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8 See www.microsoft.com/msft/stock.htm, “IPO investment results.”

9 Jay R. Ritter and Ivo Welch, “A Review of IPO Activity, Pricing, and Allocations,” Journal of Finance, August, 2002, p. 1797. Ritter’s website, at http:// bear.cba.ufl.edu/ritter/, and Welch’s home page, at http://welch.som.yale. edu/, are gold mines of data for anyone interested in IPOs.

10 Message no. 9, posted by “GoldFingers 69,” on the VA Linux (LNUX) message board at messages.yahoo.com, dated December 16, 1999. MSFT is the ticker symbol for Microsoft Corp.

* As already noted (see p. 96, footnote †), the New Housing Authority and New Community bonds are no longer issued.

† Today these “lower-quality bonds” in the “special situation” area are known as distressed or defaulted bonds. When a company is in approaching) bankruptcy, its common stock becomes essentially worthless, since U.S. bankruptcy law entitles bondholders to a much stronger legal claim than shareholders. But if the company reorganizes successfully and comes out of bankruptcy, the bondholders often receive stock in the new firm, and the value of the bonds usually recovers once the company is able to pay interest again. Thus the bonds of a troubled company can perform almost as well as the common stock of a healthy company. In these special situations, as Graham puts it, “no true distinction exists between bonds and common stocks.”(or

* Note very carefully what Graham is saying here. Writing in 1972, he contends that the period since 1949—a stretch of more than 22 years—is too short a period from which to draw reliable conclusions! With his mastery of mathematics, Graham never forgets that objective conclusions require very long samples of large amounts of data. The charlatans who peddle “time-tested” stock-picking gimmicks almost always base their findings on smaller samples than Graham would ever accept. (Graham often used 50-year periods to analyze past data.)

† Today, the enterprising investor can assemble such a list over the Internet by visiting such websites as www.morningstar.com (try the Stock Quickrank tool), www.quicken.com/investments/stocks/search/full, and http://yahoo. marketguide.com.

* Over the 10 years ending December 31, 2002, funds investing in large growth companies—today’s equivalent of what Graham calls “growth funds”—earned an annual average of 5.6%, underperforming the overall stock market by an average of 3.7 percentage points per year. However, “large value” funds investing in more reasonably priced big companies also underperformed the market over the same period (by a full percentage point per year). Is the problem merely that growth funds cannot reliably select stocks that will outperform the market in the future? Or is it that the high costs of running the average fund (whether it buys growth or “value” companies) exceed any extra return the managers can earn with their stock picks? To update fund performance by type, see www.morningstar.com, “Category Returns.” For an enlightening reminder of how perishable the performance of different investment styles can be, see www.callan.com/resource/periodic_ table/pertable.pdf.

* Graham makes this point to remind you that an “enterprising” investor is not one who takes more risk than average or who buys “aggressive growth” stocks; an enterprising investor is simply one who is willing to put in extra time and effort in researching his or her portfolio.

† Notice that Graham insists on calculating the price/earnings ratio based on a multiyear average of past earnings. That way, you lower the odds that you will overestimate a company’s value based on a temporarily high burst of profitability. Imagine that a company earned $3 per share over the past 12 months, but an average of only 50 cents per share over the previous six years. Which number—the sudden $3 or the steady 50 cents—is more likely to represent a sustainable trend? At 25 times the $3 it earned in the most recent year, the stock would be priced at $75. But at 25 times the average