How to invest in bonds from security analysis book

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

How to invest in 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:

  1. The character of Industry e.g. Water, electricity
  2. 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

  1. Public Utility
  2. Railroads
  3. 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:

  1. 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.
  2. 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.
  3. 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

  1. Bond issues, when supposing as weakness of the company and that’s why bond issued.
  2. 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

  1. 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.
  2. 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

Benjamin Graham Security Analysis: Chapter 2

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

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

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

The objective of Security Analysis of stocks:-

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

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

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

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

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

1) The Security

2) The Price

3) The Time

4) The Person

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

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

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

I) The Person:-

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

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

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

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

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

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

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

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

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

So your decision also depends on Time.

II) The Price:-

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

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

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

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

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

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

III) The Security:-

The Security and price both are going together.

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

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

to understand these terms author given two examples,

(1) Commitment On Unattractive Term:-

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

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

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

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

so think these preferred stocks buy or not.

Let’s discuss the second commitment on Attractive terms.

(2) Commitment on Attractive Terms:

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

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

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

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

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

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

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

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

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

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

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

In the Attractive company buy the security at unattractive terms.

in the unattractive company buy the security at attractive terms.

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

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

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

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

From this, we get the two principles

I) Untrained Security Buyer:

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

II) Security Analysts:

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

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

But for Analysts, this is not

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

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

# Extent of Analysis:

How much we have to do analysis.

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

This author gives the examples

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

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

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

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

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

so the author says, there are two types of analysis

Types of Analysis:

I) Quantitative Analysis

II) Qualitative  Analysis

so let’s see Quantitative Analysis

I) Quantitative Analysis:

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

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

A) Capitalization

B) Earnings and Dividends

C) Assets and Liabilities

D) Operating Statistics

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

so let’s see the qualitative analysis

II) Qualitative Analysis:

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

A) Nature of Business

B) Relative position of the company in Industry

C) Geographical and Operating characteristics

D) Character of Management

E) Outlook for company, industry, business in General

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

so let’s see one by one

A) Nature of Business:

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

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

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

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

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

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

For this, the author gives examples of company

The Public Utility

this company is Unpopular in 1919 when boom happen.

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

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

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

 

B) Factor of Management:

This factor is double count by the Stock market.

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

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

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

 

C) Future Earnings Trend:

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

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

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

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

So that much we can say

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

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

for this author give the two examples

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

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

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

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

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

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

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

Instead of that, they have to guard the future changes

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

 

D) Inherent Stability:

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

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

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

but this is also the qualitative factor.

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

So for this, the author gives the examples

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

for previous 8 years

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

So tell me which is better

.

.

.

 

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

But the answer is BiG NO

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

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

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

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

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

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

So lastly author says for decision making.

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

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

Benjamin Graham Security Analysis: Chapter 1

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

Previous Chapter: Introduction of Security Analysis book

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

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

then let’s start with the first chapter

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

Firstly Benjamin Graham define the Analysis

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

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

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

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

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

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

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

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

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

1) Descriptive

2) Critical

3) Selectives

1) Descriptive functions:

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

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

2) Critical Functions:

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

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

3) Selective Functions:

Express specific judgments of its own determination in this function.

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

so author give some examples for judgments

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

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

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

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

the answer is Not to buy

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

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

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

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

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

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

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

So this company, we have to buy or not

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

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

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

So this company we have to buy or not.

Answer: Definitely buy,

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

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

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

So this company, we have to buy or not?

Answer: Not to Buy

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

or for Man

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

we don’t need to find out the BMI

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

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

Three Obstacles to Success of Analyst:

1) Inadequacy or Incorrectness of data:

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

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

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

2) Uncertainties of Future:

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

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

So then all future prediction is meaningless.

3) Irrational behavior of Market:

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

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

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

In Value Investing We take the two assumptions

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

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

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

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

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

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

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

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

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

Common Stocks and Uncommon Profits book review

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

Previous Chapter 10

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

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

This book has attempted to show

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

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

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

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

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

Doing this can make you a fortune.

This is all about chapter 11: summary and Conclusion.

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