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Durable Competitive Advantage > Intelligent Investor Ch. 6-8 > Flashcards

Intelligent Investor Ch. 6-8 Flashcards

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0
Q

Example graham gives of second quality bonds

A

Railroad income bonds

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1
Q

Graham’s requirement for earnings before income taxes relative to total interest charges when buying second grade bonds in order to provide safety?

A

Pretax earnings should be 5 times that of interest charges

When seeking safety in bond purchase

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2
Q

2 contradictory attributes which second grade bonds and preferred stocks possess

A

1 nearly all suffer severe sinking spells in bad markets,

2 most Recover when favorable conditions return

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3
Q

When should the investor invest in second rate bonds and preferred stocks?

A

Bought at bargain levels at least 30% below par

for corporateBonds paying above average interest rates,
or preferred yielding 10% or more

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4
Q

Cumulative preferred stocks that fail to pay dividends for many
Years

A

Work out when business conditions improve

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5
Q

Graham on foreign government bonds

A

Stay away

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6
Q

New bond issues

A

Investors should be wary and perform careful examination before
Purchase

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7
Q

In 2003 how much did Wall Street make for selling IPOs

A

7% for IPOs compared to 4% for old securities

Wall Street makes almost twice as much on new issues

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8
Q

2 caveats for new issuance of securities

A

1 harder driving sales force behind it

2 always sold in favorable market conditions for the seller and
Consequently less favorable conditions for the buyer

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9
Q

Corporations choose to offer new issues of stock when…

A

Stock market is near a peak

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10
Q

Great time for buyers in the overall stock market is when there are…

A

Few IPOs

When there are a lot of IPOs the markets are overheated

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11
Q

Closed end fund financing, European financing

A

Investors are asked to pony up fees to own the same proportion
Of ownership interest (closed end funds are only example in US)

In Europe, this is still prevalent among common stocks

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12
Q

What is a dependable sign that the end of a bull market is occurring

A

When new common stocks of nondescript companies are offered
At prices somewhat higher than medium sized companies with
Long market history

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13
Q

For every dollar you make speculatively…

A

You will be lucky if you only lose 2

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14
Q

What do junk bond funds tend to do when interest rates rise?

A

Outperform most other bond funds

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15
Q

Jason zweig’s opinion on foreign bonds

A

Emerging market bonds could be up to 10% of your bond holdings
Because they never move with the s&p 500

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16
Q

Market impact

A

Extra price you pay for a stock while frequently trading

Ex. investors won’t sell you the shares unless you pay 10 cents more

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17
Q

How much do day traders underperform the market on average

A

6% from transaction costs, market impact

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18
Q

Special situation bond purchases

A

Bonds recover if a company is able to reorganize successfully
During bankruptcy

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19
Q

4 characteristic scenarios for the enterprising investor

A

1 buying in low markets and selling in high markets
2 buying carefully chosen growth stocks
3 buying bargain issues of various typed
4 buying into special situations

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20
Q

What time periods did graham use to analyze past data?

A

50 year periods

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21
Q

Graham’s PE RATIO

A

Use multi year average of past earnings

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22
Q

Investment selection: twofold merit

A

1 it must meet objective tests of underlying soundness

2 it must be different from policy followed by most investors
Or speculators

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23
Q

Relatively unpopular large company

A

Look for companies that are undervalued due to temporary

Setbacks

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24
Risks of small companies facing temporary setbacks
Risk of definitive loss of profitability Also protracted neglect from the market in spite of better earnings
25
Companies that are speculative because of widely varying earnings Tend to sell at...
Relatively high price and relatively low multiplier in their good years And low prices with high multipliers in their bad years
26
When is an issue considered a "true bargain" by graham
If it's value is at least 50% more than the price
27
2 tests by which a bargain common stock is detected
1 the method of appraisal 2 value of a business to a private owner
28
Method of appraisal
Relies on estimating future earnings and multiplying these by A factor appropriate to a particular issue
29
Value of business to private owner
Value determined chiefly by expected future earnings Attention is also paid to realizable value of assets, with particular Emphasis on net current assets or working capital
30
What are the 2 major sources of undervaluation for companies?
1 currently disappointing results 2 protracted neglect or unpopularity
31
Ideal combination for a bargain company
Large, prominent company selling both well below its past average Price and below its past average P/E ratio
32
Net working capital
Current assets - total liabilities - preferred stock
33
Most readily identified bargain issue of common stock
Common stock sells for less than company's net working | Capital after deducting all prior obligations
34
Secondary company
Company not a leader in fairly important industry
35
6 ways in which profits can arise from purchase of secondary issues
1 high dividend return 2 reinvested earnings in relation to price paid 3 bull markets are most generous to low priced issues 4 in sideways markets price adjustments to undervalued issues Will cause them to rise 5 new, better management may take over 6 company is acquired by larger company at a premium
36
Security values and the aggressive investor
The aggressive investor must have considerable knowledge of Security values to warrant viewing his security operations as Equivalent to a business enterprise
37
Full price purchases: 3 things they should not be made for
1 foreign bonds 2 ordinary preferred stocks 3 secondary common stocks
38
Full price definition
Close to par for bonds or preferred stocks Fair business value of enterprise in case of common stocks
39
When should the enterprising investor buy foreign bonds, preferred stock or secondary stock?
At prices no more than appraisal value of the securities
40
Secondary issues: value fluctuations
Tend to fluctuate at central level below fair value However they reach and surpass at times fair value in the Upper reaches of bull markets
41
Jason Zweig's: When is it bad to buy growth stocks
When they have PE's exceeding 25 or 30
42
What does Graham consider relatively short maturity for high grade bonds? What will they not be affected by significantly?
7 years or less Won't be significantly affected by changed in market prices
43
Between 1897 and 1949 there were ten complete market cycles (bear market low to bull market high to bear market low). How long did these cycles usually take? What was the percentage of advance and declines in these cycles?
6 took no longer than 4 years, 4 ran 6-7 years, one ran 11 years (1921-1932) % advance was 44%-500%, most between 50%-100% % decline was 24%-89%, most between 40%-50%
44
Well defined characteristics of nearly all bull markets? 5
``` 1 historically high price level 2 high PE ratio 3 low dividend yields as against bond yields 4 much speculation on margin 5 many IPOs of poor quality ```
45
Why is it hard to buy low and sell high in the market?
When bull markets last a long time, investors jump in with both feet
46
Easy ways to make money in the stock market fade for 2 reasons
1 natural tendency of trends to reverse over time 2 large numbers of people who adopt stock picking scheme And spoil all the fun
47
Second line companies
Companies not included in S&P
48
What does graham see as the typical fluctuation for most stocks in a 5 year period?
50% advance and a 33% decline
49
Equation book value per share
Book value per share = (total shareholder's equity - intangible assets) /(fully diluted # shares outstanding)
50
Paradox of investing in companies with great past records and great prospects
The better the company, the more speculative the price it trades At, as it's high valuation is more prone to the moods of the market The higher the premium over book value, the less certainty in Determining its intrinsic value
51
Recommendation for conservative investor buying an excellent company: the recommended valuation
Buy issues approximately selling no more than one third above Their tangible asset value
52
What should an investor demand from a company aside from just trading near its tangible asset value? 3 more things
1 satisfactory price to earnings ratio 2 strong financial position 3 prospect of at least maintaining its earnings over the years
53
Over time businesses usually change...
For the worse Sometimes they get better
54
What should an investor not allow themselves to do.
Should not be worried about unjustified market declines People who worry about market declines would be better off If the stocks had no market quotation at all
55
It is far from certain that the typical investor should regularly Hold off buying until low market levels appear, because this may...
Involve a long wait and very likely a loss of income And possible missing of investment opportunities
56
Management and market prices
Good managements produce good average market price Bad managements produce bad market prices
57
Predicting bond and stock prices
Virtually impossible to predict price movements of stocks Completely impossible to predict price movements of bonds
58
To invest in bonds the investor must value them using...
Amortized cost
59
Best deals in convertible bonds
Found during bear markets and in securities with credit ratings Below the best
60
The investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is...
Transforming his basic advantage into a basic disadvantage The investor has the full freedom to choose whether or not To follow mr market, you have the luxury of being able to think For yourself
61
Graham: the primary cause of the failure of investors
They pay too much attention to what the stock market is doing currently
62
What do investors control and what do they not control
Investors do not control short term fluctuations of the market Investors control: brokerage costs, mutual fund fees, their expectations (using realism not fantasy), risk (rebalancing, asset Allocation), taxes, behavior
63
What returns did investors who received constant news updates get compared to investors that received no news at all?
Investors that received constant news updates got half the return that investors got who received no news at all
64
When can selling into a bear market make sense?
When it creates a tax windfall

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