The Intelligent Investor_ The Definitive Book on Value Investing - Benjamin Graham [234]
2. Note that in late 1971 Studebaker-Worthington common sold as low as 38 while the $5 preferred sold at or about 77. The spread had thus grown from 2 to 20 points during the year, illustrating once more the desirability of such switches and also the tendency of the stock market to neglect arithmetic. (Incidentally the small premium of the preferred over the common in December 1970 had already been made up by its higher dividend.)
Chapter 17. Four Extremely Instructive Case Histories
1. See, for example, the article “Six Flags at Half Mast,” by Dr. A. J. Briloff, in January 11, 1971.
Chapter 18. A Comparison of Eight Pairs of Companies
1. The reader will recall from p. 434 above that AAA Enterprises tried to enter this business, but quickly failed. Here Graham is making a profound and paradoxical observation: The more money a company makes, the more likely it is to face new competition, since its high returns signal so clearly that easy money is to be had. The new competition, in turn, will lead to lower prices and smaller profits. This crucial point was overlooked by overenthusiastic Internet stock buyers, who believed that early winners would sustain their advantage indefinitely.
Chapter 19. Shareholders and Managements: Dividend Policy
1. Analytical studies have shown that in the typical case a dollar paid out in dividends had as much as four times the positive effect on market price as had a dollar of undistributed earnings. This point was well illustrated by the public-utility group for a number of years before 1950. The low-payout issues sold at low multipliers of earnings, and proved to be especially attractive buys because their dividends were later advanced. Since 1950 payout rates have been much more uniform for the industry.
Chapter 20. “Margin of Safety” as the Central Concept of Investment
1. This argument is supported by Paul Hallingby, Jr., “Speculative Opportunities in Stock-Purchase Warrants,” third quarter 1947.
Postscript
1. Veracity requires the admission that the deal almost fell through because the partners wanted assurance that the purchase price would be 100% covered by asset value. A future $300 million or more in market gain turned on, say, $50,000 of accounting items. By dumb luck they got what they insisted on.
Appendixes
1. Address of Benjamin Graham before the annual Convention of the National Federation of Financial Analysts Societies, May 1958.
Acknowledgments from Jason Zweig
My heartfelt gratitude goes to all who helped me update Graham’s work, including: Edwin Tan of HarperCollins, whose vision and sparkling energy brought the project to light; Robert Safian, Denise Martin, and Eric Gelman of Money Magazine, who blessed this endeavor with their enthusiastic, patient, and unconditional support; my literary agent, the peerless John W. Wright; and the indefatigable Tara Kalwarski of Money. Superb ideas and critical readings came from Theodore Aronson, Kevin Johnson, Martha Ortiz, and the staff of Aronson + Johnson + Ortiz, L.P.; Peter L. Bernstein, president, Peter L. Bernstein Inc.; William Bernstein, Efficient Frontier Advisors; John C. Bogle, founder, the Vanguard Group; Charles D. Ellis, founding partner, Greenwich Associates; and Laurence B. Siegel, director of investment policy research, the Ford Foundation. I am also grateful to Warren Buffett; Nina Munk; the tireless staff of the Time Inc. Business Information Research Center; Martin Fridson, chief executive officer, FridsonVision LLC; Howard Schilit, president, Center for Financial Research & Analysis; Robert N. Veres, editor and publisher, Inside Information; Daniel J. Fuss, Loomis Sayles & Co.; F. Barry Nelson, Advent Capital Management; the staff of the Museum of American Financial History; Brian