BENJAMIN GRAHAM on INVESTING This page intentionally left blank BENJAMIN GRAHAM on INVESTING EDITED BY RODNEY G KLEIN COMMENTARY BY DAVID M DARST New York Chicago San Francisco Lisbon London Madrid Mexico City Milan New Delhi San Juan Seoul Singapore Sydney Toronto Copyright © 2009 by The McGraw-Hill Companies, Inc All rights reserved Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher ISBN: 978-0-07-171312-2 MHID: 0-07-171312-3 The material in this eBook also appears in the print version of this title: ISBN: 978-0-07-162142-7, MHID: 0-07-162142-3 All trademarks are trademarks of their respective owners Rather than put a trademark symbol after every occurrence of a trademarked name, we use names in an editorial fashion only, and to the benefit of the trademark owner, with no intention of infringement of the trademark Where such designations appear in this book, they have been printed with initial caps McGraw-Hill eBooks are available at special quantity discounts to use as premiums and sales promotions, or for use in corporate training programs To contact a representative please e-mail us at bulksales@mcgraw-hill.com This publication is designed to provide accurate and authoritative information in regard to the subject matter covered It is sold with the understanding that neither the author nor the publisher is engaged in rendering legal, accounting, or other professional service If legal advice or other expert assistance is required, the services of a competent professional person should be sought —From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers TERMS OF USE This is a copyrighted work and The McGraw-Hill Companies, Inc (“McGraw-Hill”) and its licensors reserve all rights in and to the work Use of this work is subject to these terms Except as permitted under the Copyright Act of 1976 and the right to store and retrieve one copy of the work, you may not decompile, disassemble, reverse engineer, reproduce, modify, create derivative works based upon, transmit, distribute, disseminate, sell, publish or sublicense the work or any part of it without McGraw-Hill’s prior consent You may use the work for your own noncommercial and personal use; any other use of the work is strictly prohibited Your right to use the work may be terminated if you fail to comply with these terms THE WORK IS PROVIDED “AS IS.” McGRAW-HILL AND ITS LICENSORS MAKE NO GUARANTEES OR WARRANTIES AS TO THE ACCURACY, ADEQUACY OR COMPLETENESS OF OR RESULTS TO BE OBTAINED FROM USING THE WORK, INCLUDING ANY INFORMATION THAT CAN BE ACCESSED THROUGH THE WORK VIA HYPERLINK OR OTHERWISE, AND EXPRESSLY DISCLAIM ANY WARRANTY, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE McGraw-Hill and its licensors not warrant or guarantee that the functions contained in the work will meet your requirements or that its operation will be uninterrupted or error free Neither McGraw-Hill nor its licensors shall be liable to you or anyone else for any inaccuracy, error or omission, regardless of cause, in the work or for any damages resulting therefrom McGraw-Hill has no responsibility for the content of any information accessed through the work Under no circumstances shall McGraw-Hill and/or its licensors be liable for any indirect, incidental, special, punitive, consequential or similar damages that result from the use of or inability to use the work, even if any of them has been advised of the possibility of such damages This limitation of liability shall apply to any claim or cause whatsoever whether such claim or cause arises in contract, tort or otherwise For Marie My inspiration for 27 years RODNEY This page intentionally left blank CONTENTS Preface ■ BY RODNEY KLEIN Part I Introduction ■ BY ■ xiii September 1917–September 1918 D AV I D D A R S T | CURIOSITIES OF THE BOND LIST Issues That Sell on Illogical Bases—Misconceptions of Investors— Some Foreign Issue Anomalies 13 | VALUATION OF GREAT NORTHERN OIL CERTIFICATES Based on 1914 and 1916 Operations—Life of Mines—Comparison with Porphyries—An Opinion on Present Market Price 19 | INSPIRATION’S DIFFICULTIES AND ACHIEVEMENTS IN 1917 Ore Valuation and War Taxes—Costs and Profits—Investment Value of Stock 27 | NEVADA CONSOLIDATED—A MINING PHOENIX A “Dying Mine” That Refuses to Expire—Its Changing Balance Sheet— Investment Worth of Nevada’s Stock 35 | SECRETS OF INVESTED CAPITAL Tangible Assets as Revealed by the War-Tax Reserve—Real Versus Book Values 41 | THE GREAT STEEL TAX MYSTERY Various Phases of the U S Steel Tax Situation—Other Steel and Equipment Stocks—Excessive and Insufficient Tax Reserves 49 vii viii CONTENTS Part II Introduction ■ BY ■ September 1918–January 1919 D AV I D D A R S T 59 | AMERICAN AGRICULTURE AND VIRGINIA-CAROLINA Are They Selling Out of Line?—Causes of America’s Preeminence— Fertilizers as War and Peace Essentials 65 | HIGH YIELD AND SAFE INVESTMENTS Opportunities Created by Unfounded Prejudices—Instances of Six Per Cent, Safety, and a Probable Ten Point Profit—List of Bonds, Preferred Stocks, and Common Stocks 75 | HIDDEN ASSETS OF CONSOLIDATED GAS Will It Sell at 150 Again?—Definite Statement of the System’s Earnings and Asset Values—Analysis of Important Bonds 83 10 | BARGAIN HUNTING THROUGH THE BOND LIST Gilt Edged Railroad Issues at Attractive Prices—Some Cheap Industrial Bonds—Peerless 6s—The Investment Mystery Part III Introduction ■ BY ■ 93 April 1919–December 1924 D AV I D D A R S T 103 11 | ATTRACTIVE INDUSTRIAL PREFERRED STOCKS Importance of Exemption from Normal Tax—Recent Improvement in Investment Status—Various Elements in Judging Values—Attractive Issues Recommended 131 12 | NORTHERN PACIFIC OUTSTRIPS GREAT NORTHERN The See-Saw Race of the Grangers— Physical and Financial Peculiarities Analyzed—Northern Pacific’s Hidden Assets— A Preferred in Name Only 139 CONTENTS ix 13 | A NEGLECTED CHAIN STORE ISSUE The Inconspicuous Merits of McCrory—Its Present Low Price Makes It Attractive—Comparison with Its More Pretentious Rivals 147 14 | THE ART OF HEDGING Maximum Profits and Minimum Losses—Convertible Issues as a Trading Medium—Safety First Operations in a Dangerous Market 155 15 | WHICH IS THE BEST SUGAR STOCK? Strong Market Position of the Commodity—Comparative Analysis of Five Listed Issues—Importance of Capitalization Structure and Operating Efficiency 161 16 | THE “COLLAPSE” OF AMERICAN INTERNATIONAL Great Expectations Cruelly Disappointed—Is the Stock Cheap at 42?— Facts and Figures about the Company and Its Subsidiaries 169 17 | THE GOODYEAR REORGANIZATION Unofficial Insolvency Caused by Ill-Timed Expansion—Sudden Disaster Follows Wonderful Growth—Details of Proposed Reorganization and Discussion of Company’s Prospects 179 18 | IS UNITED DRUG CHEAP AT 53? Factors in the Collapse from 83 189 19 | SPECULATIVE OPPORTUNITIES IN RAILROAD STOCKS New Conditions Affecting Railroad Values—An Attempt to Estimate Future Earning Power—Detailed Discussion of Six Issues 199 20 | ARITHMETIC AND STOCK VALUES Capitalization Structure as Affecting Earning Power—Magical Results of a Little Slight-of-Hand—Owning a Corporation on Margin 207 21 | A TRUE TALK ON BOND YIELDS, OR What Every Small Investor Should Know A Financial Playlet with a Meaning 217 ... misconceptions Even as he recognizes the importance of considering interest-oninterest in bond investing, Graham describes the innate tendency of Benjamin Graham on Investing investors to disregard the. .. coupons, capitalization structure, and a realistic assessment of the future, Graham comes to the conclusion that it is best to work with ranges of intrinsic values In Graham s opinion, long-term... the proper accounting standards of the time Graham considers several factors responsible for Great Northern Ore’s relatively poor price performance, ranging from the micro the abrogation of the