The Intelligent Investor - The Definitive Book On Value Investing

comparisons would demonstrate that convertible securities as a

whole have relatively poor quality as senior issues and also are tied

to common stocks that do worse than the general market except

during a speculative upsurge. These observations do not apply to

all convertible issues, of course. In the 1968 and 1969 particularly, a

fair number of strong companies used convertible issues to combat

the inordinately high interest rates for even first-quality bonds. But

it is noteworthy that in our 20-stock sample of convertible pre-

ferreds only one showed an advance and 14 suffered bad declines.*

406 The Intelligent Investor

TABLE 16-2 Price Record of Preferred Stocks, Common Stocks,
and Warrants, December 1970 versus December 1968
(Based on Random Samples of 20 Issues Each)

Straight Preferred Stocks

Rated A

or Better

Rated

Below A

Convertible

Preferred

Stocks

Listed

Warrants

Listed

Common

Stocks

Advances 2 0 1 2 1
Declines:
0–10% 3 3 3 4 0
10–20% 14 10 2 1 0
20–40% 1 5 5 6 1
40% or more 0 0 9 7 18
Average declines 10% 17% 29% 33% 65%

(Standard & Poor’s composite index of 500 common stocks declined 11.3%.)

* Recent structural changes in the convertible market have negated some of

these criticisms. Convertible preferred stock, which made up roughly half

the total convertible market in Graham’s day, now accounts for only an

eighth of the market. Maturities are shorter, making convertible bonds less

volatile, and many now carry “call protection,” or assurances against early

redemption. And more than half of all convertibles are now investment

grade, a significant improvement in credit quality from Graham’s time. Thus,

in 2002, the Merrill Lynch All U.S. Convertible Index lost 8.6%—versus the

22.1% loss of the S & P 500-stock index and the 31.3% decline in the

NASDAQ Composite stock index.