The Intelligent Investor: The Definitive Book On Value part 16. The purpose of this book is to supply, in a form suitable for laymen, guidance in the adoption and execution of an investment policy. Comparatively little will be said here about the technique of analyzing securities; attention will be paid chiefly to investment principles and investors’ attitudes. We shall, however, provide a number of condensed comparisons of specific securities - chiefly in pairs appearing side by side in the New York Stock Exchange list in order to bring home in concrete fashion the important elements involved in specific choices of common stocks | 136 The Intelligent Investor 100 the chances are very great that at some future time the holder will see much lower quotations. For when bad business comes or just a bad market issues of this kind prove highly susceptible to severe sinking spells often interest or dividends are suspended or at least endangered and frequently there is a pronounced price weakness even though the operating results are not at all bad. As a specific illustration of this characteristic of second-quality senior issues let us summarize the price behavior of a group of ten railroad income bonds in 1946-47. These comprise all of those which sold at 96 or more in 1946 their high prices averaging 102Y. By the following year the group had registered low prices averaging only 68 a loss of one-third of the market value in a very short time. Peculiarly enough the railroads of the country were showing much better earnings in 1947 than in 1946 hence the drastic price decline ran counter to the business picture and was a reflection of the selloff in the general market. But it should be pointed out that the shrinkage in these income bonds was proportionately larger than that in the common stocks in the Dow Jones industrial list about 23 . Obviously the purchaser of these bonds at a cost above 100 could not have expected to participate to any extent in a further rise in the securities market. The only attractive feature was the income yield averaging about against for firstgrade bonds an advantage of in annual income . Yet the sequel showed all too soon and too plainly that for the minor advantage in annual income the buyer of these second-grade bonds was risking the loss of a substantial part of his principal. The above example permits us to pay our respects to the popular fallacy that goes under the sobriquet of a businessman s investment. That involves the purchase of a security showing a larger yield than is obtainable on a high-grade issue and carrying a correspondingly greater .
