Security Analysis by Benjamin Graham and David Dodd was first published in 1934. It is a fundamental book for serious students of value investing.
In Chapter 23, Mr. Graham and Mr. Dodd delve into specific features of privileged issues of various types and discuss their individual advantages and disadvantages.For non-investment grade issues, the authors think the form of security is of less importance than the prospect of the company. The writers emphasize looking at profit-sharing per share, how near the stock price is to the conversion price to generate profit and the length of the privilege as important elements in selecting such issues.
Participating issues have the best form because of their ability to receive a piece of the company's profit in good years while not losing its preferred position during weak business conditions. However, that is more true if the investment horizon is long-term. If the goal is to earn high positive price change in a rising market, privileged issues with detachable warrants fit the bill. That is because of their various advantages - lower reinvestment risk and the ability to maintain the privilege in the situation of early redemption.
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