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The Intelligent Investor

The investor And Market Fluctuations

The author here states three important points:


  1. Fluctuations in high-grade bonds of relatively shorter maturity (7 years or less) are less affected by changes in market prices.
  2. The longer-term bonds have price fluctuations in general, and,
  3. The common stocks in an investor’s portfolio are bound to price fluctuations.

There are two ways by which an investor can profit from a common stock.

A) By way of timing, 
B) By way of pricing. 


By timing, the author suggests buying a stock when it is quoted below its fair value and vice-versa. 


The problem with this method is that we are bound to become speculators and we will lose money, rather than earning. The author also mentions that we often buy or sell as shown on stock market forecasts because we might believe that a stock market broker or firm is more dependable than us but this is not always true.A stock owner should not be merely dependent on price quotations but also think from the viewpoint of a business owner.


The better a common stocks’ quality is, the more speculative its nature will be than the lower grade stocks.


The A&P example:


The author talks about a company named Great Atlanta and Pacific Tea Co. The A&P's shares were introduced in 1929, at a price of 494. By 1932, they were trading at 101 and by 1938, they fell to 36. The company’s valuations showed that the stock was significantly undervalued. At this moment any investor would be thinking of selling the stock. But, if they would have held the stock for one more year, i.e., 1939, its price saw a 117% rise. Any investor confident about their valuations about the stock should have refrained from selling the stock, if not buy more, and saw a rise in its coming years. 


Temporary fluctuations always happen in the market and we should not panic by looking at the prices every day.


Graham used an imaginary investor named (Mr. Market) and illustrated how an intelligent investor should take advantage of market fluctuations. This is a parable about greed and fear, price and value, and how an investor will react.


A bonds’ safety of its principal and interest are not questioned, however, a long-term bond market price can fluctuate widely in response to changes in its interest rates. When a bonds’ yield is low, its prices are high and vice versa.


If it’s difficult to predict stock prices, it’s impossible to predict bond prices. Hence the investor might select a bond according to his or her  preferences.


The price fluctuations of convertible bonds and preferred stocks are dependent on three factors:

  1. Variations in price of the related common stock 
  2. Variations in the credit standing of the company 
  3. Variations in general interest rates.

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Units 9/19