Security Analysis by Benjamin Graham and David Dodd was first published in 1934. It is a fundamental book for serious students of value investing.
After discussing the first three principles for selecting high-grade bonds for income purposes, Mr. Graham and Mr. Dodd tackle the subject of specific standards from chapter 8 through chapter 13.
Building on the idea of the negative art of selecting such investments, the authors emphasize the use of specific criteria. In doing so, they first look at the existing standards from New York state laws and outright exclusions of certain categories of bonds.
The authors think investors should be cautious of generalizations. The exclusion of entire foreign government and corporate bonds might have legitimate reasons given they are subject to less financial analysis and more to factors such as political situation and other beliefs. However, there are exceptions of countries (e.g. Canada) where stability and safety of the issue could warrant investment under the fixed-value category.
Similarly, outright exclusion of an entire industry might not be a sound criterion either. Individual bonds might be strong enough to offset weak industry conditions. In addition, exclusions based on the size of the bond issue might not be appropriate. The author argues that large size doesn't mean more safety -- the large debt in a large corporation could make it weak. Rather, a small debt in a large company makes it more likely to get paid, and thus more secure.
Moreover, exclusion related to favoring secured debt over unsecured is not warranted. The writers discussed this point in chapter 6, the fallacy of favoring secured bonds. Lastly, setting minimum requirements for bond investment based on the size of the company might be too stringent.
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