Intelligent Investor Ch. 15-16

Question 0

Liquidations

Answer 0

Purchase of shares which were to receive 1 or more cash

payments in liquidation of company’s assets

Question 1

Arbitrages

Answer 1

Purchase of a security and simultaneous sale of one or more
Other securities into which it was to be exchanged

Under plan of reorganization or merger

Question 2

When did graham conduct arbitrage and liquidations, 2 conditions

Answer 2

1 calculated annual return of 20% or more

2 chance of outcome at least 80%

Question 3

Related hedges

Answer 3

Purchase of convertible bonds or convertible preferred shares
And simultaneous short sale of company’s common stock

Question 4

Net-Current-Asset (or Bargain) issues

Answer 4

Buy over 100 different issues at a cost lost than net current
Asset value alone (don’t include plant assets)

Purchases typically made at two thirds or less of stripped down
Asset value

Question 5

Standard and Poor’s stock good

Answer 5

Good way to find listings and data of publicly traded companies

Question 6

Enterprising investor: Winnowing a stock guide

Answer 6

find stocks with PE ratios under 10

Question 7

Enterprising investor: financial condition ratios

Answer 7

1 current ratio = 1.5

2 debt no more than 110% net current assets (for industrial
Companies)

Question 8

Enterprising investor: earning stability

Answer 8

No deficit in last 5 years in stock guide

Question 9

Enterprising investor: dividend record

Answer 9

Some current dividend

Question 10

Enterprising investor: price to net tangible assets

Answer 10

Price less than 120% net tangible assets

Question 11

Enterprising investor: small companies

Answer 11

May have enough safety if carefully bought on group basis

Question 12

7 criteria for Graham’s stock selection

Answer 12

1 size
2 financial condition
3 earnings stability
4 dividend record
5 earnings growth
6 price
7 S & P ranking

Question 13

S&P ranking

Answer 13

Average rankings offer promise of satisfactory investment results

Question 14

Important ratio in evaluating stocks

Answer 14

Net asset value per share

Question 15

Portfolio construction: second quality issues

Answer 15

Will underperform in a bear market, so best to buy on a bargain
Basis

Question 16

Goodwill 2 causes

Answer 16

1 results from acquisitions, paying more than company’s worth

2 when stock trades substantially more than its book value

Question 17

What companies decline the most

Answer 17

Companies with high PE ratios and companies that don’t pay

Dividends

Question 18

Net working capital value vs. working capital value

Answer 18

Working capital value =
(current assets - current liabilities)/shares outstanding

Net working capital =
(current assets - total liabilities)/shares outstanding

Question 19

Trade names, and tangible assets for companies with low PE ratios

Answer 19

When Wall Street looks unfavorably at companies: trade

names, buildings, land, buildings and machines have no value

Question 20

Money managers’ recommendations on finding bargains

Answer 20

Look for stocks trading at 52 week lows

Question 21

What to look for with ROIC

Answer 21

Look for rising returns in invested capital

Question 22

ROIC defined

Answer 22

Measures how efficiently a company generates owner earnings

Question 23

Calculation of ROIC

What are attractive rates on ROIC?

Answer 23

ROIC = Owner Earnings/Invested Capital

Over 10% is attractive; 6% can be attractive if company has strong
Brand name and is having temporary difficulty

Question 24

Owner Earnings equation

Answer 24

Owner Earnings = operating profit + depreciation + amortization of goodwill - federal income tax (paid at company's average rate) - cost of stock options - (maintenance or capital expenditures)

Question 25

Invested Capital Equation

Answer 25

Invested Capital = Total assets - cash - short term investments - non interest bearing short term liabilities + past accounting charges that reduce invested capital

Question 26

Evaluating acquisitions, to valuate companies subsidiaries

Answer 26

1 start looking at company's business segments footnote, which Lists industrial sector, revenues and earnings of each subsidiary 2 also check management discussion and analysis 3 search database like factiva, pro quest or Lexis Nexis for examples of other firms in same industries that have been acquired 4 using EDGAR database, locate past annual reports to determine Ratio of purchase price to earnings of those acquired companies

Question 27

How professionals evaluate good management

Answer 27

1 keep issuance of stock options to minimum of 3% sh. Outstanding 2 good managers communicate problems candidly 3 good managers have clear plans for allocating current and Future cashflows and own sizable stakes of company's company Stock (preferably through cash purchase instead of options) 4 when management says it will do something and it happens, They are honest with shareholders and themselves

Question 28

Bad management

Answer 28

1 see if non recurring and extraordinary expenses are repeated 2 management talks more about the stock price than the business

Question 29

What's important to do in order to evaluate management

Answer 29

Listen to the company's conference calls

Question 30

What to look for in the back of the annual report where operating divisions are listed and a new CEO just took over .

Answer 30

1 good when there's a lot of turnover in the first 2 years 2 turmoil if turnover continues

Question 31

Two characteristics successful investment professionals have in common?

Answer 31

1 they're disciplined and consistent, refusing to change their Approach when it's unfashionable 2 they think a great deal about what they do and how they do it, While paying very little attention to what the market is doing

Question 32

Worthwhile newsletter

Answer 32

Outstanding investor digest

Question 33

What does Buffett look for in management

Answer 33

1 managers that set realistic goals 2 build their businesses from within rather than through acquisitions 3 allocate capital wisely 4 do not over compensate themselves in stock options

Question 34

What does Buffett look for in companies

Answer 34

``` 1 steady and sustainable earnings growth 2 buy during temporary bad news 3 strong consumer brands 4 easily understandable businesses 5 robust financial health 6 near monopolies in their markets ```

Question 35

Studying warren Buffett

Answer 35

Read his annual reports and essays

Question 36

Stock option warrants

Answer 36

Long term rights to buy common shares at stipulated prices

Question 37

Convertible bond securities

Answer 37

Usually become most prevalent toward the end of a bull market

Question 38

Why we're convertible bonds better in 2003 compared to 1970?

Answer 38

1 shorter maturities (so less volatile) 2 call protection 3 mostly investment grade

Question 39

Call protection

Answer 39

Assurance against early redemption

Question 40

The convertible preferred is safer than...

Answer 40

The common stock of the same company Carries smaller risk from eventual loss of principal

Question 41

When is a bond called

Answer 41

When the issuing corporation forcibly pays it off ahead of | Maturity date

Question 42

When do convertible bonds advance significantly in price?

Answer 42

When the common advances significantly, the convertible will have a sharp price gain

Question 43

Graham on converting convertible bonds

Answer 43

Never convert them, because you will lose your strategic position

Question 44

What is the most ideal combination of convertible bonds

Answer 44

Strongly secured convertible, exchangeable for common stock, Which itself is attractive Convertible is at a price only slightly higher than current market

Question 45

Convertible bonds: conversion privilege

Answer 45

Older issues are more likely to have attractive conversion rates Compared to newer issues that are strong

Question 46

It's important for the investor to calculate the additional common stock issuable for the conversion of what 3 instruments?

Answer 46

1 bonds 2 preferred stocks 3 options

Question 47

In a falling bond market, convertibles will...

Answer 47

Fair worse than the typical bond as they are riskier

Question 48

Interest rates of convertible bonds

Answer 48

Are lower than most bonds, this is because they have upside | From being converted into common stock

Question 49

Convertible bonds in bankruptcy proceedings

Answer 49

Remain junior to other long term debt and bank loans