The Intelligent Investor_ The Definitive Book on Value Investing - Benjamin Graham [261]
† Graham launched Graham-Newman Corp. in January 1936, and dissolved it when he retired from active money management in 1956; it was the successor to a partnership called the Benjamin Graham Joint Account, which he ran from January 1926, through December 1935.
* An “unrelated” hedge involves buying a stock or bond issued by one company and short-selling (or betting on a decline in) a security issued by a different company. A “related” hedge involves buying and selling different stocks or bonds issued by the same company. The “new group” of hedge funds described by Graham were widely available around 1968, but later regulation by the U.S. Securities and Exchange Commission restricted access to hedge funds for the general public.
* In 2003, an intelligent investor following Graham’s train of thought would be searching for opportunities in the technology, telecommunications, and electric-utility industries. History has shown that yesterday’s losers are often tomorrow’s winners.
* The successor corporation to Industrial National Bank of Rhode Island is FleetBoston Financial Corp. One of its corporate ancestors, the Providence Bank, was founded in 1791.
* For today’s investor, the cutoff is more likely to be around $1 per share—the level below which many stocks are “delisted,” or declared ineligible for trading on major exchanges. Just monitoring the stock prices of these companies can take a considerable amount of effort, making them impractical for defensive investors. The costs of trading low-priced stocks can be very high. Finally, companies with very low stock prices have a distressing tendency to go out of business. However, a diversified portfolio of dozens of these distressed companies may still appeal to some enterprising investors today.
* In Graham’s terms, a large amount of goodwill can result from two causes: a corporation can acquire other companies for substantially more than the value of their assets, or its own stock can trade for substantially more than its book value.
* Technically, the working-capital value of a stock is the current assets per share, minus the current liabilities per share, divided by the number of shares outstanding. Here, however, Graham means “net working-capital value,” or the per-share value of current assets minus total liabilities.
* Le coeur a ses raisons que la raison ne connaît point. This poetic passage is one of the concluding arguments in the great French theologian’s discussion of what has come to be known as “Pascal’s wager” (see commentary on Chapter 20).
* As discussed in the commentary on Chapter 7, merger arbitrage is wholly inappropriate for most individual investors.
1 Patricia Dreyfus, “Investment Analysis in Two Easy Lessons” (interview with Graham), Money, July, 1976, p. 36.
2 See the commentary on Chapter 11.
3 There are also many newsletters dedicated to analyzing professional portfolios, but most of them are a waste of time and money for even the most enterprising investor. A shining exception for people who can spare the cash is Outstanding Investor Digest (www.oid.com).
1 As a brief example of how convertible bonds work in practice, consider the 4.75% convertible subordinated notes issued by DoubleClick Inc. in 1999. They pay $47.50 in interest per year and are each convertible into 24.24 shares of the company’s common stock, a “conversion ratio” of 24.24. As of year-end 2002, DoubleClick’s stock was priced at $5.66 a share, giving each bond a “conversion value” of $137.20 ($5.66 24.24). Yet the bonds traded roughly six times higher, at $881.30—creating a “conversion premium,” or excess over their conversion value, of 542%. If you bought at that