New Issues, second Grade Senior Issues

138 The Intelligent InvestorNew 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 favorable for the buyer.? The effect of these considerations becomes steadily more important 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 protect their interests. Hence these offerings were carefully priced to Portfolio Policy for the Enterprising Investor: Negative Approach

• New issues of common stock-initial public offerings or IPOs-normally are

sold with an “underwriting discount” (a built in commission) of 7%. By contrast, 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.