Security Analysis by Benjamin Graham and David Dodd was first published in 1934. It is a fundamental book for serious students of value investing.
This chapter discusses the second set of securities - Privileged issues (convertible bonds, participating issues, and securities with attached warrants) - that were classified in chapter 5.The authors think the form of convertible bonds makes it an attractive security in theory - downside protection plus the potential of the upside of common stock. However, that theory hasn't worked in practice. The reasons are weak companies usually use the conversion feature to raise money and entrenched businesses usually don't do so. Second, convertibles can rise in price only so far, after that they become speculative security.
Mr. Graham and Mr. Dodd provide examples of desirable and undesirable issues. Issues trading near par should be only bought either as a fixed value investment or as a common stock investment. There is no point in buying for any reason between those two classifications.
The authors think that such investment should be sold or held but not converted.
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