The Intelligent Investor_ The Definitive Book on Value Investing - Benjamin Graham [278]
* Here Graham is describing rights offerings, in which investors who already own a stock are asked to pony up even more money to maintain the same proportional interest in the company. This form of financing, still widespread in Europe, has become rare in the United States, except among closed-end funds.
* In Graham’s day, the most prestigious investment banks generally steeredclear of the IPO business, which was regarded as an undignified exploitation of naïve investors. By the peak of the IPO boom in late 1999 and early 2000, however, Wall Street’s biggest investment banks had jumped in with both feet. Venerable firms cast off their traditional prudence and behaved like drunken mud wrestlers, scrambling to foist ludicrously overvalued stocks on a desperately eager public. Graham’s description of how the IPO process works is a classic that should be required reading in investment-banking ethics classes, if there are any.
1 See www.calpers.ca.gov/whatshap/hottopic/worldcom_faqs.htm and www. calpers.ca.gov/whatsnew/press/2002/0716a.htm; Retirement Systems of Alabama Quarterly Investment Report for May 31, 2001, at www.rsa.state.al. us/Investments/quarterly_report.htm; and John Bender, Strong Corporate Bond Fund comanager, quoted in www.businessweek.com/magazine/content/01_22/ b3734118.htm.
2 These numbers are all drawn from WorldCom’s prospectus, or sales document, for the bond offering. Filed May 11, 2001, it can be viewed at www.sec.gov/ edgar/searchedgar/companysearch.html (in “Company name” window, enter “WorldCom”). Even without today’s 20/20 hindsight knowledge that WorldCom’s earnings were fraudulently overstated, WorldCom’s bond offering would have appalled Graham.
3 For documentation on the collapse of WorldCom, see www.worldcom.com/ infodesk.
1 In the early 1970s, when Graham wrote, there were fewer than a dozen junk-bond funds, nearly all of which charged sales commissions of up to 8.5%; some even made investors pay a fee for the privilege of reinvesting their monthly dividends back into the fund.
2 Edward I. Altman and Gaurav Bana, “Defaults and Returns on High-Yield Bonds,” research paper, Stern School of Business, New York University,2002.
3 Graham did not criticize foreign bonds lightly, since he spent several years early in his career acting as a New York–based bond agent for borrowers in Japan.
4 Two low-cost, well-run emerging-markets bond funds are Fidelity New Markets Income Fund and T. Rowe Price Emerging Markets Bond Fund; for more information, see www.fidelity.com, www.troweprice.com, and www. morningstar.com. Do not buy any emerging-markets bond fund with annual operating expenses higher than 1.25%, and be forewarned that some of these funds charge short-term redemption fees to discourage investors from holding them for less than three months.
5 The definitive source on brokerage costs is the Plexus Group of Santa Monica, California, and its website, www.plexusgroup.com. Plexus argues persuasively that, just as most of the mass of an iceberg lies below the ocean surface, the bulk of brokerage costs are invisible—misleading investors into believing that their trading costs are insignificant if commission costs are low. The costs of trading NASDAQ stocks are considerably higher for individuals than the costs of trading NYSE-listed stocks (see p. 128, footnote 5).
6 Real-world conditions are still more harsh, since we are ignoring state income taxes in this example.
7 Barber and Odean’s findings are available at http://faculty.haas.berkeley. edu/odean/Current%20Research.htm and http://faculty.gsm.ucdavis.edu/ ˜bmbarber/research/default.html. Numerous studies, incidentally, have found virtually identical results among professional