The Intelligent Investor - BENJAMIN GRAHAM

Endnotes 587 found and paradoxical observation: The more money a company makes, the more likely it is to face new competition, since its high returns signal so clearly that easy money is to be had. The new competition, in turn, will lead to lower prices and smaller profits. This crucial point was over- looked by overenthusiastic Internet stock buyers, who believed that early winners would sustain their advantage indefinitely. Chapter 19. Shareholders and Managements: Dividend Policy 1. Analytical studies have shown that in the typical case a dollar paid out in dividends had as much as four times the positive effect on mar- ket price as had a dollar of undistributed earnings. This point was well illustrated by the public-utility group for a number of years before 1950. The low-payout issues sold at low multipliers of earn- ings, and proved to be especially attractive buys because their divi- dends were later advanced. Since 1950 payout rates have been much more uniform for the industry. Chapter 20. “Margin of Safety” as the Central Concept of Investment 1. This argument is supported by Paul Hallingby, Jr., “Speculative Opportunities in Stock-Purchase Warrants,” Analysts’ Journal, third quarter 1947. Postscript 1. Veracity requires the admission that the deal almost fell through because the partners wanted assurance that the purchase price would be 100% covered by asset value. A future $300 million or more in mar- ket gain turned on, say, $50,000 of accounting items. By dumb luck they got what they insisted on. Appendixes 1. Address of Benjamin Graham before the annual Convention of the National Federation of Financial Analysts Societies, May 1958. www.fx1618.com

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Acknowledgments from Jason Zweig My heartfelt gratitude goes to all who helped me update Graham’s work, including: Edwin Tan of HarperCollins, whose vision and sparkling energy brought the project to light; Robert Safian, Denise Martin, and Eric Gelman of Money Magazine, who blessed this endeavor with their enthusiastic, patient, and unconditional support; my literary agent, the peerless John W. Wright; and the indefatigable Tara Kalwarski of Money. Superb ideas and critical readings came from Theodore Aronson, Kevin Johnson, Martha Ortiz, and the staff of Aronson + Johnson + Ortiz, L.P.; Peter L. Bernstein, president, Peter L. Bernstein Inc.; William Bernstein, Efficient Frontier Advisors; John C. Bogle, founder, the Vanguard Group; Charles D. Ellis, founding partner, Greenwich Associates; and Laurence B. Siegel, director of investment policy research, the Ford Foundation. I am also grateful to Warren Buffett; Nina Munk; the tireless staff of the Time Inc. Business Information Research Center; Martin Fridson, chief executive officer, FridsonVision LLC; Howard Schilit, president, Center for Financial Research & Analysis; Robert N. Veres, editor and publisher, Inside Information; Daniel J. Fuss, Loomis Sayles & Co.; F. Barry Nelson, Advent Capital Management; the staff of the Museum of American Financial History; Brian Mattes and Gus Sauter, the Vanguard Group; James Seidel, RIA Thomson; Camilla Altamura and Sean McLaughlin of Lipper Inc.; Alexa Auerbach of Ibbotson Associates; Annette Larson of Morningstar; Jason Bram of the Federal Reserve Bank of New York; and one fund manager who wishes to remain anonymous. Above all, I thank my wife and daughters, who bore the brunt of my months of round-the-clock work. Without their steadfast love and forbearance, nothing would have been possible. www.fx1618.com

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Editor's note: Entries in this index, carried over verbatim from the print edition of this title, are unlikely to correspond to the pagination of a given e-book's software reader. Nor are these entries hyperlinked. However, entries in this index, and other terms, may be easily located by using the search feature of your e-book reader software. Index A. & P. See Great Atlantic & Pacific 271; basic thesis about, 258; for Tea Co. defensive investors, 117, 129–30, 258, 259, 271; and for defensive AAA Enterprises, 144, 422, 433–37, investors, 363; do you need, 435n 272–73; fees/commissions for, 258, 262, 263, 263n, 266, 270, Abbott Laboratories, 372 274n, 275; Graham’s views Aberdeen Mfg. Co., 385, 387 about, 257–71; and interviewing Acampora, Ralph, 190n, 217n potential advisers, 276–77; and account executives. See “customers’ investments vs. speculation, 20, 28, 29; and questions advisers brokers” ask investors, 278–29; and role accounting firms, 14, 501 of adviser, 257; sources of, accounting practices, 14, 169, 369; 257–71, 258n; and speculation, 563; and trust and verification “big bath”/“kitchen sink,” of advisers, 273–75, 274n; 428n; case histories about, 422, Zweig’s comments about, 424, 424n, 425, 576–77; and 272–79. See also type of source dividends, 493, 493n; and Aetna Maintenance Co., 144, 575–76 investor-management relations, Affiliated Fund, 230 497; and market fluctuations, age: and portfolio policy for 202n; and per-share earnings, defensive investors, 102–3, 310–21, 312n, 316n, 322, 324, 110–11n 324n, 325n, 328–29; and security aggressive investors: characteristics analysis, 307, 308; and stock of, 6, 133, 156, 159n, 175; options, 509n; and stock splits, definition of, 133n; “don’ts” for, 493, 493n. See also specific 133–44, 145–54; “do’s” for, company 155–78, 179–87; expectations for, acquisitions. See mergers and 29–34, 271; and investments vs. acquisitions; takeovers; specific speculation, 18–34; and mixing company aggressive and defensive, 176, active investor. See aggressive 178; portfolio for, 101, 133–44, investor 145–54, 155–78, 179–87; and ADP Investor Communication preferred stocks, 98, 133, Services, 501n ADV form, 274, 275, 277 Advent Capital Management, 419 advicwe: wforwag.gfrxes1si6ve1in8v.ecstoorms, 258, 591

592 Index aggressive investors (cont.) American Rubber & Plastics Co., 387 134–37, 134n, 139, 140, 142, 166, American Smelting & Refining Co., 173, 176–77, 381; psychology of, 382; recommended fields for, 387 162–75; return for, 29–34, 89; American Stock Exchange, 201, 403, rules for, 175–78; security analysis for, 303n, 376–95; stock 446, 450, 450n selection for, 376–95 American Telephone & Telegraph, Air Products & Chemicals, Inc., 67, 135, 173, 200, 289, 295–97, 450–53, 453n, 470 350, 351, 352, 354, 355, 358, 403, 410, 491 Air Reduction Co., 450–53, 453n, 470 American Tobacco Co., 289 airlines, 6, 6–7n, 7, 31, 82, 362, 364 American Water Works, 358 Alabama Gas Co., 358 Amerindo Technology Fund, 16, Alba-Waldensian, 387 243–45 Albert’s Inc., 387 Ameritas, 110 Allegheny Power Co., 358 Ameritrade, 39 Allied Chemical Co., 289, 292, 351, AMF Corp., 315 Amgen Inc., 370 352 AmSouth Bancorp, 372 Allied Mills, 387 Anaconda, 168, 289, 351, 352, 354, ALLTEL Corp., 372 355, 387 Altera Corp., 370 Analog Devices, 370 alternative minimum tax, 106n analysts. See financial analysts Altria Group, 372 Anderson, Ed, 542 Aluminum Company of America Anderson Clayton Co., 387 Andreassen, Paul, 223 (ALCOA), 289, 300, 310–21, Angelica, 216 321n, 351, 352 Anheuser-Busch, 321n, 372 Alvarez, Fernando, 329 annual earnings multipliers, 295–97 Amazon.com, 21n, 41, 41n, 126, annual meetings, 489, 502 308–9, 505 annual reports, 400, 502 America Online Inc. See AOL Time annuities, 110, 110–11n, 226n Warner AOL Time Warner, 14, 306, 442–43, American & Foreign Power Co., 413, 497, 505 415 Apple Computer Inc., 510, 510n American Brands Co., 351, 352 Applegate, Jeffrey M., 81 American Can Co., 289, 351, 352, Applied Materials, 370 354, 355, 564–65 Applied Micro Devices, 370 American Electric Power Co., 357 appreciation, 25, 26, 52, 135 American Financial Group, 466n arbitrages, 32, 32–33n, 174, 175, American Gas & Electric Co., 97 380–81, 395 American Home Products Co., Archer-Daniels-Midland, 372, 387 453–55, 455n, 470 Ariba, 478 American Hospital Supply Co., Aristotle, 76 453–55, 455n, 470 Arnott, Robert, 85n, 506, 506n American Machine & Foundry, 315 artwork, 56 American Maize Products, 385, 386, “as if” statements. See pro forma 387 statements American Power Conversion, 370 www.fx1618.com

Index 593 Asness, Clifford, 506, 506n balance sheets, 200, 285, 308, 317n, asset allocation: and advice for 331, 337, 340, 365, 392. See also specific company investors, 273, 275, 278; and aggressive investors, 133, balanced funds, 226 156–57; and defensive investors, Baldwin (D. H.), 387 22–29, 89–91, 102, 103–5; 50–50 Ball Corp., 216, 482–83 plan of, 5, 90–91, 156–57; and Baltimore Gas & Electric Co., 358 history and forecasting of stock BancBoston Robertson Stephens, 443 market, 75; and inflation, 47–48; Bank of America, 372 and institutional investors, 194, Bank of New York, 82 194n; and investments vs. Bank of Southwark, 141n speculation, 10; and market Bankers Trust, 235n fluctuations, 194, 197; tactical, bankruptcy, 14, 16n, 144, 419–20n; 194, 194n. See also diversification and aggressive investors, 144, asset backing. See book value 146, 156n, 174–75, 187, 384; of assets: elephantiasis of, 246, 251, 252; brokerage houses, 266–68; case and per-share earnings, 317n, histories about, 422–37, 423n; 320n; and security analysis, 281, and defensive investors, 100, 285; and stock selection for 111, 362; and history and aggressive investors, 381–82, forecasting of stock market, 70, 383, 385, 386, 388, 390, 391, 82; and investment funds, 235, 391n, 392, 398, 400; and stock 250; and market fluctuations, 4, selection for defensive 4n; and price, 423n; of railroads, investors, 338, 348, 349, 355, 4, 4n, 362, 384, 423n; and 356, 360, 365, 369, 370, 371, security analysis, 286, 287. See 374–75. See also asset allocation; also specific company specific company banks, 210, 414, 422; and advice, Association for Investment 258n, 268–70, 271; amd delivery Management and Research, and receipt of securities, 268–69, 264n, 280n 268n; and dividends, 493; AT&T Corp., 410n. See also American investing in, 360–61; and Telephone & Telegraph investment funds, 235; and new Atchison, Topeka & Santa Fe, 135, offerings, 269; and stock 206, 209 selection for defensive Atlantic City Electric Co., 358 investors, 361; trust Aurora Plastics Co., 393, 395 departments of, 4, 29, 231, 235, Automatic Data Processing, 372 258–59, 259n. See also type of automobile stocks, 82 bank or specific bank Avco Corp., 412 Barber, Brad, 149, 150n, 151 Avery Dennison Corp., 372 Bard (C.R.), 372 Avon Products, 456 bargains: and aggressive investors, 133–34, 155, 156, 166–73, 175, Babson’s Financial Service, 259 177–78, 186, 380n, 381–82, 389, Baby Center, Inc., 444 390–93; and bonds, 166, 173, Bagdad Copper, 387 173n; and common stock, balance-sheet value. See book value 166–73, 177; and defensive investors, 89, 96, 350; definition www.fx1618.com

594 Index bargains (cont.) Blodget, Henry, 40–41, 343–44 of, 166, 177; and investment vs. Blue Bell, Inc., 455–58, 456n, 470 speculation, 33–34; and margin Bluefield Supply Co., 387 of safety, 517–18; and market BOC Group, 453n fluctuations, 202, 206; and Bogle, John, 510 preferred stocks, 166, 173; in bond funds, 106–7, 110, 226, 283n, secondary companies, 170–73, 172n, 177–78; and value, 177 420, 420n Bond Guide (Standard & Poor’s), 423 Baruch, Bernard M.: 125 DEL bonds: and advice, 259, 261, 269, Bausch & Lomb Co., 234 Baxter Healthcare Corp., 455n 271; and aggressive investors, BEA Systems, Inc., 323 133–35, 134n, 136n, 139, 140, bear markets, 46, 140n, 228n, 421, 155, 166, 173, 173n, 174–77; and asset allocation, 10, 22–29, 525; and aggressive investors, 89–91; and bargains, 166, 173, 140n, 382; and defensive 173n; calls on, 97–98, 139; and investors, 89, 105, 111, 124, 131, characteristics of intelligent 367, 371; and history and investors, 13; common stocks forecasting of stock market, compared with, 5n, 18–29, 65–72, 74, 80–87, 210; and 56–57, 194; and convertible market fluctuations, 192–93, issues and warrants, 210–11, 193n, 194, 210, 224; silver lining 406, 412, 413, 415, 417; coupons to, 17, 17n for, 98, 98n, 134, 134n, 135, 139; “beating the market/average,” 9–10, “coverage” for, 284; defaults on, 12, 76, 120, 157–58, 157n, 88–89n, 173, 287, 423, 521; and 158–59n, 219–20, 237, 249, defensive investors, 22–29, 250–52, 255, 275, 376–77, 377n, 89–100, 101–11, 112n, 113, 114, 379n, 397, 537–38 114n, 119, 121–22, 124, 125, 131, “beating the pros,” 217–20, 249n 176, 347, 350, 365; discount, Becton, Dickinson, 372 136n; distressed, 155–56n; and Belgian Congo bonds, 138 diversification, 283n; earnings Bender, John, 147 on, 283–87; and Graham’s Benjamin Graham Joint Account, business principles, 523; and 380n history and forecasting of stock Berkshire Hathaway, 162n, 217, market, 70, 75, 76, 77, 78, 80, 82, 217n, 317n, 327, 401, 543, 544 87; inflation and, 5, 26, 47, 48, Bernstein, Peter L., 55n, 529–30 50, 51, 56–57, 58n, 60n, 61n, 110; Bernstein, William, 2n, 55n, 85n interest on, 2, 3, 5, 22–29, 70, 76, Bethlehem Steel, 289, 351, 352 77, 78, 89, 93–94, 95, 98, 98n, Bickerstaff, Glen, 245 113, 121–22, 134n, 146, 207–12, Big Ben Stores, 387 515, 515n, 516; and investment Binks Manufacturing Co., 387 funds, 226, 241; and bio-technology stocks, 369 investments vs. speculation, Biogen Inc., 370 18–22; long- and short-term, Biomet Inc., 370 91–92, 106–7, 188; and margin Birbas, Nicholas, 39 of safety, 512–13, 514, 515, 515n, Black & Decker Corp., 330n 516, 520; and market Block, Stanley, 264n fluctuations, 188, 193, 194, www.fx1618.com

Index 595 207–12; and new offerings, 8, defensive investors, 117, 120, 139, 140; price of, 23–24, 135, 129; volume of trades in, 136n, 207–12; ratings for, 95, 266–68. See also online trading; 210, 211, 283n, 350n; and risk, specific house 283–87; and role of investment brokerage transactions: delivery of, bankers, 268; safety of, 283–87; 267–268, 267–68n second-grade, 134–37, 139, 145, Bronson, Gail, 444n 147; and security analysis, 281, Brooklyn Union Gas Co., 358 283–87, 293–94, 298n; selling at Brooks, John, 266n par, 137; and size of enterprise, Brown Shoe, 484–85, 484n 285; taxes and, 22–25, 91–92, 93, Browne, Christopher, 397 94, 95, 96, 96n, 99, 106, 106n, Buffett, Warren E.: and 155, 520; types of, 91–98; yield diversification, 290n; and on, 5, 8–9, 27, 78, 89, 91, 92, 93, GEICO, 533n; and indexing 95, 96, 97, 98, 113, 114n, 124, 125, funds, 249, 249n; and investors’ 134, 138, 146, 193, 207–12, 404, relationship with company, 408n, 573. See also bond funds; 162n; and market fluctuations, convertible issues; specific 217, 217n; and “owner company or type of bond earnings,” 399; and per-share book value, 420, 451n, 569; and earnings, 327; preface by, ix–x; aggressive investors, 289, 381, and security analysis, 308; 383–84, 389, 389n, 393; and selection methods of, 400, 401; defensive investors, 348, 349, “Superinvestors of Graham- 351, 352–53, 354, 355, 359, and-Doddsville” talk by, 374–75; definition of, 374; and 537–60. See also Berkshire market fluctuations, 198–200, Hathaway 198n, 203n; and per-share Buffett Partnership, Ltd., 543, 552 earnings, 320n, 321. See also bull markets, 55, 170, 233, 525, 570; specific company and bargains, 170, 172, 177; books, 56, 80–81 characteristics of, 140, 192–94; Borden Inc., 393, 395 and convertible issues and Boskin Commission, 58n warrants, 404, 405, 405n, 408; brain: and market fluctuations, and dealings with brokerage 220–23 houses, 139, 267; death/end of, brand names, 304, 374 17, 142, 210; history and Brearley, Richard A.: 61 DEL forecasting of, 65–73, 74, 76, 78, bridge players analogy, 378–79 80–87, 210; length of, 193n; and brokerage houses: and advice, 117, market fluctuations, 192–94, 257, 258n, 261–65, 262–63n, 193n, 194, 197, 210; and new 266–68, 271, 274; discount, 129, offerings, 140, 140–41n, 142, 143, 149, 262–63n; fees/commissions 144; and portfolio policy for of, 117, 128–29, 128n; financial aggressive investors, 140, troubles of, 4, 4n, 266–68; full- 140–41n, 142, 143, 144, 170, 172, service, 262–63n; margin 177 accounts with, 21n; as part of Bunker Ramo Corp., 330n financial enterprise industry, Burlington Northern Railroad, 362n 360n; and portfolio policy for Burton-Dixie Corp., 393 www.fx1618.com

596 Index Bush, George W., 496, 507n Zweig’s comparison of eight business: buying the, 546; definition pairs of companies, 473–86 cash/“cash equivalents”: and of good, 308; knowing your, 523 aggressive investors, 398, 400; business principles: of Graham, and defensive investors, 24, 25, 102, 103–4, 105, 107, 109–10, 523–24 124; and history and forecasting “businessman’s investment,” 136–37 of stock market, 82; and BusinessWeek, 20n, 81, 505 security analysis, 303, 303–4n, buy-low-sell-high approach, 192–94 308 “buy what you know,” 125–27, 126n “cash in on the calendar,” 41–42, 46 buying back shares. See repurchase Cassidy, Donald, 253 Caterpillar, 46 plans Center for Research in Security buzzwords, investing, 172n Prices (University of Chicago): 30DEL C.-T.-R. Co., 565–66 Central Hudson Gas and Electric Cable & Wireless, 346 Co., 358 California Public Employees’ Central Illinois Light Co., 358 Central Maine Power Co., 358 Retirement System, 146 Century Telephone Inc., 372 calls, 97–98, 139, 406n, 407–8, 407n, certificates of deposit, 97, 107, 108–9 certificates, stock, 198, 198n, 495, 421 495n capital, 53, 302, 308–9, 320, 320n, Certified Financial Planner (CFP), 276n 324–26, 401, 404, 414. See also CGI (Commerce Group, Inc.), capital gains; capitalization; 481–82 return on invested capital Chambers, John, 184 (ROIC); specific company charitable institutions, 47, 47n capital gains, 227, 571–72; and Chartered Financial Analyst (CFA), market fluctuations, 219, 224n; 264n, 265, 265n and portfolio for aggressive Chase Manhattan Bank, 450n investors, 149, 180n; taxes on, Checkers Drive-In Restaurants, 216 75, 180n, 219, 360, 561, 562 chemical companies, 291, 291n, 292 Capital One Financial Corp., 477–79, Chesterton, G. K., 87 479n Cheung, Alexander, 15, 15–16n capitalization, 123, 123n, 236, 288, Chicago and Northwestern Railway 290–95, 331, 340, 384, 413, 414, Co., 317n 415 Chicago, Milwaukee, St. Paul and Career Academy, 234 Pacific bonds, 135 Carnegie, Andrew, 185 China: stock market in, 437n Carnival Corp., 167n Chiron Corp., 370 Carolina Power & Light Co., 358 Chromatis Networks, 439–40 Carter, Jimmy, 60n Chrysler Corp., 165, 167, 168, 250, case histories: and Graham’s 289, 293, 351, 352, 354 comparison of eight pairs of Chubb Corp., 372 companies, 446–72; Graham’s discussion of four “extremely instructive,” 422–37; Graham’s examples of, 575–78; Zweig’s comments on four “extremely instructive,” 438–45; and www.fx1618.com

Index 597 CIBC Oppenheimer, 40–41 term prospects for, 291; general Cincinnati Gas & Electric Co., observations on, 335–38; as growth stock, 115–17, 157–62, 358 295–98, 517; and history and Cingular Wireless, 327 forecasting of stock market, 70, Cisco Systems, Inc., 14, 81, 116n, 184, 73, 74, 75, 76, 78; inflation and, 47–57; investment merits of, 217n, 247, 473–75, 505 112–14; investment rules for, Cleveland Electric Co., 357 175–78; and investments vs. CleveTrust Realty Investors, 414 speculation, 18–22; investor’s Clorox Co., 372 personal situation and, 119–21; closed-end funds, 141n, 226, 226n, as “junior stock issues,” 285n; and margin of safety, 513–18, 227, 238–41, 252–53, 253n, 420, 571, 574; and market 495n fluctuations, 188, 189, 193, 194, CMGI, Inc., 215, 217, 481–82, 481n 195–97, 199–200, 201, 203, 205; CNBC, 342n performance of, 229; portfolio CNF Inc., 330n changes in, 117; price decline in, CNN, 255 3; price record of, 406; public Coca-Cola, 217, 224, 224n, 304, 307, attitude toward, 19–20, 20n; 372, 401 return on, 113, 377; and risk, Cohen, Abby Joseph, 190n 20–21, 121–22, 394; security Cohen & Steers Realty Shares, 63 analysis of, 281, 285, 288–301, coin flipping, 538, 539, 540 330–38, 339–46; selection of, coins, buying and selling, 56 114–15, 134, 136, 139, 155, 156n, Colgate-Palmolive, 321n 157, 158, 160, 166, 169, 176–77, College Marketing Group, 481n 178, 347, 348–66; valuation of, Columbia Gas System, 357 288–90, 569–70; Value Line Columbia Real Estate Equity Fund, Forecast (1967–69) about, 289. 63 See also specific topic Comerica Inc., 372 Commonwealth Edison Co., 357 Comiskey, Eugene, 329 companies: change in character Commerce One, Inc., 477–79 of, 203; comparison of eight commercial banks, 97, 231, 257, 270, pairs of, 446–72, 473–86; 360n, 429, 429n comparison of four listed, common stock: and advice, 269, 271; 330–38, 339–46; emotional for aggressive investors, 134, imagery of, 474; general 136, 139, 155–78, 156n, 376–95; observations about, 469–72; and asset allocation, 10, 89–91, investors’ relationship with, 156–57; bonds compared with, 162, 162n, 203; Johnny-One- 5n, 18–29, 56–57, 194; Note, 304; with large amounts characteristics of, 156; for of convertible issues (1969), 412; defensive investors, 22–29, “large, prominent, 89–91, 99, 111, 112–23, 124–32, conservatively financed,” 176, 337–38, 347, 348–66; 122–23, 195; second-line, 196, dividends on, 22, 99, 114–15, 196n; unpopular large, 163–66, 285n, 294–95, 334, 570, 571, 572; 168, 183. See also case histories; earnings on, 115, 288–301, 569; expected growth (1963 and 1969) of, 295–97; general long- www.fx1618.com

598 Index companies (cont.) corporations: debt of, 53–54, 134; corporations; secondary and fluctuations in bond prices, companies; specific company 211–12; governance of, 206–7, 206n; investors’s relationship computer industry, 6–7, 30, 172, with, 162, 162n, 203; “large, 172n, 437 prominent, conservatively financed,” 122–23, 195; Comverse Technology, 186 misleading reporting by, 236; ConAgra Foods, 372 taxes on, 99, 99n, 177; Cone Mills, 391 unpopular large, 163–66, 168, conflicts of interest, 497, 500 183. See also companies; conglomerates, 3, 411, 438, 440 corporate bonds; specific Conseco, 14, 426n corporation Consolidated Edison, 357, 372, costs. See expenses/costs; 567–68 fees/commissions Consolidated Gas of New York, coupons, 98, 98n, 134, 134n, 135, 139 567–68 Cowles Commission, 65, 66 Consolidated Natural Gas Co., Cramer, James J., 16, 16n, 217n Crandall, Pierce & Co., 193n 357 crash, stock market: of 1929, 191, Consolidated Rail Corp. (Conrail), 236; of 1987, 141n, 401, 507n; of 425n 2000, 14, 124, 141n, 173n, 291n, Consolidation Coal, 293 437n consumer-finance firms, 360n credit companies: investing in, Consumer Price Index, 58n, 59 360–61 Consumers Power Co., 358 credit ratings, 134, 160, 420n, 573 contract: investment owner’s, 219, Criterion Insurance Co., 533n CSX Corp., 362n, 425n 225, 529 “customer financings,” 439, 440 convertible issues: and aggressive “customers’ brokers,” 263, 264, 271 investors, 134, 173n, 381; and “Daddy-Knows-Best,” 490n, 503–4 defensive investors, 90, 97, 99, Damasio, Antonio, 223 100; example of working of, Dana Corp., 375 418–19n; Graham’s discussion Dante Alighieri, 535–36 about, 403–13; as junior to other Data General Corp., 342 long-term debt, 419–20n; and Davis, Christopher, 308, 397, 398, market fluctuations, 210–11; and per-share earnings, 316, 399, 400 318, 411, 414, 416; Zweig’s Davis Funds, 250, 397, 398, 399, 400 comments about, 418–21. See day trading, 37, 39, 40n, 148, 528n also warrants; specific company Dayton Power & Light Co., 358 Cooper Industries, 461n debt: and aggressive investors, 385; corporate bonds, 24, 403, 520; and aggressive investors, 134n; corporate, 53–54, 134; and and defensive investors, 92, defensive investors, 348, 349, 95, 111, 350n; and inflation, 352–53, 355, 370, 371; and 50; and investment funds, 241; dividends, 492; of emerging and market fluctuations, markets, 108–9; limit on, of U.S. 203–4, 207–12; return on, 404–5n; and security analysis, 283, 283n www.fx1618.com

Index 599 government, 94, 96; and margin Dimson, Elroy, 61n, 82, 113n of safety, 513; of public utilities, direct purchase of stock, 128–29 348; and security analysis, 303, directors, 309, 414, 488, 498, 499n, 308; and selection of stock, 348, 349, 352–53, 355, 370, 371, 385. 500, 501, 502, 511 See also bonds; specific company discount brokerage houses, 129, 149, or type of bond Deere & Co., 173 262–63n defaults, 287, 521; and bargains, 173, Discover Brokerage, 38–39 173n; on bonds, 88–89n, 173, diversification, 56, 87, 283n, 420; and 287, 423, 521; and portfolio policy for aggressive investors, advice, 259n, 273; and 138, 145, 147, 155–56n, 173, 173n aggressive investors, 145, 173n, defensive investors: characteristics 381, 387–90, 391, 392–93; and of, 6; definition of, 22; defensive investors, 114, 129, exclusions for, 176–77; 129n, 130, 347, 365, 368–69, 371; expectations for, 22–29; and and delisted stocks, 385n; and inflation, 47–57; and formula trading, 45; and investments vs. speculation, Graham’s disciples, 542; 18–29; and margin of safety, importance of, 532, 535n; and 515–16, 524; and market investment funds, 239, 245, 253; fluctuations, 199–200; and and investments vs. mixing aggressive and speculation, 37; and margin of defensive, 176, 178; portfolio safety, 515, 516, 517, 518–19, for, 89–100, 101–11, 112–23, 519n, 521, 522, 529, 531; and 124–32; return for, 22–29, 25n, market fluctuations, 219; and 27, 176; rules for, 176–77; and security analysis, 283n, 290, security analysis, 294–95, 290n 347–66; selectivity for, 363–66; dividends: academic criticism of, stock selection for, 347–66, 385n; 494, 494n; and advice, 258, 264n; Zweig’s comments about, and bargains, 166, 169, 172; 367–75. See also specific topic cumulative or noncumulative, deflation, 51, 58n, 61n 99; and earnings, 493–94, 506, delisted stocks, 385n 506n; and expectations for Delmarva Power & Electric Co., 358 defensive investors, 22–24, 25, Deltona Co., 234 25n, 26, 27; fixed, 99; and depreciation, 316, 398, 492 formula trading, 44, 45; Depression (1930s), 72, 131, 137, 170, Graham’s comments about, 203, 213, 417, 521 489–96; and growth, 490, Detroit Edison Co., 357 491–92, 506; and history and diamonds, 56 forecasting of stock market, 65, dilution: and convertible issues and 67, 69–70, 71, 72, 76, 77, 78, 80n, warrants, 411, 416, 417; and per- 85; inflation and, 48, 50, 52, 55; share earnings, 311–12, 312n, and investor-management 315, 316, 316n, 317, 318; and relations, 489–96, 490n, 503–4, repurchase plans, 507n, 508. See 511; and margin of safety, 514, also specific company 516, 523; and market fluctuations, 191, 193, 202, 205, www.fx1618.com 207, 509n; overview about, 489–96; and “payout ratio,”

600 Index dividends (cont.) Dow Jones Industrial Average 294n, 489n; and per-share (DJIA): aggressive investors earnings, 323; and performance and, 136, 158, 161, 163, 164, (1871–1970), 71; and portfolio 164n, 165–66, 171, 376, 387–90; policy for aggressive investors, and bargains, 171; “best” stocks 134n, 136, 137, 145n, 166, 169, in, 363; and comparison of four 172; and portfolio policy for listed companies, 332, 333, 334, defensive investors, 43, 91, 98, 335–36; defensive investors and, 99, 99n, 111, 113, 113–14n, 91, 113, 114–15, 115n, 118, 347, 114–15, 115n, 116, 118, 121, 122, 350–54, 356, 363, 367; and 128; and price, 490, 491, 494n; dividend return on common proper stock, 493; record of stocks, 22; in early 1970s, 4, paying, 114–15, 115n; 72–79; and expectations for reinvestment of, 128, 489–92; of investors, 23, 24, 25, 27, 27n, 28, secondary companies, 172; and 33, 34; and formula trading, 44, security analysis, 283, 285n, 288, 46; growth of, 297; and growth 294–95, 298, 298n, 302, 309; stocks, 158; and history and special, 494n; and speculation, forecasting of stock market, 66, 489, 490, 570, 571, 572; and 67, 69, 70–71, 72–73, 74, 75, 76, stock selection for aggressive 78, 79, 81; inflation and, 50, investors, 384, 386, 388, 390; and 51–55, 57; and investment stock selection for defensive funds, 231, 231n, 233; and investors, 337, 348, 349, 350, market fluctuations, 190n, 351, 352–53, 356, 356n, 362, 365, 191–92, 193n, 195, 196, 200, 201, 371, 372; stock split and, 492–96, 202, 208; and per-share 493n; taxes on, 22–23, 24–25, 99, earnings, 319–21; and Raskob’s 294n, 495–96, 496n, 507n, 561, prescription, 2; rise of 562; total dollar amount of, by (1915–70), 50; and security U.S. stocks, 503n; and volatility, analysis, 289, 291, 292, 294, 509, 509n; who pays, 504; 295–97, 299; and selection of Zweig’s comments about, stocks, 347, 350–54, 356, 363, 502–6. See also yield; specific 367, 376, 387–90; and unpopular company or type of security large companies, 163, 164, 164n, 165–66; yield of stocks (2003) Dixon, Richard, 47n on, 5n. See also specific company Dodd, David, 542; See also Security “Dow Theory,” 3, 33, 191–92, 195 Analysis (Graham and Dodd) Dreman, David, 374, 400 “Dogs of the Dow,” 164, 164n Drew, Daniel, 312n dollar-cost averaging, 2, 28–29, 75, Drexel Burnham Lambert, 164n, 187, 118, 130–31, 131n, 180n, 194, 429n, 488n 529 Drexel Firestone Co., 164, 164n Dollar General stores, 368 Dreyfus Fund, 230 Donaldson, Lufkin & Jenrette, 443 drug industry, 30 Donnelley (R.R.) & Sons, 372 Du Pont Co., 289, 292, 351, 352 dot.com stocks, 172n, 530 Du Pont, Glore, Forgan & Co., Double Click Inc., 418–19n Dover Corp., 372 266n Dow Chemical Co., 317 dual-purpose funds, 228, 228n www.fx1618.com

Index 601 due diligence, 274, 275, 375, 375n earnings-covered test, 283–87 Dundee, Angelo, 145 Eastman Kodak Co., 46, 289, 351, Durand, David, 199n, 570 352 e*Trade, 126 EDGAR database, 186, 250, 302–3, “earning power,” 53, 513, 513–14n, 306–7, 324n, 375, 399, 438n 514–15, 514n, 515–16, 517, 518, Edison Electric Light Co., 21n 568 Edward VII (king of Great Britain), earnings: and advice, 264n; average, 319–21; and bargains, 166, 313, 313n 167–69, 173; on capital funds, “efficient markets hypothesis” 320, 320n; “consensus” about, 374; debt and profits on capital (EMH), 363, 363n, 380, 380n (1950–69), 53; and dividends, Electric Autolite Co., 330 493–94, 506, 506n; and Electronic Data Systems, 375 expectations for investors, 25n, electronics industry, 30, 172, 172n, 27, 33; hiding true, 428n; and history and forecasting of stock 337, 437 market, 65, 69–70, 71, 72, 76, 77, Elias, David, 80 78, 85, 86; inflation and, 49, Ellis, Charles, 101, 256, 526n 51–55; and margin of safety, eltra Corp., 330–38, 330n, 383 513, 515n, 516–17; and market EMC Corp., 160n, 339–46, 342n fluctuations, 200, 202; owner, emerging-market nations, 108–9, 308, 398, 399; and per-share earnings, 315–16, 316–17n; and 148, 148n performance (1871–1970), 71; Emerson, Ralph Waldo, 396 and portfolio policy for Emerson Electric Co., 330–38, 330n, aggressive investors, 134, 135, 136, 140, 146, 147, 160, 163, 165, 335n, 339–46, 372 166, 167–69, 172, 173, 181, 182, Emery Air Freight, 330–38, 330n, 183; and portfolio policy for defensive investors, 115, 115n, 336–37n 116; real, 424; and repurchase Emhart Corp., 330–38, 330n, 383 plans, 507, 509n; and security employee-purchase plans, 432, 433n analysis, 281, 283, 284, 288, 290, employees: stock options for, 323. 291, 292, 293, 294, 295, 296, 298, 305, 308; and speculation, 569; See also managers/management and stock selection for endowment funds, 194, 194n, 235, aggressive investors, 382–83, 384, 386, 388, 390, 392, 400; and 235n stock selection for defensive “enhancing shareholder value,” 309, investors, 337, 348, 349, 352–53, 354, 356, 364, 365, 371, 374. See 508–9, 508n also “earning power”; per-share Enron Corp., 14, 127, 423n, 429n, earnings; price/earnings ratio; specific company or type of 497, 500–501 security enterprising investors. See www.fx1618.com aggressive investors EPS. See per-share earnings Erie Railroad, 312n ethics, 143n, 262, 262n, 269, 276n, 280 eToys Inc., 443–45, 443–44n Eversharp Co., 409 exchange-traded index funds (ETFs), 226n, 253, 253n Exodus Communications, Inc., 339–46

602 Index Expeditors International of Fidelity Funds, 15n, 37, 63, 64, 107, Washington, Inc., 307, 339–46 110, 125, 148n, 230, 245–46, 250, 400, 420, 420n expenses/costs: controlling ownership, 219; and convertible 50–50 plan, 5, 90–91, 156–57 issues and warrants, 419n, 420, financial analysts, 14, 264n, 498n, 420n; of doing business, 317n; of investment funds, 247, 248, 249, 501n; and advice, 262n, 263, 251, 252, 253, 254; of mutual 264–65, 271; collective funds, 376–77, 377n; of options, intelligence of, 380n; consensus 421; and per-share earnings, opinion of, 378; as creating 317n; of research, 376–77, 379n; valuation, 568, 570; flaw in and stock selection for approach to selection by, 379; aggressive investors, 376–77, and forecasting, 265n; functions 377n, 379n; and stock selection of, 263, 265, 265n, 378; and for defensive investors, 367; of institutional investors, 265n; trading, 363n, 377n, 379n, 385n. and investments vs. See also fees/commissions speculation, 28–29; and margin of safety, 517; and market Factiva, 399 fluctuations, 190, 206; “fair-weather investments,” 521 requirements for, 264; role of, Fama, Eugene, 504 263, 280–81; senior and junior, Family Dollar Stores, 216, 372 300; and speculation, 563, 568, Farley, William, 317n 570, 574; and stock selection for Fastow, Andrew, 500–501 aggressive investors, 376, 378; Faust (Goethe), 415–16 and stock selection for favorite stocks, 247, 247n defensive investors, 363. See also Fedders Co., 234 securities analysis Federal National Mortgage financial condition: and common stock, 293–94; and dividends, Association (“Fannie Mae”), 110 492; and security analysis, 302, Federal Reserve Board, 2n, 19–20n, 308–9; and stock selection for aggressive investors, 384, 385, 50, 121 386, 388, 401; and stock fees/commissions: for advice, 258, selection for defensive investors, 337, 348, 349, 350, 262, 263, 263n, 266, 270, 274, 369. See also specific company 274n, 275; for aggressive Financial Corp. of America, 187 investors, 145n, 148–50, 148n, financial developments: major, 149n, 180n; of brokerage 14–15 houses, 117, 128–29, 128n; financial institutions/industry, controlling, 219; and convertible 139, 269, 360–61, 411n. See also issues and warrants, 419n; of type of institution or specific investment funds, 227, 227n, institution 238n, 242, 246, 247, 249n, 250, financial markets: history and 253n; and IPOs, 139n; and forecasting of, 1–2, 10, 24n, 54, market fluctuations, 200, 219; 54n, 65–79, 80–87. See also stock and portfolio changes, 117; on market reinvestments, 253n; and financial plan, 273, 278 timing, 180n. See also expenses/costs www.fx1618.com

Index 603 financial planners, 129, 258n, 259n, and pricing of, 189–92, 206; and 263n, 270n, 274, 274n, 276 valuation, 188, 189, 195–207, 211, 212–13 financial reports. See financial FMC Corp., 545–46, 559–60 statements; specific report Food and Drug Administration, U.S., 167n financial service “The Foolish Four” trading, 44–46 organizations/industry, 259–62, footnotes to financial statements, 360n 315, 328–29, 328n, 399, 432, 439 Forbes magazine, 185, 185n, 337n financial statements, 236, 324n, forced sale of stock, 203, 204 328–29, 328n, 399, 432, 439, 442, forecasting: addiction to, 221, 223; 509n. See also per-share and advice, 260–61; and earnings; security analysis; type aggressive investors, 179–80, of report 184, 378; and “consensus” earnings, 374; and defensive First Tennessee National Bank, investors, 131–32, 364, 364n, 372 374; and financial analysts, 265n; and history of stock Firsthand mutual funds, 81, 126, market, 72–79, 80–87; of 243–45 inflation, 48, 50, 54, 54n; and investment funds, 255; and Fischhoff, Baruch, 127 investments vs. speculation, Fisher, Kenneth, 185n 24n; and market fluctuations, Fisher, Lawrence, 67n 189–92, 190n, 206, 210; and fixed-value investments, 512–13. See Raskob’s prescription, 2; reliability of, 10; and security also type of investment analysis, 281, 282n, 288–89, Fleet Boston Financial Corp., 384n 291n, 293n, 298, 299; and Florida real estate, collapse of, 144 selection of stock, 364, 364n, fluctuations, market, 4, 188–225, 374, 378; and speculation, 572; and timing, 179–80; the 236n, 509n; and aggressive unpredictable, 378 investors, 33; and asset foreign stocks/bonds, 134, 138, 148, allocation, 197; in bond prices, 148n, 176–77, 186–87, 239–40, 207–12; book value and, 250, 252 198–200, 198n, 203n; and brain, formula investing/trading, 28–29, 220–23; and buy-low-sell-high 41–46, 90–91, 192. See also approach, 192–94; and specific formula defensive investors, 189; formula plans/planners, 194–95, example of, 200–205; and 195n forecasting, 189–92, 190n, 206, formula timing, 156–57 210; and formula investment Fortune 500 list, 181, 426n, 500 plans, 194–95, 195n; as guide to Four Seasons Nursing, 234 investment decisions, 189–92; 401(k) plans, 64, 104, 105, 106, 111n, history of (1871–1972), 65–72; of 126–27, 147, 215, 249 investor’s portfolio, 195–97; FPA Capital Fund, 397, 400 managers and, 206–7; and margin of safety, 525; and mispricing of stock, 212–13; Morgan’s comments about, 54, 54n; and Mr. Market parable, 204–5, 212–25; and other people’s mistakes, 221, 223; silver lining to, 17, 224; timing www.fx1618.com

604 Index “franchise” companies, 172, 172n, Goldman Sachs & Co., 404n, 443 374, 401, 422, 433–37 good decisions: factors that Franklin, Benjamin, 124, 505 characterize, 528–29 Franklin Utilities, 354n Goodbody & Co., 266n fraud, 14, 236, 324n, 369, 413, 429n, goodwill, 374, 389, 389n, 390, 392, 442n, 450n 398, 428, 439, 440, 441n, 453, 568 French, Kenneth, 504 Goodyear Tire Co., 289, 351, 352 French assignats, 415, 415n Gordon, Robert N., 224n Fridson, Martin, 329 Gordon equation, 25n Friend-Blume-Crockett study, 377, Government Employees Financial 377n Corp., 533n friends or relatives: advice from, 270 Government Employees Insurance Froelich, Robert, 81 Fruit of the Loom, 317n Co. (GEICO), 228n, 494, 532–33, fund industry. See investment funds 532–33n, 535, 535n Fundamental Investments Co., 230 Government National Mortgage Association (“Ginnie Mae”), 110 Galbraith, Steve, 38n, 369 Graham, Benjamin: Buffett’s tribute Galileo Select Equities Fund, 245 to, ix, x; business principles of, Gallup Organization, 83, 84 523–24; definition of investment Galvin, Thomas, 190n of, 19, 35, 35n, 45; disciples of, “gambler’s fallacy,” 458n 537–60; forecasts of, 25, 25n; gambling, 19n, 21, 36, 46, 199n, 368, misjudgements of, 49–50, 50n; Zweig’s comments about, xi–xiv 464, 518–19, 519n, 525, 530, 535, Graham, John R., 180, 180n 535n Graham-Newman Corp., 228n, Gannett Co., 372 380–83, 380n, 533n, 541 Gardner, John, 438 Graham-Newman methods: Gates, Bill, 162n, 185 summary of, 380–83 GEICO. See Government Employees Graham’s Law, 46 Insurance Co. Grainger (W. W.), 372 General American Investors, 241 Great Atlantic & Pacific Tea Co., General Electric Co., 55, 160, 181, 200–205, 202n 182, 183, 247, 289, 295–97, 351, greed, 197, 437, 437n 352, 372, 575–73 Greenspan, Alan, 179–80 General Foods Corp., 289, 351, 352 Group Rexel, 469n General Motors Corp., 2, 46, 166, growth, 15, 228, 264n, 414; average, 289, 292, 295–97, 351, 352, 410n 319–21; calculation of past rate Generally Accepted Accounting of, 319–21; definition of, 157; Principles (GAAP), 316n, 325n and dividends, 490, 491–92, 506; Georgeson Shareholder, 501n and history and forecasting of Gillette, 217, 304, 307, 401 stock market, 73, 85, 87, 184; Glassman, James K., 80, 102n and margin of safety, 516, 517; Global Crossing Ltd., 14, 127, 303, and market fluctuations, 9, 304n, 324–25, 325n, 326, 497 199n; mutual funds for, 158n, Goethe, Johann Wolfgang Von, 159n, 161, 228n; and per-share 415–16 earnings, 319–21, 321n; and gold, buying, 55, 55–56n portfolio policy for aggressive www.fx1618.com

Index 605 investors, 156, 157–62, 158–59n, Home Depot, 181, 182, 183 181–84; and portfolio policy for Honda, 250 defensive investors, 114, 115–17, Honeywell Corp., 330n 123; real, 85, 87; and risk, 160; Horizon Corp., 234 and security analysis, 281, 282, hostile takeovers, 32–33n, 429n, 488n 282n, 294–98, 300, 305; slow Household International, 373 down in, 321n; speculative, 85, Housing and Urban Development 87, 569, 570; and stock selection for aggressive investors, 379, (HUD), U.S. Department of, 96n 384, 386, 390, 392, 401; and Housing Authority bonds, 94–95, 96 stock selection for defensive Houston Light & Power Co., 357 investors, 338, 347, 348, 349–50, “How much?” question, 8–9, 15 352–53, 354, 355, 356, 364, 369, Hudson Pulp & Paper, 543 371, 374; and types of investors, “human factor” in selection, 365 6–8. See also specific company Huron Consulting Group, 324n Guerin, Rick, 544 hyperinflation, 60n Gulf & Western Inc., 412 Gulf Oil, 488n I-bonds, 110 Ibbotson Associates, 61n, 62, 131, H & R Block, Inc., 401, 455–58, 456n, 470 131n, 404n, 419 “In the Money” (CNN-TV), Harley Davidson, 304 Harvey, Campbell R., 180, 180n 126n Hassett, Kevin A., 80, 102n income, 106–7, 136, 259, 398, 419, Hawkins, O. Mason, 399–400 Hayden, Stone & Co., 266n 421, 516, 571–72. See also specific Haydon Seitch and Instrument Co., company income bonds, 99–100, 136 576 income tax. See taxes Hazlitt, William, 313n “incubated funds,” 246 hedging: and aggressive investors, indexing funds: and advice, 277n; and aggressive investors, 180, 381; and convertible issues and 396; Buffett’s advice about, warrants, 420n; and defensive 249n; compulsory holdings for, investors, 106n; and definition 476; and convertible issues and of intelligent investors, 13, 13n; warrants, 419n; and defensive and expectations for investors, investors, 124, 130, 132, 347n, 26n, 32, 33n; and half a hedge, 367, 368, 375n; flaws of, 249; 61; and inflation, 55–56, 61; and and investment funds, 248–49, investment funds, 226–27, 227n; 248n, 249; and market “related” and “unrelated,” 381, fluctuations, 219; and security 381n, 382, 382n analysis, 290n; of total U.S. Heine, Max, 396 stock market, 347n, 367. See also Heinz (H.J.), 373 exchange-traded index funds Hennessy funds, 44n (ETFs) herding, 247, 546 industrial bonds, 155, 284, 285, high-yield bonds. See junk bonds 287 Hoffman, Mark, 478, 479 Industrial National Bank of Rhode “home bias,” 127 Island, 384, 384n industrial stocks, 359, 387–90 www.fx1618.com

606 Index industry: analysis of, 298–99; 121–22, 364n; and expectations predicting growth of, 6–8, 6–7n for investors, 22–29, 33; fixed, 211; and history and forecasting inflation, 3, 24, 47–57, 58–64, 294; of stock market, 70, 76, 77, 78; accuracy of rate of, 58n; as inflation and, 54, 55; and dead, 58, 58n, 59–60; and margin of safety, 515, 515n, 516; defensive investors, 23, 25n, 26, and security analysis, 283, 284, 26n, 102, 113, 114, 364n; and 298, 298n, 301, 308; and taxes, history and forecasting of stock 99n, 100, 561, 562. See also market, 48, 50, 54, 54n, 83, 85, specific company or type of 86, 87; and money illusion, security 59–60; nominal and real, 59; and International Business Machines price, 49, 61, 62; protection (IBM), 6, 7, 73, 116, 116n, 160, against, 23, 55–56, 61–64; and 199, 234, 295–97, 384, 390, 392, Raskob’s prescription, 2n; and 456, 491, 565–67, 578 returns/yield, 50, 54, 57, 62; and International Flavors & Fragrances, risk, 47n, 55, 57; and taxes, 50, 458–61, 458n, 470 63–64; and value, 58. See also International Game Technology, 216 type of security International Harvester Co., 289, 295–97, 351, 352, 458–61, 458n, Informix Corp, 328–29n 460n, 470 InfoSpace, Inc., 323, 428–29n International Nickel, 289, 311, 351, initial public offerings (IPOs), 139, 352 International Paper Co., 289, 351, 139n, 140, 140–41n, 142–43n, 353 150–54, 246, 270n, 312n, 434–35, International Telephone & 435n, 438, 444n, 528n. See also Telegraph, 412 specific company Internet: as source of advice, 258n Inktomi Corp., 212–13 Internet companies, 6n, 14, 15, Insana, Ron, 342n 40–41, 270n, 337n, 435n, 437n, insider trading, 479n 508n, 530 institutional investors, 115, 194, investment banks/bankers, 141, 194n, 249n, 265n, 343, 375, 501n 360n, 428–29n; and advice, 257, insurance companies, 177, 210, 268–70; and aggressive 211–12, 360n, 495n, 501n, 518 investors, 140, 141, 142–43n, Intel Corp., 160n 152, 172n; and IPOs, 435n, 437; intelligent investors: as businesslike, and reform of Wall Street, 437, 523; characteristics of, 13–14; 437n; role of, 268–70 and “controlling the Investment Company of America, controllable,” 219; ways of 230 being, 101–2 investment contracts, 219, 225, 529 interest, 15, 258, 505n; and investment counseling firms, 20, 28, aggressive investors, 134, 134n, 29, 258–59, 259n, 260, 270 135, 136, 140, 146, 147, 160, 173; investment funds: and advertising, and bargains, 173; compound, 251; advice about, 231; and 570; and Cramer’s aggressive investors, 152, 159, recommendations, 16; and 376–78; aim/purpose of, 227, defensive investors, 89, 93–94, 95, 97, 98, 98n, 99, 99n, 100, 106–7, 106n, 109, 110, 111, 113, www.fx1618.com

Index 607 228, 229; asset elephantiasis of, investments: conventional and 246, 251, 252; and balanced nonconventional, 520; fund investments, 241; bank- definition of, 519; expectations operated, 4, 235; and “beating for, 22–34; “fair-weather,” 521; the market,” 250–52, 255; Graham’s comments about, changes in, 254; closed end vs. 18–34, 520–24; Graham’s open end, 238–41; closing of, definition of, 19, 35, 35n, 45; 251, 252; and common stock, importance of long-term, 226, 229, 231, 236, 241, 249n; 565–66; of large sums of money, and daring to be different, 250, 543; major change since 1964 in, 252; and defensive investors, 29, 22–24; margin of safety as 226, 360–61; dividends on, 227, central concept of, 512–24; 238; and earnings, 227, 232; opportunities for, 521, 532–34; expenses/costs of, 227, 227n, speculation vs., 10, 18–34, 238n, 242, 246, 247, 248, 249, 35–46, 519–20; Zweig’s 249n, 250, 251, 252, 253, 253n, comments about, 35–46. See also 254; Graham’s comments about, specific topic 226–41; and growth stocks, 7, 228; and “hot” stocks, 6–7n; and investors: active and passive, 101–2; interest, 227; managers of, 4, activism of, 460, 460n; 229–32, 245–46, 246n, 247, 249, beginning, 128; consistency of, 250, 252, 254; method of sale of, 402; controlling behavior of, 227; number of, 226; 24n, 223, 278, 529, 530; courage overvalued, speculative of, 524, 535; definition of long- investments of, 5; performance term, 150; discipline of, 24n, of, 229–32, 237, 243–45, 248, 251, 105, 193n, 220, 402; and 252, 253, 254; price of, 250; dividends, 489–96; elderly, 17; questions about, 228; rating of, emotions of, 8, 14, 19, 102, 193n; 252, 252n; registration of, 226, and “enhancing shareholder 226n; regulation of, 226, 237; value,” 309; expectations for, return on, 241, 246, 247, 248, 22–34, 25n, 27, 219; functions of, 249, 250, 252, 253, 254, 255; and 497–98; Graham’s comments risk, 232, 233, 237, 246, 247, 251, about, 487–96; inflation and, 252; selection of, 255, 360–61, 47–57; as intelligent owners, 376–78; sheepish behavior in, 499, 501–2; interests of, 499, 247; taxes on, 227, 241, 250, 251, 508n, 510; investment contract 254; time to sell, 254, 256; of, 219, 225, 529; ironical turnover of stock in, 247; situation of, 364n; managers as, types/classification of, 226, 228; 250, 252; and Zweig’s comments about, managers/management, 242–56. See also closed-end 487–96, 497–511, 498n, 502–6; funds; mutual funds meaning of term, 18–22; “Investment Owner’s Contract,” measuring success of, 217–20; 219, 225 as mixed aggressive and investment policy statement, defensive, 176, 178; and other 278 people’s mistakes, 203, 221, 223; investment trusts, 226n personal situation of, 119–21; predicting behavior of, 24n, 223; www.fx1618.com

608 Index investors (cont.) junior stock issues. See common primary cause of failure by, stock 217n; and proxy materials, 499n, 500–502, 501n; psychology junk bonds, 96, 96n, 108–9, 145–47, of, 8, 51, 103, 119, 196, 272–73; 145n, 173n, 251, 420n, 429n, “reckless,” 19; relationship with 488n company of, 162, 162n, 203; self- defeating behavior of, 12, 15; Juno Online Services, 40, 40n self-knowledge of, 102; sheep “just do what works,” 42–44 behavior of, 498; speculators distinguished from, 1–2, 10, Kadlec, Charles, 80 18–34, 35–46, 205–6; theory vs. Kahneman, Daniel, 151, 221, 528 practice regarding, 497–98, Kaplan, G. E., 235–36 498n; as thinking of self, 215, Karp, Morris, 450n 217; types of, 6; and whose Kayos, Inc., 447n money is it?, 502–6; Zweig’s Kayser-Roth Co., 393, 395 comments about, 497–511. See Keck family, 491n also type of investor Kemper Funds, 81 Keogh accounts, 64 Investors Stock Fund, 230 KeyCorp, 373 IPOs. See initial public offerings Keynes, John Maynard, 133n IRA accounts, 64, 111n Kierkegaard, Soren, 180 ITI Corp., 384 Kimberly-Clark, 373 King Resources Co., 234 J. B. Hunt Transportation, 216 Klingenstein, J. K., 525–26 J. P. Morgan Chase, 82 Knapp, Tom, 542 Jackson, Phil, 39 Kozlowksi, L. Dennis, 442n Jacob (Ryan) Internet Fund, 236n Kutyna, Donald, 339 Jantzen Inc., 391, 392 “January effect,” 41–42, 46 Lamont, Owen, 139n Janus Global Techology Fund, Landis, Kevin, 81, 126, 126n Lasus, Jay, 369 243–45 lawsuits, 175, 175n Japan, 61n, 187 Lee, Kate Leary, 180 JDS Uniphase Corp., 14, 323, 505, Leffler, Edward G., 242 Legg Mason Value Trust, 397, 399 527–28 Leggett & Platt, 373 Jeddo Highland Coal, 543 Lehman Corp., 241 Jefferson-Pilot, 373 Lessons for Investors (Graham), 571, Jesus: Graham’s reference to, 498n Jobs, Steve, 510 572 Johnny-One-Note Co., 304 letter stocks, 3, 3n, 227, 227n, 236 Johns Manville Corp., 175n, 289, 351, Leuthold Group, 337n leverage, 294 353 leveraged buyouts, 32–33n, 429n Johnson & Johnson, 183, 183n, 305, Levin, Gerald M., 442, 443 LexisNexis, 399 373 liabilities, 348, 355, 356, 369, 370, Johnson Controls, 373 Jones, Charles, 128n 371, 385, 391n, 398. See also Jordan, Michael, 83 specific company Jos. A. Bank Clothiers, 216 www.fx1618.com

Index 609 Lichtenberg, G. C., 497 different, 250, 252; and life insurance, 89, 118, 361 dividends, 341n, 489–92; Lilly (Eli), 373 efficiency of, 499, 503;functions Linear Technology, 370 of, 508n; Graham’s comments Ling-Temco-Vought Inc., 4n, 412, about, 487–96; and interests of investors, 499, 508n, 510; of 417, 422, 425–29, 425–26n investment funds, 229–32, Lipper, Inc., 248, 253 245–46, 246n, 247, 249, 250, 251, liquidations, 32, 381 252, 254, 290n; investors’s liquidity, 203, 312n relations with, 487–96, 497–511, LJM Corp., 500–501 498n; and market fluctuations, load funds, 227 206–7; migrating, 245–46; Lockheed Martin, 216 misbehavior of, 14, 497; and “long run”: how long is, 113n per-share earnings, 315–16, 322; Long-Term Capital Management poor, 488; as promoters, 307; and repurchase plans, 506–9; L.P., 13 reputation of, 251; and security Longleaf Partners, 250, 251, 399–400 analysis, 293, 302, 305–7, 309; as Loomis, Carol, 181 shareholders, 250, 252; stock Lorie, James H., 67n options for, 322, 507–8, 507n, losses, 224, 273, 420, 421; “carrying 509, 509n, 510–11; and stock selection for aggressive forward,” 318n; cost of, 526; and investors, 379, 399–400, 401, Graham’s definition of 402; wealth of, 341n; and whose investment, 35, 35n; importance money is it?, 502–6 of avoiding, 12–13; and margin Manhattan Fund, Inc., 233–35 of safety, 516, 518, 525–28, 529, margin accounts, 21–22, 21n, 47n, 530; and per-share earnings, 193, 267 314, 316, 318n; “really margin of safety, 10, 296, 301, 349, dreadful,” 15; and taxes, 561, 371, 399, 401, 512–31, 515n, 562. See also specific company 519n, 537, 547, 571, 574 low-multiplier stocks, 387–90, 400, Marsh, Paul, 113n 451, 515–16 Massachusetts Investment Trust, 230 Lowe’s Companies, 373 mathematics, 569–70 LSI Logic Corp., 370 Mattel Inc., 234, 303 LTV Corp., 426n Maxim Integrated Products, 370 Lubin, Melanie Senter, 275 Maxwell Motors Co., 293 Lucent Technologies Inc., 14, 303, May Department Stores, 373 438–40 McCormick Harvesting Machine luck, 243, 396, 525, 533, 535n Co., 458n Lynch, Peter, 15n, 125–26, 250 McDonald’s Corp., 373 McGraw Edison, 461–62, 461n, 470 “mad money” account, 21–22, 46 McGraw-Hill, Inc., 135, 373, 461–62, Mairs & Power Growth Fund, 251 461n, 470, 471, 472 managers/management: Merck & Co., 373 Mergenthaler Linotype Enterprises, compensation for, 306, 316n, 330 401, 501, 507–8, 509, 509n, 510–11; competence of, 293, 487, 499; and convertible issues and warrants, 411; and daring to be www.fx1618.com

610 Index mergers and acquisitions: and mortgages, 108–9, 110, 173, 360–61, aggressive investors, 173, 174, 360n 381, 389n, 393, 393n, 401; and case histories, 422, 424, 424n, Motorola, 81 426, 426n, 438, 440–43, 441n; Mr. Market parable, 204–5, 212–25, and defensive investors, 374; and dividends, 505, 505n; and 380n, 531 investments vs. speculation, 32, Mr. Tax of America, 433n, 434 33n; and per-share earnings, Mulford, Charles, 329 323; and security analysis, 303, Munger, Charles, 401, 544, 554–55 303n; serial, 474n; stock vs. cash municipal bonds, 24, 259, 520; and in, 505n aggressive investors, 134n, 155; Merrill Lynch & Co., 266n, 405n, and defensive investors, 92, 95, 406n, 410n, 443 106, 106n, 108–9; fluctuations in price of, 208, 210; and Micron Technology, 326–27 investment funds, 251, 253 Microsoft, 115n, 116n, 150, 151, 162n, Murray, Nick, 278 mutual funds: and aggressive 185, 247, 505, 505n investors, 141n, 145, 145n, 147, MicroStrategy, 368, 369 148, 158n, 159n, 187, 377, 377n, Miller, Merton, 494n 379n; as almost perfect, 242; and Miller, William, 397, 399 “buy what you know” picking, Minkow, Barry, 433–34n 127; characteristics of, 242; Minnie Pearl’s Chicken System Inc., closed-end funds vs. open-end, 238–41; closing of, 237–38n; and 463, 466 convertible issues and Mobil Corp., 491n warrants, 420; and corporate Modigliani, Franco, 494n bonds, 283n; decline in funds Money Magazine, 45, 255, 368, invested in, 17; and defensive investors, 28, 28n, 89, 96n, 105, 530 128, 128n, 129–30, 354n, 356n, “money managers,” 235–36, 237, 360–61, 369; expenses/costs of, 128n, 219, 242, 376–77, 377n; 360n, 400, 501n “focused” portfolios of, 290n; money-market funds, 107, 108–9 foreign stocks and bonds in, “Moneyline” (CNN program), 81 148, 187; and formula trading, monopolies, 304, 356, 401 44; and growth stocks, 158n, Montaigne, Michel de, 272 159n, 161; and inflation, 64; Monument Internet Fund, 15, introduction of, 242; for junk bonds, 145n, 147; managers of, 15–16n, 243–45 290n; and market fluctuations, Moody’s Investment Service, 95, 6–7n, 7, 218; and new offerings, 141n; performance of, 229–32, 260, 501n 242, 245n, 377, 377n; precious Morey, Matthew, 252n metals, 56n; and public attitude Morgan Fun-Shares, 253 about stocks, 20n; registration Morgan Guaranty Bank, 235n of, 226, 226n; as “regulated Morgan Stanley, 39, 115n, 371, investment company” (RIC), 227–28n; return on, 253, 290n; 374–75 Morgan, J. P., 54, 54n Morningstar: ratings by, 252; website for, 129n, 148n, 157n, 159n, 183, 186, 227n, 252n, 374n, 375, 397, 420n www.fx1618.com

Index 611 and secondary companies, 268–69. See also initial public 172n; and security analysis, offerings 290n; small-cap, 369; and New York Central Railroad, 424n speculation, 5, 37; and “sure New York Edison Co., 567–68 things,” 15, 15–16n; taxes on, New York Institute of Finance, 473 227–28n, 242, 562–63; types of, New York Stock Exchange (NYSE): 226–27, 227n. See also advice from members of, 261, investment funds; specific fund 264, 267, 270, 271; bankruptcy Mutual Series Funds, 396 of firms registered with, 266; and bargains, 186; closing bell name brands, 392, 401 on, 35; comparison of four NASDAQ, 38, 81, 149n, 152, 186, companies listed on, 330–38; and comparison of securities, 1; 190n, 217n, 359, 406n, 414n and convertible issues and National Biscuit Co., 393 warrants, 413n; costs of trading National Cash Register, 234 stocks on, 149n; “customers’ National General Corp., 4n, 412, brokers” as registerd with, 264; and dealings with brokerage 415, 463–66, 466n, 470, houses, 138, 139, 266, 267; and 472 dividends, 493, 493n, 494n; fees National Investors Fund, 230 for stock listed on, 128n; National Presto Industries, 168, highest-price stock on, 491n; 391, 393, 463–66, 466n, 470, and per-share earnings, 315; 514 and portfolio policy for National Student Marketing Corp., aggressive investors, 186; and 234, 235n, 481n stock selection for aggressive Navistar, 458n, 460n investors, 202, 377, 377n; and Neff, John, 228n stock selection for defensive Nelson, F. Barry, 419 investors, 356; and stock splits, net asset value. See book value 493, 493n; turnover of stock on, net current assets. See working 37, 266–67; and World War I, 10 capital New York Trap Rock Co., 543 neuroscience of investing, 220–23 Newman, Jerome, 532–33, 532–33n New Community debentures, 95, 96, Newman, Paul, 447n 155 news, stockmarket, 221–23, 223n New Haven Railroad, 286 Newton, Isaac, 13–14, 15 New Housing Authority, 96, 96n, Niagara-Mohawk Power Co., 357 155 “Nifty Fifty” stocks, 336–37n new offerings, 172, 253n, 405; and Nissim, Doron, 506, 506n advice, 268–69; and aggressive Nixon, Richard M., 50n investors, 134, 139–44, 172, no-load funds, 227, 227n, 239 174–75, 176–77, 392; and case Nokia, 81 histories, 433–37; of common nonconvertible bonds, 98–99, 134 stock, 139n, 141–44, 269; and Norfolk & Western, 425 defensive investors, 176; and Norfolk Southern Railroad, 217n, investments vs. speculation, 28; 362n, 425n and market fluctuations, 193; Norsk Hydro, 250 and per-share earnings, 312n; and role of investment bankers, www.fx1618.com

612 Index Nortek, Inc., 483–84 P/E ratio. See price/earnings ratio Nortel Networks, 184, 483–84 Pacific Gas & Electric Co., 357 Northern Pacific Railway, 168, Pacific Partners, Ltd., 556 PacTel, 327 207–8, 209 PaineWebber, 41, 83 Northwest Industries Inc., 317–18, Palm, Inc., 479–80 Panhandle Eastern Pipe Line Co., 317n, 412 Norway bonds, 138 357 Novellus Systems, 370 Parker Pen Co., 391, 392 Nucor Corp., 373 Pascal, Blaise, 35, 392, 529–31 NVF Corp., 411, 422, 429–33, 429n, “Pascal’s wager,” 392n, 529–31 patents and trademarks, 374 433n, 576–77 PBHG Technology & Nygren, William, 397, 399 Communications Fund, 243–45 Oakmark Fund, 251, 397, 399 Penn Central Railroad, 4n, 94, 286, Odean, Terrance, 149, 150n, 151 oil companies, 291, 291n, 292 362, 384, 422, 423–25, 423n, online message boards, 502 424n, 425n, 466n, 564–65 online trading, 38–39, 128, 272, 344, Pennsylvania Electric Co., 424 pension funds, 84, 194, 194n, 308, 345 316n, 327–28, 398, 429n, 501n, open-end funds, 116, 237–38n, 545–46. See also specific company Peoples Gas Co., 357 238–41. See also mutual funds PepsiCo Inc., 373, 477 OPM (Other People’s Money), 303, per-share earnings: and aggressive investors, 398; and common 303–4n stock, 318, 320; and convertible opportunities: recognizing, 532–34, issues and warrants, 316, 318, 411, 414, 416; and defensive 535n investors, 338, 348, 351; and options, call, 421 dividends, 492; Graham’s options, stock, 3, 3n, 306, 308, 316n, comments about, 310–21; and margin of safety, 514n; and 322, 323, 398, 400, 421, 507–11, repurchase plans, 506–7, 508; 507n, 509n, 522n. See also Zweig’s comments, 322–29. See warrants; specific company also specific company Oracle Corp., 505, 508–9 performance: and advice, 275; and Orbitex Emerging Technology Fund, aggressive investors, 172n, 16n, 244 376–78, 377n, 379n, 388; and orders: execution of, 267–68 defensive investors, 348, 356; O’Shaughnessy, James, 42–44, 44n, factors influencing, 85; and 45 Graham’s definition of overvaluation, 5, 14, 81, 172, 246, investment, 35, 35n; of growth 261, 505; and aggressive stocks, 451–52n; and market investors, 163, 172, 382; fluctuations, 203; and per-share “gambler’s fallacy” about, earnings, 321; of secondary 458n; and repurchase plans, companies, 172n; and security 508n, 509. See also specific analysis, 291n, 292, 293n, company Owens-Illinois Glass Co., 289, 351, 353 owner earnings, 308, 398, 399 owners: intelligent, 499, 501–2 www.fx1618.com

Index 613 299–301; of value stocks, development of, 155–78, 179–87; 451–52n; vogue of, 4. See also rebalancing of, 104–5, 180n, 197, “beating the market/average”; 219; vodka-and-burrito, 148. See specific company or type of also asset allocation; selection, security stock performance funds, 228, 228n, portfolio trackers, 117n, 397 232–37 Posner, Victor, 429n Performance Systems Inc., 463 PPG Industries, 373 Perimeter (Stan) Investments, 545, “pre-emptive right,” 414 557 precious metals, 55, 55–56n periodicals: as source of advice, predictions. See forecasting 257–58, 258n preferred stock: and aggressive Perot, H. Ross, 266n investors, 98, 133, 134–37, 134n, Petersburg Paradox, 570 139, 140, 142, 166, 173, 176–77, Pfizer, Inc., 167n, 247, 373 381; and balanced funds, 241; Philadelphia Electric Co., 357 and bargains, 166, 173; and Philip Morris, 175n convertible issues and Pickens, T. Boone, 488n warrants, 404, 405, 406, 406n, Piecyk, Walter, 41 412, 415, 417; and defensive Pier 1 Imports, 216 investors, 89, 98–99, 100, 108–9, Pimco, 110 111, 121, 176, 365; dividends on, Pinault-Printemps-Redoute Group, 98–99, 99n, 134n, 285n, 323, 404, 469n 516; and Graham’s business Plato, 251 principles, 523; and inflation, Plexus Group, 42, 149n 48; and investment funds, 241; Polaroid, 234, 392 and margin of safety, 512, 513, portfolio: for aggressive investors, 516, 520; and new offerings, 101, 133–44, 145–54, 155–78, 140, 142, 405; and per-share 179–87, 376–95; autopilot, earnings, 318, 323; price 128–29, 130–32, 223; basic fluctuations in, 210–11; price characteristics of, 89; changes record of, 405, 406; ratings for, to, 117; chaotic, 273; as 210; recommended “coverage” combination of active and for, 284; and risk, 283–87; and passive ways of investing, 102; security analysis, 281, 283–87, and common stocks, 112–23, 293–94, 308; as senior stock 124–32; for defensive investors, issues, 285n; switches between 89–100, 101–11, 112–23, 124–32, common and, 411–13; yield on, 337–38, 347–66; Graham’s 573. See also specific company concept of appropriate price: and advice, 261; and individual, 18–34; inflation and, bankruptcy, 423n; Buffet’s 47–57; “laddered,” 106n; market comments about, 540–41; fluctuations and, 195–97; calculation of true market, 416; negative approach to and comparison of four listed development of, 133–44, 145–54; companies, 330–38, 334n, 337n; 100– stock, 105; overview about, and convertible issues and 1–11; own corporation stock in, warrants, 405, 406, 415, 416; 126–27; positive approach to decline in common stock, 3; of www.fx1618.com

614 Index price (cont.) price/earnings ratio: and advice, delisted stocks, 385n; and 264n; and bargains, 168; dividends, 490, 491, 494n; and calculation of, 159–60n, 374, earnings, 115–16, 318n; and 374n; and convertible issues expectations for investors, 24, and warrants, 416; definition of, 24n, 31, 32; “gambler’s fallacy” 70n; forward, 374; Graham’s about, 458n; and history and criticisms of high, 476, 476n; forecasting of stock market, 65, and growth stocks, 159; and 69, 70, 71, 73, 74, 77, 78, 81, 83, history and forecasting of stock 84, 84n, 85, 334; and inflation, market, 70, 71, 76, 78; and 61, 62; and investment funds, investments vs. speculation, 37; 238, 239, 241, 250; and investor- and margin of safety, 514n; and management relations, 487, 488; market fluctuations, 193, 200, and margin of safety, 513, 515n, 202; and per-share earnings, 516, 517–18, 521, 521n, 522, 321; and portfolio policy for 522n; and market fluctuations, aggressive investors, 159, 17, 23–24, 189–92, 207–12; and 159–60n, 168, 181, 182, 183; and mispricing of stock, 212–13, portfolio policy for defensive 363n; and new offerings, 140, investors, 115, 116, 117n; and 142, 143–44; and portfolio security analysis, 291, 292, 295, policy for aggressive investors, 296; and stock selection for 4, 133–44, 136n, 158, 159, 163, aggressive investors, 382–83, 165–69, 171, 172, 174–78, 181, 384, 385, 399; and stock 183; and portfolio policy for selection for defensive defensive investors, 97, 111–16, investors, 338, 349, 350, 350n, 113–14n, 122, 124, 176; and 352–53, 354, 355, 359, 374, 375. repurchase plans, 507, 507n, See also specific company 508n; and risk, 17, 122; and security analysis, 302–9; and price-to-assets ratio, 349 speculation, 572; of stock price-to-book value ratio, 374–75 options, 306; and stock selection Priceline.com, 504–5 for aggressive investors, 378, primary stock issues, 123 382–83, 384, 386, 388, 389, 390, pro forma (“as if”) statements, 307, 391; and stock selection for defensive investors, 338, 347, 316n, 322–23, 411, 424n, 431 348, 349, 350, 350n, 351, 354, Procter & Gamble, 289, 305, 351, 373 355, 356, 359, 363, 363n, 364, profitability, 333, 453n. See also 365, 374–75; and timing, 189–92; unpredictability of, 24, specific measure of profitability 24n; and value, 10, 32, 36, 39n, profitable reinvestment theory, 40, 122, 206, 521, 522, 541; wholesale, 76, 77. See also 489–92, 490n, 492, 493, 494 appreciation; bargains; ProFunds Ultra OTC Fund, 243–45 fluctuations, market; inflation; ProQuest, 399 price/earnings ratio; specific prospectus, 252, 437 company Providence Bank, 384n proxy materials, 499n, 500–502, price-and-wage freeze, 50n 501n, 510–11 www.fx1618.com Public Service Commission, 568 Public Service Electric & Gas Co., 357

Index 615 public utilities: and aggressive Raskob, John J., 1–2, 2n, 534 investors, 175, 383n, 389; and rating: of bonds, 95, 210, 211, 283n, bonds, 286–87; debt of, 348; as defensive investment, 354, 350n; of investment funds, 252, 356–60; and defensive investors, 252n 122, 348, 354, 354n, 356–60, rating agencies, 501n 356n, 362; dividends of, 493, Reagan, Ronald, 274 495–96; and inflation, 54; and real estate, 56, 63, 63n, 203, 360n, investments vs. speculation, 27; 414, 415n, 521 and market fluctuations, 9, 200; Real Estate Investment Trust regulation of, 286n; and security Company, 446–50, 470 analysis, 284, 285, 286–87, 300, Real Estate Investment Trusts 304; and selection of stock, 348, (REITs), 63, 63n, 360n 354, 354n, 356–60, 356n, 362, Realty Equities Corp. of New York, 383n, 389; and subscription 446–50, 447n, 450n, 470 rights, 495–96 rebalancing, 104–5, 180n, 197, 219 Red Hat, Inc., 484–85, 484n, 485n Public Utility Holding Company Regions Financial, 373 Act (1935), 286n reinvestment, 172, 179n, 253n; and defensive investors, 113, 113n, Puma Technology, 38 128, 356n; and dividends, Purex Co., 494 489–92, 490n, 492, 493, 494; and Putnam Growth Fund, 230 margin of safety, 515, 516; and portfolio for aggressive QLogic Corp., 370 investors, 145n, 172, 179n Quaker Oats, 303 REITs. See Real Estate Investment Qualcomm Inc., 14, 41, 41n, 370 Trusts quicken.com, 157n, 354n, 375 repurchase plans, 309, 316n, 506–9, “quotational” value/loss, 20, 36 507n, 508n, 509n, 511 quotations, market, 198–99, 203, 204, research, 126, 128, 159n, 243, 246, 265n, 272, 363n, 367, 376–77, 205, 206, 221, 222, 223 379n Qwest Communications, 323–24, research and development (R&D), 305, 316, 440 324n restructuring charges, 428, 428n retail bonds, 284 radio companies, 82 retirement plans, 126–27, 273. See railroads, 82, 361, 423; and also pension plans; specific plan Retirement Systems of Alabama, 146 aggressive investors, 136, 173, return: and advice, 272, 275, 277; 173n, 174–75; bankruptcy of, 4, aggregate, 27; for aggressive 4n, 362, 384, 423n; and bargains, investors, 29–34, 89, 135, 174, 173, 173n; bonds of, 172, 173, 182, 377, 381, 393; average 173n, 174–75, 284, 285, 286, 287, annual, 25n, 34, 112n; average 423, 424, 512; and defensive expected, 83, 84; for defensive investors, 100, 122, 359, 361–62, investors, 22–29, 25n, 89, 91, 92, 362n; and market fluctuations, 96, 111, 112n, 113, 113n, 121, 122, 4, 4n; and security analysis, 284, 176, 368; and Graham’s 285, 286, 287; and speculation, 570–71. See also specific railroad Randell, Cort, 235n Rapid American, 412 www.fx1618.com

616 Index return (cont.) short selling, 458n; and business principles, 523; speculation, 571; and value, 122; Graham’s comments about, what is, 525–26; Zweig’s 18–34; and Graham’s definition comments about, 535. See also of investment, 35n; and history specific company or type of and forecasting of stock market, security 67, 78, 80–87; and inflation, 50, Risk Management Association, 501n 54, 62; and investment vs. Ritter, Jay, 150 speculation, 18, 19–20n; Roche Pharmaceutical Co., 410n measures of, 453n; and public Rockefeller family, 185 attitude about stocks, 19–20n; Rodriguez, Robert, 397, 400 on Raskob’s prescription, 2; and Rogers, Will, 368 risk, 89; and security analysis, Rohm & Haas, 373 290n; Zweig’s comments about, Rosen, Jan M., 224n 35–46. See also dividends; Ross, Robert M., 97 DEL interest; performance; return on Roth, John, 184 invested capital (ROIC); yield; Rothschild, Nathan Mayer, 179 specific company or type of Rothschild family, 33, 33n security roulette, 518–19, 519n Rouse Corp., 234 return on invested capital (ROIC), Rowan Companies, 370 398, 399 Royce, Charles, 369, 400 Ruane, Bill, 543, 544, 545 revenue bonds, 94 Ruettgers, Michael, 342n Riley, Pat, 101 “Rule of 72,” 115n, 298n risk: and advice, 264n; and “rule of opposites,” 208, 208n aggressive investors, 32, 133n, “safety of principle,” 18, 35, 45 134n, 136–37, 145, 146, 159n, safety tests: for bonds, 283–87 160, 163, 174–75, 377, 392–93; San Francisco Real Estate Investors, Buffett’s comments about, 546–47; and defensive investors, 447n 89, 96n, 102–4, 106n, 107, 110, Sanford C. Bernstein & Co., 38n, 181 112, 114, 114n, 116, 121–22, 124, Santa Fe Industries, 384 125, 367; and factors that Santayana, George, 1 characterize good decisions, savings accounts, 24, 55, 75, 97 528–29; foolish, 12; and formula savings and loan associations, trading, 44, 45; and Graham’s business principles, 523; and 360–61, 360n history and forecasting of stock savings banks, 89, 97 market, 80–81; and inflation, savings bonds, 24, 108–10, 211 47n, 55, 57; and investment vs. Saxon Industries, 234 speculation, 20–21, 21n; Saylor, Michael, 369 managing of, 12–13, 535, 535n; SBC Communications, 46, 84, 327 and margin of safety, 515, 516, Schilit, Howard, 329 521–22n, 522, 525–26, 528–29; Schloss, Walter J., 541–42, 543–44, and market fluctuations, 188, 219; and price, 17, 122; and 545, 549–50 return/reward, 89, 546–47; and Schow, Howard, 400 security analysis, 283–87; and Schultz, Paul, 139n www.fx1618.com

Index 617 Schwab (Charles A.) Corp., 107 characteristics of, 282–83; and Schweber, Mark, 64 comparison of four listed Schwert, William, 42, 42n, 150 companies, 330–38, 339–46; Scientific-Atlanta, 370 concept of, 280–301; for Scudder, Stevens & Clark, 260 defensive investors, 294–95, Sears Roebuck Co., 289, 319, 320, 347–66; and dividends, 302; and financial strength, 302, 308–9; 351, 353 and forecasting, 281, 282n, SEC. See Securities and Exchange 288–89, 291n, 293n, 298, 299; and general long-term Commission prospects, 302; and growth secondary companies, 5, 123, stocks, 281, 282, 295–98; and management, 302; and per- 170–73, 172n, 176–78, 196, 196n, share earnings, 310–21; 294, 383–84, 520 prediction/qualitative securities: delivery and receipt of, approach to, 364, 364n, 365; and 267–68, 267–68n price, 302–9; Securities & Exchange Commission protection/quantitative (SEC): and advice, 274; and approach to, 364, 364n, 365; and AOL-Time Warner case, 443; risk, 283–87; and speculation in and defensive investor, 128; and common stocks, 572; techniques GEICO, 533n; and hedge funds, for, 281, 282, 282n; and two-part 382n; and investment funds, appraisal process, 321; and 226, 226n, 227n, 228n, 236, 250; valuation, 281–82; Zweig’s and IPOs, 437; and letter-stocks, comments about, 302–9, 339–46. 3n; and mutual funds, 116; and See also case histories; financial new issues, 392; and NVF- analysts; per-share earnings; Sharon Steel case, 429n; and selection, stock; type of security per-share earnings, 324n, Security Analysis (Graham and 328–29n; and Realty Equities Dodd), 18, 35n, 283, 423, 484n, case, 450n; regulation of 499n, 508n, 514n, 537, 548, 564 brokerage houses by, 266; security analyst. See financial regulation of public utilities by, analysts 286n; and repurchase plans, selection, stock: and adoption of 508n; and security analysis, schemes by large numbers of 286–87, 286n; and stock people, 195n; and advice, 272; selection for defensive for aggressive investors, 30–31, investors, 369; and Tyco case, 376–95; and bargain issues, 441n; website for, 186, 250, 274, 390–93; and “best” stocks in 303, 306–7, 324n, 375, 399, 438n, DJIA, 363; and bridge player 510n analogy, 378–79; “buy what you Securities Industry Association, 17, know,” 125–27, 126n; criteria 258n for, 337–38, 348–66, 385–86; for Securities Investor Protection Corp. defensive investors, 337–38, (SIPC), 268 347–75, 385n; do it yourself, security analysis, 330–38; and 128–29; Graham-Newman advice, 260; for aggressive methods for, 380–83; Graham’s investors, 303n, 376–95; and capital structure, 302, 308–9; and capitalization, 288; www.fx1618.com

618 Index selection, stock (cont.) Southern New England Telephone, comments about, 349–50, 327 376–95; Graham’s criteria for, 369, 371, 374–75; “human Southwest Airlines, 368 factor” in, 365; for long- and Spalding United Kingdom, 315 short-term, 30, 31; and low- special charges, 311, 312–14, 315, multiplier industrial stocks, 387–90; and market 316, 317, 319, 320, 416, 424. See fluctuations, 200, 206; “pick the also specific company winners,” 76; and practicing “Special Purpose Entities,” selecting stocks, 396–97; 316–17n prediction/qualitative special situations. See “workouts” approach to, 364, 364n, 365; speculation: and advice, 260, 262–63, protection/quantitative 268, 269, 563; and aggressive approach to, 347–48, 364, 364n, investors, 141n, 143, 160, 165, 365; rules for common stock, 171, 175, 392; and bargains, 171; 114–15, 117; and secondary benefits of, 21n; and case companies, 383–84; single histories, 433–37; and criteria for, 387–90; and special convertible issues and situations, 393–95; and stock- warrants, 406, 409; and picking “systems,” 37; Zweig’s defensive investors, 89, 112, 115, comments about, 367–75. See 116, 119, 128; and dividends, also asset allocation; 489, 490; expectations from, diversification; security analysis 24–34; Graham’s comments about, 18–34, 563–64; and Sequoia Fund, 254, 254n, 543, 553 history and forecasting of stock shareholders. See Investors market, 74, 85, 87; and inflation, Sharon Steel Co., 411, 429–33, 429n, 47; intelligent, 21; investing distinguished from, 1–2, 10, 576–77 18–34, 35–46, 205–6, 519–20; and sheepish behavior, 247, 498 investment funds, 5, 229, 232, Shiller, Robert, 85–86 233, 237; and margin of safety, shorting, 19, 30, 32, 32n, 381n, 519–20, 521, 522n; and market fluctuations, 5, 188, 189, 190–91, 458n 193, 199; and new offerings, Siebel Systems, 370 141n, 143, 392; and problems of Siegel, Jeremy, 2n, 47n, 80, 82, 85n, brokerage houses, 267; and Raskob’s prescription, 2; and 475 role of investment bankers, 268; Siegel, Laurence, 60n and security analysis, 294; Sigma-Aldrich, 373 Zweig’s comments about, Sing, Jeanette, 478 35–46 size of enterprise, 337, 348, 349, 350, Spinoza, Baruch, 195 splits, stock, 309, 344, 491, 492–96, 369, 386, 388, 389, 390, 499 493n Slovic, Paul, 529 Sprint Corp., 497, 509 Small Business Administration, stability, 178, 348, 349, 371, 386. See also volatility 447 stagflation, 59 small-cap stocks, 252, 369 Smith, Adam, 541–42 South Sea Co., 13 Southern California Edison, 357 www.fx1618.com

Index 619 stamps, rare, 56 Starbucks, 126 Standard & Poor’s: and advice, 260; state bonds, 24, 95, 259, 520 Staunton, Mike, 113n and bargains, 169, 171; bond steel industry, 167, 379, 383 ratings by, 95, 423; and stock: alternatives to, 15; “delisting” convertible issues and warrants, 403, 406n, 408n, 419; of, 385n; direct purchase of, and dividends, 294n; and 128–29; good and bad, 521n; expectations for investors, 27n, mental value of, 474; and 28, 28n; and Graham’s disciples, portfolio for defensive 537–38, 543, 544, 546; and investors, 103, 104, 105; public history and forecasting of stock attitude about, 19–20, 19–20n; market, 65–72, 76, 77, 84, 85; turnover rate of, 37, 38, 247, and inflation, 50; and 266–67; “watered,” 312n. See investment funds, 231, 231n, also common stock; preferred 233, 235, 237, 239, 250, 254, 255; stock; specific stock or sector of and investment vs. speculation, stock 37; listing of constituent stock/equity ratio, 285 companies in, 250, 333; and Stock Guide (Standard & Poor’s), market fluctuations, 190n, 144, 169, 354, 383–87, 388, 192–94, 209, 212, 218; and May 389, 391, 403, 433, 463, 575–76, 1970 debacle, 463n; and mutual 578 funds, 230, 290n; and portfolio stock market: and “beating the for aggressive investors, 158, pros,” 217–20, 217n; books 161, 169, 171; and portfolio for about, 80–81; in China, 437n; defensive investors, 111, 112n, easy ways to make money in, 115n, 131, 131n, 132; and 195n; as going wrong, 202–3; price/earnings ratio, 70n; price history and forecasting of, 1, 2, record from, 406; as rating 10, 24n, 54, 54n, 65–79, 80–87; agency, 501n; and “second-line 1972 level in, 72–79; structure companies,” 196, 196n; and of, 573–74; total value of U.S., security analysis, 290n, 294n, 84. See also financial market 299; and stock selection for stockbrokers. See brokerage houses aggressive investors, 202, 377, stockholders. See investors 379n, 383–87, 388, 389, 390, 397; Streisand, Barbra, 39, 39n, 126 and stock selection for Strong Corporate Bond Fund, 146 defensive investors, 350n, 354, Stryker Corp., 482–83 354n, 359, 360, 361, 362, 369, Studebaker-Worthington Corp., 371, 374–75; and technology 412–13 companies, 578; website for, subscription rights, 495–96, 495n 129n, 196n, 250. See also Stock Sullivan, Erin, 245–46 Guide; specific company Sun Microsystems, 181, 182, 183, 375 Standard Oil, 185 Superior Oil, 490–91, 491n Standard Oil of California, 168–69, Supervalu Inc., 373 289, 292, 350, 351, 353 “sure things,” 15–17, 371, 521–22n Standard Oil of New Jersey, 289, 292, Swift & Co., 289, 351, 353, 354, 355 351, 353, 429 Sycamore Networks, Inc., 304 Stanley Works, 373 Sysco Corp., 473–75 www.fx1618.com

620 Index T. Rowe Price, 105, 107, 148n, 251, and security analysis, 291n, 299; 369 as “sure things,” 15. See also specific company takeovers, 429–33, 429n, 487–88, Teco Energy, 373 487–88n. See also specific telecommunications stocks, 81, 215, company 291n, 369, 383n, 437n, 521–22n Teleprompter Corp., 234 tangible-asset value. See book value television, financial, 258n Target Corp., 373 Telex Corp., 234 taxes: and aggressive investors, 134, Tellabs Inc., 370 Temco Services, 40 149, 149n, 155, 180n, 398; on Tenneco, 458n corporations, 99, 99n, 177; and Texaco, 187, 289, 292, 351, 353 defensive investors, 91–96, 96n, Texas Instruments, 116, 116n, 490 99, 99n, 100, 106, 106n, 108, 109, Third Avenue Funds, 369, 400 110, 129, 363n; on dividends, 99, 3Com, 479–80 294n, 493, 495–96, 496n, 507n, 3M Co., 305, 372, 568 561, 562; and expectations for Thurlow Growth Fund, 243–45 investors, 23–25, 27, 34; and TIAA-CREF, 110, 111n history and forecasting of stock ticker symbols, 40, 40n market, 75; important rules Ticketmaster Online, 40 concerning, 561–62; and Tillinghast, Joel, 400 inflation, 50, 54, 63–64; and Time Warner Inc, 442–43. See also interest, 99n, 100, 561, 562; and AOL Time Warner investor-management relations, timing, 156–57, 179–80, 179n, 189–92, 497; and losses, 561, 562; and 206 margin of safety, 520; and TIPS. See Treasury Inflation- market fluctuations, 207–12, Protected Securities 219, 224, 224n; and per-share Tomlinson, Lucile, 118 earnings, 314, 316, 318, 318n, Torray (Robert) Fund, 251, 397, 400 324n; of regulated investment Toys “R” Us, Inc., 444, 445 companies, 561–62; and tracking stocks, 396–97 repurchase plans, 507, 509; and trade names. See brand names security analysis, 284, 285, 294n, trades: costs of, 318n, 363n, 379n, 305; and stock options, 509, 385n; of delisted stocks, 385n; 509n. See also specific company size of, 247; volume of, 266–68 TCW, 245 trading: insider, 479n “technical approaches,” 2–3 “trading in the market,” 30 technology stocks: and aggressive Trane Co., 316 investors, 30, 172n, 173n, 187, Transamerica Premier Equity Fund, 383n; and convertible issues 245 and warrants, 411n; and Treasury Inflation-Protected defensive investors, 126n, 369; Securities (TIPS), 26n, 63–64, and dividends, 490n; in 63n, 211n investment funds, 243; and Tri-Continental Corp., 417 investments vs. speculation, 37; Tricon Global Restaurants, Inc., 477n and investor-management trust companies, 29, 270, 360n relations, 503, 507; and margin of safety, 521–22n; and market fluctuations, 215; and risk, 12; www.fx1618.com

Index 621 trust funds, 4, 47, 89, 231, 232, 235, U.S. treasury securities, 107, 258–59, 259n 108–9 Tversky, Amos, 151, 221 U.S. Utilities Sector Index Fund, Tweedy Browne Partners, 397, 542, 356n 543–44, 551 USA Interactive, 307 two-part appraisal process, 299–301, USG Corp., 175n UST Inc., 216, 368 321 Tyco International Ltd., 14, 303, VA Linux, 152–54 Value Line (investment service), 186, 410n, 426n, 440–42, 442n, 497 288, 341, 342, 343 Ulysses (mythological figure), value/valuation: and advice, 259, 535–36 261, 274; and aggressive uncertainty, 535 investors, 32, 33, 137, 166, 167, undervaluation, 261, 508n; and 177, 178, 380n, 391n; and bargains, 166, 167, 177, 178; aggressive investors, 13–14, 32, Buffet’s comments about, 34, 167, 170, 172–73, 175, 382, 540–41; business vs. stock- 400; and bargains, 167, 170, market, 198–207; and dealings 172–73; Buffet’s comments with brokerage houses, 267; and about, 537; and margin of defensive investors, 22–23, 24, safety, 517–18, 520 25, 26, 27, 120, 122, 125, 364; underwriting, 268–70, 434–35, 518. dependability of, 318n, 321; and See also specific company or “enhancing shareholder value,” underwriter 309; financial analysts as Union Carbide Co., 289, 351, 353 creating, 568; and history and Union Pacific Railroad, 362n forecasting of stock market, 74, Union Underwear, 317n 83, 87; importance of, 533; unit investment trusts, 226n inflated, 267; and inflation, 54, United Accum., 230 58; and investment funds, 238, United Aircraft Co., 289, 351, 353 239, 241, 245; and investor- “units,” 414n management relations, 498n; Universal Marion Co., 393, 394, 395 and margin of safety, 520, 521, University of Michigan, 19–20n 522; and per-share earnings, unpopular large companies, 163–66, 318, 318n, 320; and price, 10, 32, 168, 183 36, 39n, 40, 122, 206, 521, 522, Updegrave, Walter, 111n, 219 541; and problems of brokerage U.S. Bancorp, 373 houses, 267; “quotational,” 20, U.S. bonds (other than savings), 24, 36; and repurchase plans, 507; 94–95, 96, 119 and risk, 122; and security U.S. savings bonds, 92, 93–94, 95, analysis, 281–82, 285, 288–90, 118, 119, 120, 121, 188, 210, 211, 294, 295–98, 300; and selection 241, 520 of stock, 364, 380n, 391n; and U.S. Steel Corp., 289, 351, 353, 384 speculation, 569; and stock U.S. Treasury, 110, 496 splits, 493n; and two-part U.S. Treasury bonds, 63, 94, 106n, appraisal process, 299–301. 107, 108–9, 111, 112n, 147, 250, See also earnings; fluctuations, 419 U.S. Treasury certificates, 94–95 www.fx1618.com

622 Index value/valuation (cont.) Westinghouse Electric Co., market; overvaluation; 289 price/earnings ratio; undervaluation; specific company Wheelabrator-Frye, 469n or type of security Whiting Corp., 467–69, 469n, Van Wagoner Funds, 243–45 470 Vanguard Group, 63, 64, 107, Whitman, Martin, 400 Wiesenberger Financial Services, 110, 132, 248, 249, 251, 369, 400, 420, 420n, 510 158, 230, 239, 241 Veres, Robert, 259n, 276n, Willcox & Gibbs, 467–69, 469n, 278 VF Corp., 373 470 video game, financial, 38–41 Williams, Jackie G., 433–34, 433n, Vilar, Alberto, 16 Vinik, Jeffrey, 37 436 vodka-and-burrito portfolio, Williams Communications, 148 volatility, 245, 356n, 406n, 420n, 509, 304 509n. See also stability Wilshire indexes, 27–28n, 215, 216, volume: trading, 312n Volvo, 250 243–45 Winstar Communications, 81 Wal-Mart Stores, 185, 247, 373 wireless stocks, 172n Walgreen Co., 373 Woolworth Company (F. W.), 289, Walker, Rob, 323n Wall Street: reform of, 437 351, 354, 355, 569 Wall Street Journal, 30, 81, 186, 310, working capital: and aggressive 317, 397 investors, 166, 169, 169n1, 170, Walton, Sam, 185 186, 381, 382, 385, 387–93, 391n; Warner-Lambert Co., 167n and defensive investors, 348, warrants, 3, 3n, 134, 311, 316, 318, 356, 369, 370, 371; and dividends, 492; and security 403, 403n, 406, 411, 412, 413–21, analysis, 281 413n, 414n, 522, 522n. See also “workouts,” 155, 156, 174–75, specific company 393–95, 522 Wasatch, 251 WorldCom, 14, 127, 146–47, Washington Mutual, 375 303, 304n, 423n, 426n, 429n, Washington Post Co., 217, 401, 497 545–46, 547, 558 Worthington Steel, 368 Wasserstein Perella, 478 W. R. Grace, 175n “watered” stock, 312n Wyeth, 455n Watson, T. L., Sr., 566 Webvan, 505 Xerox Corp., 14, 199, 295, 297, 392, Welles, C., 235–36 456 West Point Pepperell, 391, 392 Xilinx Inc, 370 Westinghouse Corp., 351, 353 Y2K bug, 342–43n Yahoo! Inc., 213, 475–77, 476n www.fx1618.com yield: and aggressive investors, 134, 135, 136–37, 138, 394; and convertible issues and warrants, 404, 404n, 411–12; and defensive investors, 26,

Index 623 89, 91, 92, 93, 95, 96, 97, 98, performance; return; type of 107, 110, 113, 113–14n, 124, security 125, 350; fluctuations in, 193, Yum! Brands, Inc., 475–77, 207–12; and history and 477n forecasting of stock market, 71, 77, 78; and inflation, 57; Zenith Radio, 335 and speculation, 573. See also Ziv, Amir, 506, 506n dividends; interest; ZZZZ Best, 433–34n www.fx1618.com

About the Authors BENJAMIN GRAHAM (1894-1976), the father of value investing, has been an inspiration for many of today’s most successful businesspeople. He is also the author of Securities Analysis and The Interpretation of Financial Statements. JASON ZWEIG is a senior writer at Money magazine, a guest columnist at Time, and a trustee of the Museum of American Financial History. Formerly a senior editor at Forbes, he has written about investing since 1987. www.fx1618.com

Credits Cover design by mucca design Interior Designed by Nancy Singer Olaguera www.fx1618.com

Grateful acknowledgment is made for permission to reprint: “The Superinvestors of Graham-and-Doddsville,” by Warren E. Buffett, from the Fall 1984 issue of Hermes, Magazine of Columbia Business School. Reprinted by permission of Hermes, Magazines of Columbia Business School, copyright © 1984 The Trustees of Columbia University and Warren E. Buffett. “Benjamin Graham,” b y Warren E . Buffett, from the November/December 1976 issue of Financial Analyst Journal. Reprinted by permission of Financial Analysts Federation. T HE INTELLIGENT INVESTOR—Revised Edition. Copyright © 1973 by Benjamin Graham. New material: Copyright © 2003 by Jason Zweig. All rights reserved under International and Pan-American Copyright Conventions. By payment of the required fees, you have been granted the non-exclusive, non-transferable right to access and read the text of this e-book on-screen. No part of this text may be reproduced, transmitted, down-loaded, decompiled, reverse engineered, or stored in or introduced into any information storage and retrieval system, in any form or by any means, whether electronic or mechanical, now known or hereinafter invented, without the express written permission of PerfectBound™. PerfectBound™ and the PerfectBound™ logo are trademarks of HarperCollins Publishers, Inc. AdobeAcrobat eBook Reader June 2003 eISBN 0-06-058328-2 10 9 8 7 6 5 4 3 2 1 www.fx1618.com

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