The Intelligent Investor_ The Definitive Book on Value Investing - Benjamin Graham [274]
1 By the 1840s, these indexes had widened to include a maximum of seven financial stocks and 27 railroad stocks—still an absurdly unrepresentative sample of the rambunctious young American stock market.
2 See Jason Zweig, “New Cause for Caution on Stocks,” Time, May 6, 2002, p. 71. As Graham hints on p. 65, even the stock indexes between 1871 and the 1920s suffer from survivorship bias, thanks to the hundreds of automobile, aviation, and radio companies that went bust without a trace. These returns, too, are probably overstated by one to two percentage points.
2 Those cheaper stock prices do not mean, of course, that investors’ expectation of a 7% stock return will be realized.
3 See Jeremy Siegel, Stocks for the Long Run (McGraw-Hill, 2002), p. 94, and Robert Arnott and William Bernstein, “The Two Percent Dilution,” working paper, July, 2002.
* See Graham’s “Conclusion” to Chapter 2, p. 56–57.
* Graham’s objection to high-yield bonds is mitigated today by the widespread availability of mutual funds that spread the risk and do the research of owning “junk bonds.” See the commentary on Chapter 6 for more detail.
† † The “New Housing” bonds and “New Community debentures” are no more. New Housing Authority bonds were backed by the U.S. Department of Housing and Urban Development (HUD) and were exempt from income tax, but they have not been issued since 1974. New Community debentures, also backed by HUD, were authorized by a Federal law passed in 1968. About $350 million of these debentures were issued through 1975, but the program was terminated in 1983.
* A bond’s “coupon” is its interest rate; a “low-coupon” bond pays a rate of interest income below the market average.
* While Graham’s logic remains valid, the numbers have changed. Corporations can currently deduct 70% of the income they receive from dividends, and the standard corporate tax rate is 35%. Thus, a corporation would pay roughly $24.50 in tax on $100 in dividends from preferred stock versus $35 in tax on $100 in interest income. Individuals pay the same rate of income tax on dividend income that they do on interest income, so preferred stock offers them no tax advantage.
1 For more about the distinction between physically and intellectually difficult investing on the one hand, and emotionally difficult investing on the other, see Chapter 8 and also Charles D. Ellis, “Three Ways to Succeed as an Investor,” in Charles D. Ellis and James R. Vertin, eds., The Investor’s Anthology (John Wiley & Sons, 1997), p. 72.
2 A recent Google search for the phrase “age and asset allocation” turned up more than 30,000 online references.
3 James K. Glassman and Kevin A. Hassett, Dow 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market (Times Business,1999), p. 250.
4 For a fascinating essay on this psychological phenomenon, see Daniel Gilbert and Timothy Wilson’s “Miswanting,” at www.wjh.harvard.edu/˜dtg/ Gilbert_&_Wilson (Miswanting).pdf.
5 For the sake of simplicity, this example assumes that stocks rose instantaneously.
6 For the 2003 tax year, the bottom Federal tax bracket is for single people earningless than $28,400 or married people (filing jointly) earning less than $47,450.
7 Two good online calculators that will help you compare the after-tax income of municipal and taxable bonds can be found at www.investinginbonds. com/cgi-bin/calculator.pl and www.lebenthal.com/index_infocenter.html. To decide if a “muni” is right for you, find the “taxable equivalent yield” generated by these calculators, then compare that number to the yield currently available on Treasury bonds (http://money.cnn.com/markets/bondcenter/ or www.bloomberg.com/markets/C13.html). If the yield on Treasury bonds is higher than the taxable equivalent yield, munis are not for you. In any case, be warned that municipal bonds and funds produce lower income, and more price fluctuation, than most taxable bonds. Also, the alternative minimum tax, which now hits many middle-income Americans, can negate the advantages of municipal bonds.
8 For an excellent introduction