The Intelligent Investor_ The Definitive Book on Value Investing - Benjamin Graham [171]
* A bond is “called” when the issuing corporation forcibly pays it off ahead of the stated maturity date, or final due date for interest payments. For a brief summary of how convertible bonds work, see Note 1 in the commentary on this chapter (p. 418).
* In recent years, convertibles have tended to outperform the Standard & Poor’s 500-stock index during declining stock markets, but they have typically underperformed other bonds—which weakens, but does not fully negate, the criticism Graham makes here.
* This sentence could serve as the epitaph for the bull market of the 1990s. Among the “few prudent principles” that investors forgot were such market clichés as “Trees don’t grow to the sky” and “Bulls make money, bears make money, but pigs get slaughtered.”
* AT&T Corp. no longer is a significant issuer of convertible bonds. Among the largest issuers of convertibles today are General Motors, Merrill Lynch, Tyco International, and Roche.
* For a further discussion of “pro forma” financial results, see the commentary on Chapter 12.
† In recent years, convertible bonds have been heavily issued by companies in the financial, health-care, and technology industries.
* Warrants were an extremely widespread technique of corporate finance in the nineteenth century and were fairly common even in Graham’s day. They have since diminished in importance and popularity—one of the few recent developments that would give Graham unreserved pleasure. As of year-end 2002, there were only seven remaining warrant issues on the New York Stock Exchange—only the ghostly vestige of a market. Because warrants are no longer commonly used by major companies, today’s investors should read the rest of Graham’s chapter only to see how his logic works.
* Today, the last remnant of activity in warrants is in the cesspool of the NASDAQ “bulletin board,” or over-the-counter market for tiny companies, where common stock is often bundled with warrants into a “unit” (the contemporary equivalent of what Graham calls a “package”). If a stockbroker ever offers to sell you “units” in any company, you can be 95% certain that warrants are involved, and at least 90% certain that the broker is either a thief or an idiot. Legitimate brokers and firms have no business in this area.
* The “notorious French assignats” were issued during the Revolution of 1789. They were originally debts of the Revolutionary government, purportedly secured by the value of the real estate that the radicals had seized from the Catholic church and the nobility. But the Revolutionaries were bad financial managers. In 1790, the interest rate on assignats was cut; soon they stopped paying interest entirely and were reclassified as paper money. But the government refused to redeem them for gold or silver and issued massive amounts of new assignats. They were officially declared worthless in 1797.
* Graham, an enthusiastic reader of Spanish literature, is paraphrasing a line from the play Life Is a Dream by Pedro Calderon de la Barca (1600–1681): “The greatest crime of man is having been born.”
Commentary on Chapter 16
That which thou sowest is not quickened, except it die.
—I. Corinthians, XV:36.
The Zeal of the Convert
Although convertible bonds are called “bonds,” they behave like stocks, work like options, and are cloaked in obscurity.
If you own a convertible, you also hold an option: You can either keep the bond and continue to earn interest on it, or you can exchange it for common stock of the issuing company at a predetermined ratio. (An option gives its owner the right to buy or sell another security at a given price within a specific