hello friends, in today’s, article, we see the specific standard for bond investment from chapter 8 of the security analysis book and also what is a bond, how we invest in them, and what are the problems come while investing in bonds.
Principle 4: Definite standard of safety must be applied:-What is a bond
In principle 4, we talk about those states, they have their own laws and rules on those that are saving banks that can invest in specific areas.
they have to satisfy their criteria of states
So the author (Benjamin graham and David dodd’s) use the New York Status, because, he thinks it’s a good point to start.
After that, whatever its criteria, the author criticism them and if need to neglect them or reject them also and they modified them if required.
So there are 7 criteria prescribed by New York Statutes:
In the Coming 4 chapters we explain the 7 criteria in this, we see only two criteria.
So firstly the author explains, what the new york statute says, and what author explains his own view if they are right or wrong
General criteria prescribed by New York Statute:-(what is a bond)
- Nature and location of business or government business
- Size of enterprise, or the Issues
- Terms of the issues
- Record of solvency and dividend payments
- Relation of earnings to interest requirement
- Relation of the value of property to funded debt
- Relation of stock capitalization to funded debt.
Criteria 1: Nature and Location
1 ) New York Statute says, ” You can invest in U.S. government bond, state bonds, municipal bond”
but You can not invest in foreign government and foreign corporation bonds.
2) You can invest in Railroad, gas, and telephone industry, b
but you can not invest in street railway and water companies and also in debentures of public utilities.
3) You can invest in the first mortgage on a real estate bond,
but you can not invest in all industrial bonds and also financial companies’ bonds, investment trust, and credit concern companies also.
so for this author give some problems with New York statutes
Problems with New York Statute on Criteria 1:
1 ) In any industry, we can’t invest, so this is not talking about practically way because, in the industry also, there are some companies that perform well in bad times also and we can select them.
If we neglect whole industry segment then, what remain only railroads and public utility and government bond according to the New York Statutes.
So it’s happening, if we can’t find good then don’t go for bad.
so this is like we are doing narrow and it’s not right, so we can include the industrial also.
2) Water companies neglect the public utility by the New York Statutes and don’t give a good reason and other states include the water company and we also include them.
3) In 1938, One commitment that happens in the banking sector is in that they do the consortium of banks can waive as many rules as it sees fit, and they decide which criteria can remain and eliminate and also do modifications according to them by doing a simple variation.
so for this, the author says, ” Until now there is not any problem of consortium bank, but happen problem in future.”
so we don’t have to take tension because, nowadays, no consortium bank, that told us to do this or that.
4) Foreign government restriction is a good restriction according to the author, because, the foreign government pays or does not pay. If they don’t pay you, so you can’t force them to pay and you can’t take their asset, and revenue source,
the author gives examples of some countries that full fill the obligation and some more countries that don’t fulfill the obligations.
like those fulfill obligation country are Canada, Holland, and Switzerland, etc.
after that, the author talks about foreign company bond investment.
So many cases, present there, those fulfill the obligation by a foreign company but not that time government doesn’t fulfill it.
but sometimes the company is able to pay but the government restricts them.
So sometimes exchange is restricted on the company by the government.
so the foreign company has the ability to pay but they can’t pay, because the government does not allow it.
Criteria 2: Size of company
The author says those are a small company that is very much vulnerable at unexpected changes.
so those are big companies, they can go easily and unexpected harsh condition goes easily. means, they can pass easily in dangerous situations also.
Because, they have good relation with bank and they have lots of resources, that deals with that situation.
so New York statute, what say, about this criterion is
In railroad, in that much amount of mine is spread over the area, and in municipal bonds, that much amount of population is required and in public utility, they say different types of criteria, but in this point that much is not important, if you want to know about them then, buy a book by clicking above image of book.
So come here directly and what author reconnects
The author says, ” buy municipality bonds when the population is 10 thousand or by public utility when gross revenue is about $2 million and on the railroad, the gross revenue is $3 million
and lastly, in the industrial, the gross revenue is $5 million.
Industrial is not included in New York statute, because they don’t say, to b buy or avoid them
and author says, ” invest in industrial also.”
So large size does not mean to have safety
so it’s may happen those are the largest companies that are the weakest company.
if they have maximum debt.
So large size criteria are not affected in this municipality, railroad, and public utility,
so small and large both are the same.
but in industrial, have an effect, those are large size, they are more stable than small size.
So this is all about the two criteria for specific standards for bond investment.
4) Common Stocks and Uncommon Profits
[…] Security analysis book summary […]