Quotes from Graham And Dodd’s Security Analysis: Sixth Edition, Foreword by Warren Buffett via Total Goon Move, Slide Share.

See Part I and Part II here.

Security Analysis Chapter 22: Privileged Issues

“Such issues [senior securities with speculative features] must therefore be considered as the most attractive of all in point of form, since they permit the combination of maximum safety with the chance of unlimited appreciation in value… Despite this impressive argument in favor of privileged senior issues as a form of investment, we must recognize that actual experience with this class has not been generally satisfactory.”

“Although there is indeed no upper limit to the price that a convertible bond may reach, there is a very real limitation on the amount of pro?t that the holder may realize while still maintaining an investment position. After a privileged issue has advanced with the common stock, its price soon becomes dependent in both directions upon changes in the stock quotation, and to that extent the continued holding of the senior issue becomes a speculative operation.”

“A privileged senior issue, selling close to or above face value, must meet the requirements either of a straight ?xed-value investment or of a straight common-stock speculation, and it must be bought with one or the other qualification clearly in view.”

“Generally speaking, there should be no middle ground. The investor interested in safety of principal should not abate his retirements in return for a conversion privilege; the speculator should not be attracted to an enterprise of mediocre promise because of the pseudo-security provided by the bond contract.”

“Where an intermediate stand is take, the result is usually confusion, clouded thinking, and self-deception.”

“In the typical case, a convertible bond should not be converted by the investor. It should be either held or sold.”

“When the price of his bond has passed out of the investment range, he must sell it; most important of all, he must not consider his judgment impugned if the bond subsequently rises to a much higher level. The market behavior of the issue, once it has entered the speculative range, is no more the investor’s affair than the price gyrations of any speculative stock about which he knows nothing.”

Security Analysis Chapter 23: Technical Characteristics Of Privileged Senior Securities

“The attractiveness of a pro?t-sharing feature depends upon two major but entirely unrelated factors: (1) the terms of the arrangement and (2) the prospects of pro?ts to share.”

“As between the two factors, it is undoubtedly true that it is more pro?table to select the right company than to select the issue with the most desirable terms… But in analyzing privileged issues of the investment grade, the terms of the privilege must receive the greater attention, not because they are more important but because they can be more definitely dealt with.”

“In examining the terms of a pro?t-sharing privilege, three component elements are seen to enter. These are: a. The extent of the pro?t-sharing or speculative interest per dollar of investment. b. The closeness of the privilege to a realizable pro?t at the time of purchase. c. The duration of the privilege.”

“The reluctance to sell one good thing and buy another, which characterizes the typical investor, is one of the reasons that holders of high-priced convertibles are prone to convert them rather than to dispose of them.”

Security Analysis Chapter 24: Technical Aspects Of Convertible Issues

“The effective terms of a conversion privilege are frequently subject to change during the life of the issue. These changes are of two kinds: (1) a decrease in the conversion price, to protect the holder against “dilution”; and (2) an increase in the conversion price… for the benefit of the company.”

“The competitive pressure to take advantage of a limited opportunity introduces an element of compulsion into the exercise of the conversion right which is directly opposed to that freedom of choice for a reasonable time which is the essential merit of such a privilege. There seems no reason why investment bankers should inject so confusing and contradictory a feature into a security issue. Sound practice would dictate its complete abandonment or in any event the avoidance of such issues by intelligent investors.”

Security Analysis

Security Analysis: Sixth Edition, Foreword by Warren Buffett by Benjamin Graham

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