Chapter 6. Portfolio Policy for the Enterprising Investor:
Negative Approach
- In 1970 the Milwaukee road reported a large deficit. It suspended
interest payments on its income bonds, and the price of the 5% issue
fell to 10.
- For example: Cities Service $6 first preferred, not paying dividends,
sold at as low as 15 in 1937 and at 27 in 1943, when the accumulations
had reached $60 per share. In 1947 it was retired by exchange for
$196.50 of 3% debentures for each share, and it sold as high as 186.
- An elaborate statistical study carried on under the direction of the
National Bureau of Economic Research indicates that such has actu-
ally been the case. Graham is referring to W. Braddock Hickman,
Corporate Bond Quality and Investor Experience(Princeton University
Press, 1958). Hickman’s book later inspired Michael Milken of Drexel
Burnham Lambert to offer massive high-yield financing to companies
with less than sterling credit ratings, helping to ignite the leveraged-
buyout and hostile takeover craze of the late 1980s.
- A representative sample of 41 such issues taken from Standard &
Poor’s Stock Guideshows that five lost 90% or more of their high
price, 30 lost more than half, and the entire group about two-thirds.
The many not listed in the Stock Guideundoubtedly had a larger
shrinkage on the whole.
Chapter 7. Portfolio Policy for the Enterprising Investor:
The Positive Side
- See, for example, Lucile Tomlinson, Practical Formulas for Successful
Investing;and Sidney Cottle and W. T. Whitman, Investment Timing:
The Formula Approach,both published in 1953.
- A company with an ordinary record cannot, without confusing the
term, be called a growth company or a “growth stock” merely
because its proponent expects it to do better than the average in the
future. It is just a “promising company.” Graham is making a subtle but
important point: If the definition of a growth stock is a company that will
thrive in the future, then that’s not a definition at all, but wishful thinking.
It’s like calling a sports team “the champions” before the season is over.
This wishful thinking persists today; among mutual funds, “growth” port-
folios describe their holdings as companies with “above-average growth
Endnotes 581
