Four key principles for selections of bonds

By | February 14, 2018

Recently I have been reading Ben Graham and David Dodd’s “Security Analysis” for the third time. Every time I found myself extracting some more wise advice from the book, and every time I can draw some crazy observations used by the authors as examples of speculation with something happening in today’s market, even though the book was written 70 years ago. Where else you can find such timeless book on any subject, other than Bible?

The book has over 800 pages, but I highly recommend anyone who wants to be a successful long-term investor to read it (maybe for several times). In that book you can find practically all root philosophies that were anchoring Warren Buffett and other successful value investors’ decision-making process. Drawing a reference to some famous Chinese idioms, this is “truly the finger that turns stuff to gold”. Who doesn’t want to have a finger to turn stuff to gold?

For bond investing, the following four principles should always be practiced:

Principle 1: Safety is measured not by specific lien or other contractual rights, but by the ability of the issuer to meet all its obligations.

Principle 2: This ability should be measured under conditions of depression rather than prosperity

Principle 3: Deficient safety cannot be compensated for by an abnormally high coupon rate

Principle 4: The selection of all bonds for investment should be subject to rules of exclusion and to specific quantitative tests corresponding to those prescribed by statute to govern investments of savings banks.

By Ben Graham and David Dodd

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