Benjamin Graham Security Analysis: Chapter 2

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

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

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

The objective of Security Analysis of stocks:-

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

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

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

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

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

1) The Security

2) The Price

3) The Time

4) The Person

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

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

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

I) The Person:-

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

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

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

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

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

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

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

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

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

So your decision also depends on Time.

II) The Price:-

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

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

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

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

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

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

III) The Security:-

The Security and price both are going together.

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

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

to understand these terms author given two examples,

(1) Commitment On Unattractive Term:-

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

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

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

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

so think these preferred stocks buy or not.

Let’s discuss the second commitment on Attractive terms.

(2) Commitment on Attractive Terms:

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

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

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

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

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

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

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

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

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

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

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

In the Attractive company buy the security at unattractive terms.

in the unattractive company buy the security at attractive terms.

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

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

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

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

From this, we get the two principles

I) Untrained Security Buyer:

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

II) Security Analysts:

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

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

But for Analysts, this is not

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

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

# Extent of Analysis:

How much we have to do analysis.

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

This author gives the examples

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

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

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

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

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

so the author says, there are two types of analysis

Types of Analysis:

I) Quantitative Analysis

II) Qualitative  Analysis

so let’s see Quantitative Analysis

I) Quantitative Analysis:

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

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

A) Capitalization

B) Earnings and Dividends

C) Assets and Liabilities

D) Operating Statistics

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

so let’s see the qualitative analysis

II) Qualitative Analysis:

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

A) Nature of Business

B) Relative position of the company in Industry

C) Geographical and Operating characteristics

D) Character of Management

E) Outlook for company, industry, business in General

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

so let’s see one by one

A) Nature of Business:

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

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

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

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

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

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

For this, the author gives examples of company

The Public Utility

this company is Unpopular in 1919 when boom happen.

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

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

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

 

B) Factor of Management:

This factor is double count by the Stock market.

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

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

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

 

C) Future Earnings Trend:

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

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

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

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

So that much we can say

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

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

for this author give the two examples

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

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

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

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

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

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

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

Instead of that, they have to guard the future changes

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

 

D) Inherent Stability:

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

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

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

but this is also the qualitative factor.

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

So for this, the author gives the examples

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

for previous 8 years

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

So tell me which is better

.

.

.

 

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

But the answer is BiG NO

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

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

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

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

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

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

So lastly author says for decision making.

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

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

Benjamin Graham Security Analysis: Chapter 1

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

Previous Chapter: Introduction of Security Analysis book

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

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

then let’s start with the first chapter

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

Firstly Benjamin Graham define the Analysis

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

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

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

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

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

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

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

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

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

1) Descriptive

2) Critical

3) Selectives

1) Descriptive functions:

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

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

2) Critical Functions:

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

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

3) Selective Functions:

Express specific judgments of its own determination in this function.

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

so author give some examples for judgments

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

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

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

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

the answer is Not to buy

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

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

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

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

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

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

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

So this company, we have to buy or not

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

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

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

So this company we have to buy or not.

Answer: Definitely buy,

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

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

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

So this company, we have to buy or not?

Answer: Not to Buy

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

or for Man

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

we don’t need to find out the BMI

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

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

Three Obstacles to Success of Analyst:

1) Inadequacy or Incorrectness of data:

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

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

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

2) Uncertainties of Future:

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

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

So then all future prediction is meaningless.

3) Irrational behavior of Market:

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

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

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

In Value Investing We take the two assumptions

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

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

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

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

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

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

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

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

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

Security Analysis Book Introduction

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

Security Analysis Book Introduction
Security Analysis Book Introduction:

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

About this book(security analysis):-

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

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

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

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

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

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

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

so let’s start,

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

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

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

so let’s start with first

1) high-Grade bonds and Preferred stocks:

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

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

A) Safety of principal and interest

B) Future of Interest rates and bond price

C) Value of a dollar

let’s start with the first problem

A) Safety of principal and Interest:

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

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

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

B) Future of interest rates and Bond prices:

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

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

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

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

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

let’s see the third problem,

C) Value of a Dollar:

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

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

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

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

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

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

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

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

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

2) Speculative Bonds and Preferred stocks

In this, we see some problems, lets stats

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

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

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

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

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

B) Approach them as common stocks with limited claims:

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

 

3) Common Stocks:

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

The author gives for this an example of General Electrics

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

you don’t have the common sense

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

A) General future of Corporate Profits:

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

so nothing is sure about the future.

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

 

B) Quality differential between companies:

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

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

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

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

C) Interest Rates:

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

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

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

 

D) Factor of Timing:

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

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

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

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

this philosophy of timing is opposite to the investment nature.

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

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

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

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