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an increasing proportion of the mergers announced failed to be consummated. In such cases, of course, the aimed-for profit is not realized, and is likely to be replaced by a more or less serious loss. Reasons for nonsuccess are numerous, including antitrust intervention, shareholder opposition, change in “market conditions,” unfavorable indications from further study, inability to agree on details, and others. The trick here, of course, is to have the judgment, buttressed by experience, to pick the deals most likely to succeed and also those which are likely to occasion the smallest loss if they fail.*

Further Comment on the Examples Above

KAYSER-ROTH. The directors of this company had already rejected (in January 1971) the Borden proposal when this chapter was written. If the operation had been “undone” immediately the overall loss, including commissions, would have been about 12% of the cost of the Kayser-Roth shares.

AURORA PLASTICS. Because of the bad showing of this company in 1970 the takeover terms were renegotiated and the price reduced to 10½. The shares were paid for at the end of May. The annual rate of return realized here was about 25%.

UNIVERSAL-MARION. This company promptly made an initial distribution in cash and stock worth about $7 per share, reducing the investment to say 14½. However the market price fell as low as 13 subsequently, casting doubt on the ultimate outcome of the liquidation.

Assuming that the three examples given are fairly representative of “workout or arbitrage” opportunities as a whole in 1971, it is clear that they are not attractive if entered into upon a random basis. This has become more than ever a field for professionals, with the requisite experience and judgment.

There is an interesting sidelight on our Kayser-Roth example. Late in 1971 the price fell below 20 while Borden was selling at 25, equivalent to 33 for Kayser-Roth under the terms of the exchange offer. It would appear that either the directors had made a great mistake in turning down that opportunity or the shares of Kayser-Roth were now badly undervalued in the market. Something for a security analyst to look into.

Commentary on Chapter 15

It is easy in the world to live after the world’s opinion; it is easy in solitude to live after our own; but the great man is he who in the midst of the crowd keeps with perfect sweetness the independence of solitude.

—Ralph Waldo Emerson

Practice, Practice, Practice

Max Heine, founder of the Mutual Series Funds, liked to say that “there are many roads to Jerusalem.” What this masterly stock picker meant was that his own value-centered method of selecting stocks was not the only way to be a successful investor. In this chapter we’ll look at several techniques that some of today’s leading money managers use for picking stocks.

First, though, it’s worth repeating that for most investors, selecting individual stocks is unnecessary—if not inadvisable. The fact that most professionals do a poor job of stock picking does not mean that most amateurs can do better. The vast majority of people who try to pick stocks learn that they are not as good at it as they thought; the luckiest ones discover this early on, while the less fortunate take years to learn it. A small percentage of investors can excel at picking their own stocks. Everyone else would be better off getting help, ideally through an index fund.

Graham advised investors to practice first, just as even the greatest athletes and musicians practice and rehearse before every actual performance. He suggested starting off by spending a year tracking and picking stocks (but not with real money). 1 In Graham’s day, you would have practiced using a ledger of hypothetical buys and sells on a legal pad; nowadays, you can use “portfolio trackers” at websites like www.morningstar.com, http://finance.yahoo.com, http://money.cnn. com/services/portfolio/ or www.marketocracy.com (at the last site, ignore the “market-beating” hype on its funds and other services).

By test-driving your techniques before trying them with real