Sunday, July 6, 2008

Security Analysis: Chapter 5

Security Analysis by Ben Graham and David Dodd is a must read for anyone serious about value investing.

Graham and Dodd begin this chapter by arguing that securities often do not fall into the standard categories of bonds and stocks. They cite examples of convertible issues, callable issues, participating preferreds, and other non-standard securities that are not adequately represented by their titles.

To remedy this, Graham and Dodd reclassify all securities into the following categories:

1) Fixed-Value Type: Containing high-grade bonds and preferreds
2) Senior Securities of Variable Value: Convertibles or low-grade fixed income
3) Common Stock

They go on to argue that securities of the can fall in different categories despite having the same title. For example, a convertible bond, where the conversion takes place at a remote price,would fall in Category 1, but a convertible bond that trades at a level where investors are expecting to convert, would fall into Category 3.

Part I, which lays out the justification, resources, and methods for the analyst with which to think about securities, is thus complete. The reader is now ready to delve into the analysis of "fixed-value" investments.


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