security analysis

Investment bonds from security analysis chapter 6

July 6, 2021 by Laxman Sonale 1 Comment

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

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

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

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

Class III, is about Common stocks.

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

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

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

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

In Fixed-Value type Include: (Investment bonds)

1) High-Grade straight bonds and Preferred stocks

2) High-Grade Privileged Issues.

3) Common Stocks having guarantee or Preferred status.

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

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

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

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

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

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

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

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

4 principles for selection of Fixed-Value Types Securities:

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

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

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

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

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

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

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

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

So in this chapter, we see only Principle 1

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

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

Two views:

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

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

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

So this type of people thinking on bond or senior lien

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

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

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

So in this which is right,

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

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

Three problems with the first view:

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

so understanding this point the author gives the examples

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

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

the second problem is

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

Because Court does not allow you for this.

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

the third problem is

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

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

So from these principles what we learn

the first thing we learn is

Corollaries from Principle-I:

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

This debenture is a junior form of debt.

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

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

The second thing we learn is

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

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

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

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

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

The third thing we learn is

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

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

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

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

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

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

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

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

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

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

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

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

Classification of Securities: Chapter 5

June 29, 2021 by Laxman Sonale Leave a Comment

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

The Previous chapter 4

Classification of Securities from chapter 5 of Security Analysis book:

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

let’s see

Conventional Grouping of Securities:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

then the author gives their own Classification.

So they divide them into three classes:

1. Class I (Fixed-value type)

2. Class II (Variable-Value type)

3. Class III ( Common Stock type)

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

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

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

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

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

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

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

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

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

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

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

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

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

Annual Reports of the company: Security Analysis

June 19, 2021 by Laxman Sonale Leave a Comment

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

Previous Chapter 2: Problems of stocks Analysis

So where we get the information about the company, before that you have to know which type of information we need to analyze the company.

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

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

I) Terms of Issue

II) Data of Company

III) Data of Industry

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

so let’s starts with the terms of the issue

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

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

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

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

II) Data on Company:

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

so let’s see one by one

1) monthly Statement:

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

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

So very few companies only publish the monthly statement

2) Quarterly Statement:

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

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

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

3) Semi-Annual Reports:

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

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

4) Annual Reports of Company:

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

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

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

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

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

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

But nowadays, this type of problem does not remain.

5) Periodic reports to Public Agencies:

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

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

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

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

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

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

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

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

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

6) Listing Application:

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

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

But nowadays this information gets easily.

7) Registration Statement And Prospectuses:

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

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

8) Miscellaneous Official Reports:

This government division includes like US coal Commission.

This division gives the reports on the coal company.

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

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

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

9) Statistical and Financial Publications:

An agency like Standard and poor, Moodys

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

10) Request for Direct Information from Company:

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

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

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

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

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

III) Data on Industry:

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

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

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

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

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

Benjamin Graham Security Analysis: Chapter 2

June 17, 2021 by Laxman Sonale 2 Comments

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.

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

June 9, 2021 by Laxman Sonale Leave a Comment

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

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

The market price of stocks is misaligned with the actual price.
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.