Convertible Bonds: Understanding How They Work

In Chapter 16 of The Intelligent Investor, Benjamin Graham explores the world of convertible issues, namely convertible bonds and convertible preferred stocks. He also discusses stock-option warrants.

This article is part of a series on Understanding The Intelligent Investor. It continues from the Chapter 15 review on beating the stock market with proven strategies by Joseph Hogue, CFA at My Stock Market Basics.

One of the most important lessons in this chapter is the idea that Wall Street often spins the value of products to favor the commissioned-based seller and issuing company. Instead of relying on advisers or sellers to identify an attractive product, the discerning investor could do well to fully understand both the advantages and disadvantages of investment products.

Let’s delve into convertibles and discover what Graham thinks of them.

Market Fluctuations: How to Act When They Happen

Chapter 8 of The Intelligent Investor focuses on dealing with market fluctuations. Graham opens this chapter advising investors to know about the possibility of these ups and downs. He urges us to be prepared financially and psychologically.

To be clear about the nature of potential fluctuations, Graham describes a probable set of circumstances. Within the next five years, shares of a given security may experience a 50+% price increase from its low point or a 30+% decline from its high point. Such changes in stock prices may bear no relationship to changes in economic values.

While the rise in prices sounds great, the decrease seems scary. Still, it’s this scenario for which Graham wishes to equip investors to withstand (and possibly profit from). He offers advice that I interpret in this way:

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