Warrants – LUCKY IDIOT

As per Mr. Graham, convertibles are smaller into the risk compared with the common stock of the same company. We also know that preferred stockholders get first preference compared to the common stock for dividend/interest and also at liquidation. Convertibles are more related to common stocks rather than debt instruments.

But always a question that when to sell convertibles? Should we opt for the conversion to common stock? Or keep on holding a bond and getting interested in it?

When the company is doing well, growing more than a cost of capital, generating higher return ratios, then it is advisable to hold convertible and let them getting convert to common stock.

If the company has an average performance, average return ratio, no clue for potential decent growth then it is advisable to hold convertible and keep getting interested in it.

Generally, warrant or stock option are not recorded under the common stock capitalization and also, EPS is shown without an impact of it. So that we need to add those warrant or the stock option to the outstanding equity shares and consider EPS. Company issues warrant when they require a capital, prepayment of bond / preferred stock, etc. But this is not a suitable way to raise capital. If a company wants to issue a common stock then they need to directly issue to shareholders on the prevailing market price rather issue a warrant on the below market price. This will result in more dilution of equity compared to the issue at a higher price.

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation.

Read for more detail: The Intelligent Investor by Benjamin Graham, Jason Zweig

I am really grateful to Riddhi for helping me with editing work.

WB Letter 1964

Mr. Buffett had made an investment into the “Texas National Petroleum” where the announcement was made of sell out of oil and gas producing business to Union Oil of California.

WB 1964 01

This kind of situation has a protected downside and we can generate a decent annualized return. Buffett had made a decent annualized return on this workout.

WB 1964 02

We can make a decent return from such situations in India also. Here are some examples which are taken from Prof. Sanjay Bakshi’s note. (http://ppfas.com/media/articles/sanjay-bakshi/special-situations.pdf)

WB 1964 03

Mr. Buffett had sold off Dempster mill and he mentioned that “Our business is making excellent purchases — not making extraordinary sales.” This shows that Buffett has emphasized on the buying decision and if we think wisely then it’s only the buying decision that is in our control; so we should focus on buying a business at proper value hence reducing the additional efforts of selling.

WB Letter 1965

Mr. Buffett demonstrated an outstanding performance in Down Jones and other few investment management companies over a period of time.

WB 1965 01

WB 1965 02

Up to 1964, Mr. Buffett had categorized his investment operations into 3 categories (i.e. General, Workouts, and Controls) but from the year 1965, Mr.Buffett expanded his categories of investment operations into 4 (i.e. General -Private Owner Basis, Generals -Relatively Undervalued, Workouts and Controls).