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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.

What to Do with Company Stock

Accumulating company stock has been a good way for my family to build wealth. I’ve heard others say they’ve been able to generate income by buying shares at a discounted price and then selling shares at a higher price. In this way, they may have more money available to pay off debt or invest, increasing their net worth.

I won’t argue in favor of or against the inclusion of company stock in an investment portfolio. But we’ve decided not to hold company stock forever. Here are a few things we’ve done with the shares:

How to Create a Stress-Free Investing Strategy

(Guest post by Joseph Hogue, CFA): The idea of stress-free investing for the individual investor is one of the best themes in The Intelligent Investor. Unfortunately, sometimes it’s a little vague on how you can apply the concepts and create your own portfolio. For that, I use one of my favorite investing tools to create a simple portfolio and save money investing.

Investing in Relationships: Thoughts on Making Choices

There’s a prevailing stance on relationships that I find both intriguing and disturbing. It starts with the idea that each of us is the average of the five people we spend the most time with. Where this leads can be beneficial or dangerous – depending on whether I continue to embrace loved ones who may (or may not) fully represent what I aspire to become or reject them in favor of pursuing relationships based on superficial and possibly meaningless measures, such as net worth or perceived business acumen.

There’s truth in the thought process that we’re affected by people with whom we interact regularly. There’s also value in the concept that we should intentionally invest in certain relationships and abandon others. But choosing who benefits from my relationship efforts and by what standard — without a proper guide — seems treacherous.

As a Christian, I wondered what I might learn from how Jesus lived and what he taught his disciples about relationships. I decided to start with the Gospel of Matthew and then build upon my knowledge. I’m not a theologian and I’m sure I have personal biases … but wanted to share what I’ve learned. Here are some thoughts on making choices about investing in relationships:

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