September 22nd, 2009 — Investment Strategies
The proverbial sink or swim moment had arrived for Volkswagen.
The company had some success with Passats, GTIs, and Cabrios imported from Germany, but reliability problems were rampant with the Golf and the Jetta-the entry point cars for VW’s customers. The company was down to “selling only to die hard VW fans, the ones who would buy the cars if they came in boxes and had to be assembled in their driveways.” Without a complete revival of its manufacturing, operations, and marketing, it couldn’t survive in the U.S. market.
Assuming it could fix these problems, the big question loomed-how to regain trust and revive the emotional connection with its lost or disheartened customers.
The make or break moment for Volkswagen in the U.S. market had arrived. After years of living as an endangered species, VW was reborn with the reintroduction of the Bug in 1997. To the delight of VW, the Bug had never really died in the hearts of its fans, many of whom had kept and restored their 1960s or 1970s models for nostalgic reasons.
The new Bug was VW’s “Walk This Way” remake-the car and the song were just the opening paragraphs of the rest of the story for each entity’s branding saga. Just as Aerosmith had to fix the addiction and relationship problems of the band’s members before releasing its next album and attracting new fans, so did VW have to fix its brand before unleashing a new advertising campaign and attracting new customers. Fixing the brand meant solving product quality and reliability issues that had alienated customers in the late 1970s and 1980s. If there is something wrong with the brand or the product, the worst thing a marketer can do is create a great advertising campaign that attracts customers. Why? Because their trust is tough to gain the first time, let alone the second time, after they’ve been disappointed.
September 4th, 2009 — Investment Strategies
Convertible Issues and Warrants 1. This point is well illustrated by an offering of two issues of Ford Motor Finance Co. made simultaneously in November 1971. One was a 20 year nonconvertible bond, yielding ?2%. The other was a 25 year bond, subordinated to the first in order of claim and yielding only
?2%; but it was made convertible into Ford Motor stock, against its then price of ?2. To obtain the conversion privilege the buyer gave up 40% of income and accepted a junior creditor position.
2. Note that in late 1971 Studebaker Worthington common sold as low as 38 while the $5 preferred sold at or about 77. The spread had thus grown from 2 to 20 points during the year, illustrating once more the desirability of such switches and also the tendency of the stock market to neglect arithmetic. (Incidentally the small premium of the preferred over the common in December 1970 had already been made up by its higher dividend.) Chapter 17. Four Extremely Instructive Case Histories 1. See, for example, the article “Six Flags at Half Mast,” by Dr. A. J.
Briloff, in Barron’s, January 11, 1971.
Chapter 18. A Comparison of Eight Pairs of Companies 1. The reader will recall from p. 434 above that AAAEnterprises tried to enter this business, but quickly failed. Here Graham is making a pro586 Endnotesfound and paradoxical observation: The more money a company makes, the more likely it is to face new competition, since its high returns signal so clearly that easy money is to be had. The new competition, in turn, will lead to lower prices and smaller profits. This crucial point was overlooked by overenthusiastic Internet stock buyers, who believed that early winners would sustain their advantage indefinitely.
September 4th, 2009 — Investment Strategies
(cont’d from p. 499) Graham had in mind were money managers, rating agencies and organizations of security analysts. Today, investors could choose from among hundreds of consulting firms, restructuring advisers, and members of entities like the Risk Management Association.
Tabulations of voting results for 2002 by Georgeson Shareholder and ADP’s Investor Communication Services, two leading firms that mail proxy solicitations to investors, suggest response rates that average around 80% to 88% (including proxies sent in by stockbrokers on behalf of their clients, which are automatically voted in favor of management unless the clients specify otherwise). Thus the owners of between 12% and 20% of all shares are not voting their proxies. Since individuals own only 40% of U.S. shares by market value, and most institutional investors like pension funds and insurance companies are legally bound to vote on proxy issues, that means that roughly a third of all individual investors are neglecting to vote.
What is “proxy material” and why does Graham insist that you read it? In its proxy statement, which it sends to every shareholder, a company announces the agenda for its annual meeting and discloses details about the compensation and stock ownership of managers and directors, along with transactions between insiders and the company. Shareholders are asked to vote on which accounting firm should audit the books and who should serve on the board of directors. If you use your common sense while reading the proxy, this document can be like a canary in a coal mine-an early warning system signaling that something is wrong. (See the Enron sidebar above.) Yet, on average, between a third and a half of all individual investors cannot be bothered to vote their proxies.
September 4th, 2009 — Investment Strategies
Convertible Issues and Warrants
- Graham, an enthusiastic reader of Spanish literature, is paraphrasing a line
from the play Life Is a Dream by Pedro Calderon de la Barca (1600
September 4th, 2009 — Investment Strategies
Among the “few prudent principles” that investors forgot were such market clich
September 4th, 2009 — Investment Strategies
?8. This represented a value of only 27 for the debenture issues, or a loss of 75% of the original price instead of a profit of over 100%.
The real point of this story is that some of the original purchasers converted their bonds into the stock and held the stock through its great decline. In so doing they ran counter to an old maxim of Wall Street, which runs: “Never convert a convertible bond.” Why this advice? Because once you convert you have lost your strategic combination of prior claimant to interest plus a chance for an attractive profit. You have probably turned from investor into speculator, and quite often at an unpropitious time (because the stock has already had a large advance). If “Never convert a convertible” is a good rule, how came it that these experienced fund managers exchanged their Eversharp bonds for stock, to their subsequent embarrassing loss? The answer, no doubt, is that they let themselves be carried away by enthusiasm for the company’s prospects as well as by the “favorable market action” of the shares. Wall Street has a few prudent principles; the trouble is that they are always forgotten when they are most needed.* Hence that other famous dictum of the oldtimers: “Do as I say, not as I do.” Our general attitude toward new convertible issues is thus a mistrustful one. We mean here, as in other similar observations, Convertible Issues and Warrants * This sentence could serve as the epitaph for the bull market of the 1990s.
September 4th, 2009 — Investment Strategies
Because of the extraordinary length of the 1950
September 4th, 2009 — Investment Strategies
So far, so good. But pursue the matter a bit. In many cases where the holder sells at 125 the common stock continues to advance, carrying the convertible with it, and the investor experiences that peculiar pain that comes to the man who has sold out much too soon. The next time, he decides to hold for 150 or 200. The issue goes up to 140 and he does not sell. Then the market breaks and his bond slides down to 80. Again he has done the wrong thing.
Aside from the mental anguish involved in making these bad guesses-and they seem to be almost inevitable-there is a real arithmetical drawback to operations in convertible issues. It may be assumed that a stern and uniform policy of selling at 25% or 30% profit will work out best as applied to many holdings. This would then mark the upper limit of profit and would be realized only on the issues that worked out well. But, if-as appears to be true-these issues often lack adequate underlying security and tend to be floated and purchased in the latter stages of a bull market, then a goodly proportion of them will fail to rise to 125 but will not fail to collapse when the market turns downward. Thus the spectacular opportunities in convertibles prove to be illusory in practice, and the overall experience is marked by fully as many substantial losses-at least of a temporary kind-as there are gains of similar magnitude.
September 4th, 2009 — Investment Strategies
TABLE 16 1 Price Record of New Preferred Stock Issues Offered in No decline 7 Declined 0
September 4th, 2009 — Investment Strategies
- Graham detested warrants, as he makes clear on pp. 413