The Intelligent Investor_ The Definitive Book on Value Investing - Benjamin Graham [262]
2 Like many of the track records commonly cited on Wall Street, this one is hypothetical. It indicates the return you would have earned in an imaginary index fund that owned all major convertibles. It does not include any management fees or trading costs (which are substantial for convertible securities). In the real world, your returns would have been roughly two percentage points lower.
3 However, most convertible bonds remain junior to other long-term debt and bank loans—so, in a bankruptcy, convertible holders do not have priorclaim to the company’s assets. And, while they are not nearly as dicey as high-yield “junk” bonds, many converts are still issued by companies with less than sterling credit ratings. Finally, a large portion of the convertible market is held by hedge funds, whose rapid-fire trading can increase the volatility of prices.
4 For more detail, see www.fidelity.com, www.vanguard.com, and www. morningstar.com. The intelligent investor will never buy a convertible bond fund with annual operating expenses exceeding 1.0%.
* How “shocked” was the financial world by the Penn Central’s bankruptcy, which was filed over the weekend of June 20–21, 1970? The closing trade in Penn Central’s stock on Friday, June 19, was $11.25 per share—hardly a going-out-of-business price. In more recent times, stocks like Enron and WorldCom have also sold at relatively high prices shortly before filing for bankruptcy protection.
* Penn Central was the product of the merger, announced in 1966, of the Pennsylvania Railroad and the New York Central Railroad.
† This kind of accounting legerdemain, in which profits are reported as if “unusual” or “extraordinary” or “nonrecurring” charges do not matter, anticipates the reliance on “pro forma” financial statements that became popular in the late 1990s (see the commentary on Chapter 12).
* A railroad’s “transportation ratio” (now more commonly called its operating ratio) measures the expenses of running its trains divided by the railroad’s total revenues. The higher the ratio, the less efficient the railroad. Today even a ratio of 70% would be considered excellent.
† Today, Penn Central is a faded memory. In 1976, it was absorbed into Consolidated Rail Corp. (Conrail), a federally-funded holding company that bailed out several failed railroads. Conrail sold shares to the public in 1987 and, in 1997, was taken over jointly by CSX Corp. and Norfolk Southern Corp.
† Ling-Temco-Vought Inc. was founded in 1955 by James Joseph Ling, anelectrical contractor who sold his first $1 million worth of shares to the public by becoming his own investment banker, hawking prospectuses from a booth set up at the Texas State Fair. His success at that led him to acquire dozens of different companies, almost always using LTV’s stock to pay for them. The more companies LTV acquired, the higher its stock went; the higher its stock went, the more companies it could afford to acquire. By 1969, LTV was the 14th biggest firm on the Fortune 500 list of major U.S. corporations. And then, as Graham shows, the whole house of cards came crashing down. (LTV Corp., now exclusively a steelmaker, ended up seeking bankruptcy protection in late 2000.) Companies that grow primarily through acquisitions are called “serial acquirers”—and the similarity to the term “serial killers” is no accident. As the case of LTV demonstrates, serial acquirers nearly always leave financial death and destruction in