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 sus-
ceptible to severe sinking spells; often interest or dividends are
suspended or at least endangered, and frequently there is a pro-
nounced 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 102
1
⁄2. 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 4.25% (against 2.50% for first-
grade bonds, an advantage of 1.75% 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 popu-
lar 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 risk. It is bad business to accept an
136 The Intelligent Investor
* Bond prices are quoted in percentages of “par value,” or 100. A bond
priced at “85” is selling at 85% of its principal value; a bond originally
offered for $10,000, but now selling at 85, will cost $8,500. When bonds
sell below 100, they are called “discount” bonds; above 100, they become
“premium” bonds.
acknowledged possibility of a loss of principal in exchange for a
mere 1 or 2% of additional yearly income. If you are willing to
assume some risk you should be certain that you can realize a
really substantial gain in principal value if things go well. Hence a
second-grade 5.5 or 6% bond selling at par is almost always a bad
purchase. The same issue at 70 might make more sense—and if you
are patient you will probably be able to buy it at that level.
Second-grade bonds and preferred stocks possess two contra-
dictory attributes which the intelligent investor must bear clearly
in mind. Nearly all suffer severe sinking spells in bad markets. On
the other hand, a large proportion recover their position when
favorable conditions return, and these ultimately “work out all
right.” This is true even of (cumulative) preferred stocks that fail to
pay dividends for many years. There were a number of such issues
in the early 1940s, as a consequence of the long depression of the
1930s. During the postwar boom period of 1945–1947 many of
these large accumulations were paid off either in cash or in new
securities, and the principal was often discharged as well. As a
result, large profits were made by people who, a few years previ-
ously, had bought these issues when they were friendless and sold
at low prices.

2
It may well be true that, in an overall accounting, the higher
yields obtainable on second-grade senior issues will prove to have
offset those principal losses that were irrecoverable. In other
words, an investor who bought all such issues at their offering
prices might conceivably fare as well, in the long run, as one who
limited himself to first-quality securities; or even somewhat better.
3
But for practical purposes the question is largely irrelevant.
Regardless of the outcome, the buyer of second-grade issues at full
prices will be worried and discommoded when their price declines
precipitately. Furthermore, he cannot buy enough issues to assure
an “average” result, nor is he in a position to set aside a portion of
his larger income to offset or “amortize” those principal losses
which prove to be permanent. Finally, it is mere common sense to
abstain from buying securities at around 100 if long experience
indicates that they can probably be bought at 70 or less in the next
weak market.
Portfolio Policy for the Enterprising Investor: Negative Approach 137
Foreign Government Bonds
All investors with even small experience know that foreign
bonds, as a whole, have had a bad investment history since 1914.
This was inevitable in the light of two world wars and an interven-
ing world depression of unexampled depth. Yet every few years
market conditions are sufficiently favorable to permit the sale of
some new foreign issues at a price of about par. This phenomenon
tells us a good deal about the working of the average investor’s
mind—and not only in the field of bonds.
We have no concrete reason to be concerned about the future his-
tory of well-regarded foreign bonds such as those of Australia or

Norway. But we do know that, if and when trouble should come,
the owner of foreign obligations has no legal or other means of
enforcing his claim. Those who bought Republic of Cuba 4
1
⁄2s as
high as 117 in 1953 saw them default their interest and then sell as
low as 20 cents on the dollar in 1963. The New York Stock
Exchange bond list in that year also included Belgian Congo 5
1
⁄4s at
36, Greek 7s at 30, and various issues of Poland as low as 7. How
many readers have any idea of the repeated vicissitudes of the 8%
bonds of Czechoslovakia, since they were first offered in this coun-
try in 1922 at 96
1
⁄2? They advanced to 112 in 1928, declined to 67
3
⁄4 in
1932, recovered to 106 in 1936, collapsed to 6 in 1939, recovered
(unbelievably) to 117 in 1946, fell promptly to 35 in 1948, and sold
as low as 8 in 1970!
Years ago an argument of sorts was made for the purchase of
foreign bonds here on the grounds that a rich creditor nation such
as ours was under moral obligation to lend abroad. Time, which
brings so many revenges, now finds us dealing with an intractable
balance-of-payments problem of our own, part of which is ascrib-
able to the large-scale purchase of foreign bonds by American
investors seeking a small advantage in yield. For many years past
we have questioned the inherent attractiveness of such invest-
ments from the standpoint of the buyer; perhaps we should add

now that the latter would benefit both his country and himself if he
declined these opportunities.
138 The Intelligent Investor
New Issues Generally
It might seem ill-advised to attempt any broad statements about
new issues as a class, since they cover the widest possible range of
quality and attractiveness. Certainly there will be exceptions to any
suggested rule. Our one recommendation is that all investors
should be wary of new issues—which means, simply, that these
should be subjected to careful examination and unusually severe
tests before they are purchased.
There are two reasons for this double caveat. The first is that
new issues have special salesmanship behind them, which calls
therefore for a special degree of sales resistance.* The second is that
most new issues are sold under “favorable market conditions”—
which means favorable for the seller and consequently less favor-
able for the buyer.†
The effect of these considerations becomes steadily more impor-
tant as we go down the scale from the highest-quality bonds
through second-grade senior issues to common-stock flotations at
the bottom. A tremendous amount of financing, consisting of the
repayment of existing bonds at call price and their replacement by
new issues with lower coupons, was done in the past. Most of this
was in the category of high-grade bonds and preferred stocks. The
buyers were largely financial institutions, amply qualified to pro-
tect their interests. Hence these offerings were carefully priced to
Portfolio Policy for the Enterprising Investor: Negative Approach 139
* New issues of common stock—initial public offerings or IPOs—normally are
sold with an “underwriting discount” (a built-in commission) of 7%. By con-
trast, the buyer’s commission on older shares of common stock typically

ranges below 4%. Whenever Wall Street makes roughly twice as much for
selling something new as it does for selling something old, the new will get
the harder sell.
† Recently, finance professors Owen Lamont of the University of Chicago
and Paul Schultz of the University of Notre Dame have shown that corpora-
tions choose to offer new shares to the public when the stock market is near
a peak. For technical discussion of these issues, see Lamont’s “Evaluating
Value Weighting: Corporate Events and Market Timing” and Schultz’s
“Pseudo Market Timing and the Long-Run Performance of IPOs” at http://
papers.ssrn.com.
meet the going rate for comparable issues, and high-powered
salesmanship had little effect on the outcome. As interest rates fell
lower and lower the buyers finally came to pay too high a price for
these issues, and many of them later declined appreciably in the
market. This is one aspect of the general tendency to sell new secu-
rities of all types when conditions are most favorable to the issuer;
but in the case of first-quality issues the ill effects to the purchaser
are likely to be unpleasant rather than serious.
The situation proves somewhat different when we study the
lower-grade bonds and preferred stocks sold during the 1945–46
and 1960–61 periods. Here the effect of the selling effort is more
apparent, because most of these issues were probably placed with
individual and inexpert investors. It was characteristic of these
offerings that they did not make an adequate showing when
judged by the performance of the companies over a sufficient num-
ber of years. They did look safe enough, for the most part, if it
could be assumed that the recent earnings would continue without
a serious setback. The investment bankers who brought out these
issues presumably accepted this assumption, and their salesmen
had little difficulty in persuading themselves and their customers

to a like effect. Nevertheless it was an unsound approach to invest-
ment, and one likely to prove costly.
Bull-market periods are usually characterized by the transfor-
mation of a large number of privately owned businesses into com-
panies with quoted shares. This was the case in 1945–46 and again
beginning in 1960. The process then reached extraordinary propor-
tions until brought to a catastrophic close in May 1962. After the
usual “swearing-off” period of several years the whole tragicom-
edy was repeated, step by step, in 1967–1969.*
140 The Intelligent Investor
* In the two years from June 1960, through May 1962, more than 850 com-
panies sold their stock to the public for the first time—an average of more than
one per day. In late 1967 the IPO market heated up again; in 1969 an aston-
ishing 781 new stocks were born. That oversupply helped create the bear
markets of 1969 and 1973–1974. In 1974 the IPO market was so dead that
only nine new stocks were created all year; 1975 saw only 14 stocks born.
That undersupply, in turn, helped feed the bull market of the 1980s, when
roughly 4,000 new stocks flooded the market—helping to trigger the over-
New Common-Stock Offerings
The following paragraphs are reproduced unchanged from the
1959 edition, with comment added:
Common-stock financing takes two different forms. In the case
of companies already listed, additional shares are offered pro rata
to the existing stockholders. The subscription price is set below
the current market, and the “rights” to subscribe have an initial
money value.* The sale of the new shares is almost always under-
written by one or more investment banking houses, but it is the
general hope and expectation that all the new shares will be taken
by the exercise of the subscription rights. Thus the sale of addi-
tional common stock of listed companies does not ordinarily call

for active selling effort on the part of distributing firms.
The second type is the placement with the public of common
stock of what were formerly privately owned enterprises. Most of
this stock is sold for the account of the controlling interests to
enable them to cash in on a favorable market and to diversify their
Portfolio Policy for the Enterprising Investor: Negative Approach 141
enthusiasm that led to the 1987 crash. Then the cycle swung the other way
again as IPOs dried up in 1988–1990. That shortage contributed to the bull
market of the 1990s—and, right on cue, Wall Street got back into the busi-
ness of creating new stocks, cranking out nearly 5,000 IPOs. Then, after the
bubble burst in 2000, only 88 IPOs were issued in 2001—the lowest annual
total since 1979. In every case, the public has gotten burned on IPOs, has
stayed away for at least two years, but has always returned for another scald-
ing. For as long as stock markets have existed, investors have gone through
this manic-depressive cycle. In America’s first great IPO boom, back in 1825,
a man was said to have been squeezed to death in the stampede of specu-
lators trying to buy shares in the new Bank of Southwark; the wealthiest buy-
ers hired thugs to punch their way to the front of the line. Sure enough, by
1829, stocks had lost roughly 25% of their value.
* Here Graham is describing rights offerings, in which investors who already
own a stock are asked to pony up even more money to maintain the same
proportional interest in the company. This form of financing, still widespread
in Europe, has become rare in the United States, except among closed-end
funds.
own finances. (When new money is raised for the business it
comes often via the sale of preferred stock, as previously noted.)
This activity follows a well-defined pattern, which by the nature of
the security markets must bring many losses and disappointments
to the public. The dangers arise both from the character of the
businesses that are thus financed and from the market conditions

that make the financing possible.
In the early part of the century a large proportion of our leading
companies were introduced to public trading. As time went on, the
number of enterprises of first rank that remained closely held
steadily diminished; hence original common-stock flotations have
tended to be concentrated more and more on relatively small con-
cerns. By an unfortunate correlation, during the same period the
stock-buying public has been developing an ingrained preference
for the major companies and a similar prejudice against the minor
ones. This prejudice, like many others, tends to become weaker as
bull markets are built up; the large and quick profits shown by
common stocks as a whole are sufficient to dull the public’s critical
faculty, just as they sharpen its acquisitive instinct. During these
periods, also, quite a number of privately owned concerns can be
found that are enjoying excellent results—although most of these
would not present too impressive a record if the figures were car-
ried back, say, ten years or more.
When these factors are put together the following consequences
emerge: Somewhere in the middle of the bull market the first
common-stock flotations make their appearance. These are priced
not unattractively, and some large profits are made by the buyers of
the early issues. As the market rise continues, this brand of financing
grows more frequent; the quality of the companies becomes steadily
poorer; the prices asked and obtained verge on the exorbitant. One
fairly dependable sign of the approaching end of a bull swing is the
fact that new common stocks of small and nondescript companies
are offered at prices somewhat higher than the current level for
many medium-sized companies with a long market history. (It
should be added that very little of this common-stock financing is
ordinarily done by banking houses of prime size and reputation.)*

142 The Intelligent Investor
* In Graham’s day, the most prestigious investment banks generally steered
clear of the IPO business, which was regarded as an undignified exploita-
The heedlessness of the public and the willingness of selling
organizations to sell whatever may be profitably sold can have
only one result—price collapse. In many cases the new issues lose
75% and more of their offering price. The situation is worsened by
the aforementioned fact that, at bottom, the public has a real aver-
sion to the very kind of small issue that it bought so readily in its
careless moments. Many of these issues fall, proportionately, as
much below their true value as they formerly sold above it.
An elementary requirement for the intelligent investor is an abil-
ity to resist the blandishments of salesmen offering new common-
stock issues during bull markets. Even if one or two can be found
that can pass severe tests of quality and value, it is probably bad pol-
icy to get mixed up in this sort of business. Of course the salesman
will point to many such issues which have had good-sized market
advances—including some that go up spectacularly the very day
they are sold. But all this is part of the speculative atmosphere. It is
easy money. For every dollar you make in this way you will be lucky
if you end up by losing only two.
Some of these issues may prove excellent buys—a few years
later, when nobody wants them and they can be had at a small
fraction of their true worth.
In the 1965 edition we continued our discussion of this subject
as follows:
While the broader aspects of the stock market’s behavior since
1949 have not lent themselves well to analysis based on long expe-
rience, the development of new common-stock flotations pro-
ceeded exactly in accordance with ancient prescription. It is

doubtful whether we ever before had so many new issues offered,
of such low quality, and with such extreme price collapses, as we
Portfolio Policy for the Enterprising Investor: Negative Approach 143
tion of naïve investors. By the peak of the IPO boom in late 1999 and early
2000, however, Wall Street’s biggest investment banks had jumped in with
both feet. Venerable firms cast off their traditional prudence and behaved
like drunken mud wrestlers, scrambling to foist ludicrously overvalued
stocks on a desperately eager public. Graham’s description of how the IPO
process works is a classic that should be required reading in investment-
banking ethics classes, if there are any.
experienced in 1960–1962.
4
The ability of the stock market as a
whole to disengage itself rapidly from that disaster is indeed an
extraordinary phenomenon, bringing back long-buried memories
of the similar invulnerability it showed to the great Florida real-
estate collapse in 1925.
Must there be a return of the new-stock-offering madness
before the present bull market can come to its definitive close?
Who knows? But we do know that an intelligent investor will not
forget what happened in 1962 and will let others make the next
batch of quick profits in this area and experience the consequent
harrowing losses.
We followed these paragraphs in the 1965 edition by citing “A
Horrible Example,” namely, the sale of stock of Aetna Maintenance
Co. at $9 in November 1961. In typical fashion the shares promptly
advanced to $15; the next year they fell to 2
3
⁄8, and in 1964 to
7

⁄8. The
later history of this company was on the extraordinary side, and
illustrates some of the strange metamorphoses that have taken
place in American business, great and small, in recent years. The
curious reader will find the older and newer history of this enter-
prise in Appendix 5.
It is by no means difficult to provide even more harrowing
examples taken from the more recent version of “the same old
story,” which covered the years 1967–1970. Nothing could be more
pat to our purpose than the case of AAA Enterprises, which hap-
pens to be the first company then listed in Standard & Poor’s Stock
Guide. The shares were sold to the public at $14 in 1968, promptly
advanced to 28, but in early 1971 were quoted at a dismal 25¢.
(Even this price represented a gross overvaluation of the enter-
prise, since it had just entered the bankruptcy court in a hopeless
condition.) There is so much to be learned, and such important
warnings to be gleaned, from the story of this flotation that we
have reserved it for detailed treatment below, in Chapter 17.
144 The Intelligent Investor
COMMENTARY ON CHAPTER 6
The punches you miss are the ones that wear you out.
—Boxing trainer Angelo Dundee
For the aggressive as well as the defensive investor, what you don’t
do is as important to your success as what you do. In this chapter,
Graham lists his “don’ts” for aggressive investors. Here is a list for
today.
JUNKYARD DOGS?
High-yield bonds—which Graham calls “second-grade” or “lower-
grade” and today are called “junk bonds”—get a brisk thumbs-down
from Graham. In his day, it was too costly and cumbersome for an indi-

vidual investor to diversify away the risks of default.
1
(To learn how bad
a default can be, and how carelessly even “sophisticated” profes-
sional bond investors can buy into one, see the sidebar on p. 146.)
Today, however, more than 130 mutual funds specialize in junk bonds.
These funds buy junk by the cartload; they hold dozens of different
bonds. That mitigates Graham’s complaints about the difficulty of
diversifying. (However, his bias against high-yield preferred stock
remains valid, since there remains no cheap and widely available way
to spread their risks.)
Since 1978, an annual average of 4.4% of the junk-bond market
has gone into default—but, even after those defaults, junk bonds have
145
1
In the early 1970s, when Graham wrote, there were fewer than a dozen
junk-bond funds, nearly all of which charged sales commissions of up to
8.5%; some even made investors pay a fee for the privilege of reinvesting
their monthly dividends back into the fund.