Analysis Chapter 8
  10. Security Analysis Chapter 9
  11. Security Analysis Chapter 10

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

Warren Buffett Books Recommandations

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

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

Bond real estate
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

or

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.