Quotes from Graham And Dodd’s Security Analysis: Sixth Edition, Foreword by Warren Buffett via Total Goon Move, Slide Share.
See Part I here.
Security Analysis Chapter 6: The Selection Of Fixed-Value Investments
“In exchange for limiting his participation in future profits, the bondholder obtains a prior claim and a definite promise of payment, while the preferred stockholder obtains only the priority, without the promise. But neither priority nor promise is itself an assurance of payment.”
“Since the chief emphasis must be placed on avoidance of loss, bond selection is primarily a negative art.”
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“In the past the primary emphasis was laid upon the specific security, i.e., the character and supposed value of the property on which the bonds hold a lien. From our standpoint this consideration is quite secondary; the dominant element must be the strength and soundness of the obligor enterprise. There is here a clearcut distinction between two points of view. On the one hand the bond is regarded as a claim against property; on the other hand, as a claim against a business.”
“As a practical matter it is not so easy to distinguish in advance between the underlying bonds that come through reorganization unscathed and those which suffer drastic treatment. Hence the ordinary investor may be well advised to leave such issues out of his calculations and stick to the rule that only strong companies have strong bonds.”
Security Analysis Chapter 7: The Selection Of Fixed-Value Investments: Second And Third Principles
“Any bond can do well when conditions are favorable; it is only under the acid test of depression that the advantages of strong over weak issues become manifest and vitally important.”
“…there is no such thing as a depression-proof industry…
“The distinction to be made, therefore, is not between industries which are exempt from and those which are affected by depression, but rather between those which are more and those which are less subject to fluctuation. The more stable the type of enterprise, the better suited it is to bond financing and the larger the portion of the supposed normal earning power which may be consumed by interest charges.”
“The fact that no good bonds are available is hardly an excuse for either issuing or accepting poor ones. Needless to say, the investor is never forced to buy a security of inferior grade. At some sacrifice in yield he can always find issues that meet his requirements, however stringent; and…attempts to increase yield at the expense of safety are likely to prove unprofitable.”
“A reasonable amount of funded debt is of advantage to a prosperous business, because the stockholders can earn a profit above interest charges through the use of the bondholders’ capital.”
“It appears to be a financial axiom that whenever there is money to invest, it is invested; and if the owner cannot find a good security yielding a fair return, he will invariably buy a poor one. But a prudent and intelligent investor should be able to avoid this temptation, and reconcile himself to accepting an unattractive yield from the best bonds, in preferences to risking his principal in second-grade issues for the sake of a large coupon return.”
“Security prices and yields are not determined by any exact mathematical calculate not the expected risk, but they depend rather upon the popularity of the issue. This popularity reflects in a general way the investors’ view as to the risk involved, but it is also influenced largely by other factors, such as the degree of familiarity of the public with the company and the issue (seasoning) and the ease with which the bond can be sold (marketability).”
“In life insurance the relation between age and mortality rate is well defined and changes only gradually. The same is true, to a much lesser extent, of the relation between the various types of structures and the fire hazard attaching to them. But the relation between different kinds of investments and the risk of loss is entirely too indefinites, and too variable with changing conditions, to permit of sound mathematical formulation.”
“For the individual is not qualified to be an insurance underwriter. It is not his function to be paid for incurring risks; on the contrary it is to his interest to pay others for insurance against loss.”
Security Analysis: Sixth Edition, Foreword by Warren Buffett by Benjamin Graham
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