Comparisons & Thoughts on Value – The Intelligent Investor Book Review (Chapters 16, 17, 18, & 19)
This is Part 7 of our book review of The Intelligent Investor, Revised Edition, Updated with New Commentary by Jason Zweig (affiliate link). Part 7 covers Chapters 16, 17, 18, and 19.
You may find the Introduction and relevant links at: The Intelligent Investor Book Review in 30 Minutes.
Convertible Issues and Warrants – Chapter 16
Wall Street has attempted to market convertibles as “the best of both worlds”. For the investor, they tout the increased protection over stocks, plus the hope of capital gains if the underlying stock increases. In addition the issuing company has the advantages of a lower cost of capital and the ability to get rid of debt obligations through bond conversions.
Graham points out the fallacy of such an argument. The convertible bond buyer is usually giving up yield and accepting greater risk in exchange for the conversion right. The company is possibly giving up common shareholders benefits of future growth.
The truth is, convertible issues must be evaluated individually, just as any other form of security. The type of security, by itself, does not make it worth your investment.
However, investors should be especially leery of new convertible issues. This is because companies usually issue convertibles during periods of time that are advantageous for the company; such as near the end of bull markets. Most bargain convertible issues will be found among older issues.
Zweig points out in the commentary that convertible bonds have historically provided less total return, but more income, and less risk than stocks. Compared to bonds, their total return is greater, but provide less income with greater risk. In reality they have been more correlated with stock prices than bond prices.
Four Extremely Instructive Case Histories – Chapter 17
I enjoyed the commentary of Jason Zweig more than Graham’s analysis. This is only because he uses more current illustrations of companies I was familiar with. Both provide instructive case histories from which we can learn valuable lessons.
Graham and Zweig look at extreme cases of companies, bankers, and investors making monumental mistakes that should have been recognized and avoided. Basic security analysis of these companies would have given investors the information they needed to recognize the fraudulent behavior of a few companies and the gross overvaluation of some stocks.
A Comparison of Eight Pairs of Companies – Chapter 18
One of the advantages of reading the revised version, with Jason Zweig’s commentary, is having more recent examples in the company comparisons. Since I was familiar with the companies, Zweig’s analysis gave even greater meaning to Graham’s older comparisons.
History continually repeats itself. The companies, participants, and investors are different, but the outcomes remain the same. As Zweig points out, “there are good and bad companies, there is no such thing as a good stock; there are only good stock prices, which come and go”.
There are cases where investors get excited and pay exorbitant prices for the stock of companies whose soundness is problematic. These outcomes end unsatisfactorily. At the same time, you will find companies whose stock is out of favor and whose price is below its real worth. These outcomes, more often than not, eventually offer satisfactory returns.
Many investors try to buy stocks with the best prospects based on market actions or future earnings. Graham was skeptical about this form of investing. He preferred to find find the minority of opportunities where he was confident the price was well below the real value of the company.
Stockholders and Managements – Chapter 19
Graham urged shareholders to take an active role in being owners of the company. He thought management with good results should be rewarded, and management with poor results should be questioned and challenged.
He was particularly adamant about shareholders demanding a fair portion of their earnings returned in dividends. This is because much of the time companies squander past earnings. Just because management does a good job with current operations doesn’t mean they know the best use of excess company capital.
If every stockholder acted like an intelligent investor he would hold company board members accountable. They should be required to account for their management decisions, dividend policies, buy-back programs, and overall commitment to looking out for the interests of the shareholders.
Continue to Part 8:
Discover, Compare, and Evaluate Dividend Stocks Without Emotional Bias
Minimize Large Portfolio Drawdowns
Invest With Confidence in Less Time - Manage Your Portfolio Without Behavioral Errors