The Intelligent Investor_ The Definitive Book on Value Investing - Benjamin Graham [231]
Chapter 4. General Portfolio Policy: The Defensive Investor
1. A higher tax-free yield, with sufficient safety, can be obtained from certain a relative newcomer among financial inventions. They would be of interest particularly to the enterprising investor.
Chapter 5. The Defensive Investor and Common Stocks
1. Wilfred Funk, Inc., 1953.
2. In current mathematical approaches to investment decisions, it has become standard practice to define “risk” in terms of average price variations or “volatility.” See, for example, by Richard A. Brealey, The M.I.T. Press, 1969. We find this use of the word “risk” more harmful than useful for sound investment decisions—because it places too much emphasis on market fluctuations.
3. All 30 companies in the DJIA met this standard in 1971.
Chapter 6. Portfolio Policy for the Enterprising Investor: Negative Approach
1. In 1970 the Milwaukee road reported a large deficit. It suspended interest payments on its income bonds, and the price of the 5% issue fell to 10.
2. For example: Cities Service $6 first preferred, not paying dividends, sold at as low as 15 in 1937 and at 27 in 1943, when the accumulations had reached $60 per share. In 1947 it was retired by exchange for $196.50 of 3% debentures for each share, and it sold as high as 186.
3. An elaborate statistical study carried on under the direction of the National Bureau of Economic Research indicates that such has actually been the case. Graham is referring to W. Braddock Hickman, Corporate Bond Quality and Investor Experience (Princeton University Press, 1958). Hickman’s book later inspired Michael Milken of Drexel Burnham Lambert to offer massive high-yield financing to companies with less than sterling credit ratings, helping to ignite the leveragedbuyout and hostile takeover craze of the late 1980s.
4. A representative sample of 41 such issues taken from Standard & Poor’s shows that five lost 90% or more of their high price, 30 lost more than half, and the entire group about two-thirds. The many not listed in the undoubtedly had a larger shrinkage on the whole.
Chapter 7. Portfolio Policy for the Enterprising Investor:
The Positive Side
1. See, for example, Lucile Tomlinson, and Sidney Cottle and W. T. Whitman, both published in 1953.
2. A company with an ordinary record cannot, without confusing the term, be called a growth company or a “growth stock” merely because its proponent expects it to do better than the average in the future. It is just a “promising company.” Graham is making a subtle but important point: If the definition of a growth stock is a company that will thrive in the future, then that’s not a definition at all, but wishful thinking. It’s like calling a sports team “the champions” before the season is over. This wishful thinking persists today; among mutual funds, “growth” portfolios describe their holdings as companies with “above-average growth potential” or “favorable prospects for earnings growth.” A better definition might be companies whose net earnings per share have increased by an annual average of at least 15% for at least five years running. (Meeting this definition in the past does not ensure that a company will meet it in the future.)
3. See Table 7-1.
4. Here are two age-old Wall Street proverbs that counsel such sales: “No tree grows to Heaven” and “A bull may make money, a bear may make money, but a hog never makes money.”
5. Two studies are available. The first, made by H. G. Schneider, one of our students, covers the years 1917–1950 and was published in June 1951 in the The second was made by Drexel Firestone, members of the New York Stock Exchange, and covers the years 1933–1969. The data are given here by their kind permission.
6. See pp. 393–395, for three examples of special situations existing in 1971.
Chapter 8. The Investor and Market Fluctuations