The Intelligent Investor_ The Definitive Book on Value Investing - Benjamin Graham [281]
* Defaulted railroad bonds do not offer significant opportunities today. However, as already noted, distressed and defaulted junk bonds, as well as convertible bonds issued by high-tech companies, may offer real value in the wake of the 2000–2002 market crash. But diversification in this area is essential—and impractical without at least $100,000 to dedicate to distressed securities alone. Unless you are a millionaire several times over, this kind of diversification is not an option.
* A classic recent example is Philip Morris, whose stock lost 23% in two days after a Florida court authorized jurors to consider punitive damages of up to $200 billion against the company—which had finally admitted that cigarettes may cause cancer. Within a year, Philip Morris’s stock had doubled—only to fall back after a later multibillion-dollar judgment in Illinois. Several other stocks have been virtually destroyed by liability lawsuits, including Johns Manville, W. R. Grace, and USG Corp. Thus, “never buy into a lawsuit” remains a valid rule for all but the most intrepid investors to live by.
1 Lisa Gibbs, “Optic Uptick,” Money, April, 2000, pp. 54–55.
2 Brooke Southall, “Cisco’s Endgame Strategy,” InvestmentNews, November 30, 2000, pp. 1, 23.
1 “The Truth About Timing,” Barron’s, November 5, 2001, p. 20. The headline of this article is a useful reminder of an enduring principle for the intelligent investor. Whenever you see the word “truth” in an article about investing, brace yourself; many of the quotes that follow are likely to be lies. (For one thing, an investor who bought stocks in 1966 and held them through late 2001 would have ended up with at least $40, not $11.71; the study cited in Barron’s appears to have ignored the reinvestment of dividends.)
2 The New York Times, January 7, 1973, special “Economic Survey” section, pp. 2, 19, 44.
3 Press release, “It’s a good time to be in the market, says R. M. Leary & Company,” December 3, 2001.
4 You would also have saved thousands of dollars in annual subscription fees (which have not been deducted from the calculations of these newsletters’ returns). And brokerage costs and short-term capital gains taxes are usually much higher for market timers than for buy-and-hold investors. For the Duke study, see John R. Graham and Campbell R. Harvey, “Grading the Performance of Market-Timing Newsletters,” Financial Analysts Journal, November/December, 1997, pp. 54–66, also available at www.duke.edu/ ˜charvey/research.htm.
5 For more on sensible alternatives to market timing—rebalancing and dollar-cost averaging—see Chapters 5 and 8.
6 Carol J. Loomis, “The 15% Delusion,” Fortune, February 5, 2001, pp. 102–108.
7 See Jason Zweig, “A Matter of Expectations,” Money, January, 2001, pp. 49–50.
8 Louis K. C. Chan, Jason Karceski, and Josef Lakonishok, “The Level and Persistence of Growth Rates,” National Bureau of Economic Research, Working Paper No. 8282, May, 2001, available at www.nber.org/papers/ w8282.
9 Almost exactly 20 years earlier, in October 1982, Johnson & Johnson’s stock lost 17.5% of its value in a week when several people died after ingesting Tylenol that had been laced with cyanide by an unknown outsider. Johnson & Johnson responded by pioneering the use of tamper-proof packaging, and the stock went on to be one of the great investments of the 1980s.
10 For the observation that it is amazingly difficult to remain on the Forbes 400, I am indebted to investment manager Kenneth Fisher (himself a Forbes columnist).
11 In the late 1990s, the forecasts of “market strategists” became more influential than ever before. They did not, unfortunately, become more accurate. On March 10, 2000, the very day that the NASDAQ composite