Security Analysis : Sixth Edition, Foreword by Warren Buffett: Additional Aspects of Security Analysis. Discrepencies Between Price and Value

have their counterpart in the field of senior securities as between seasoned and unseasoned issues. A seasoned issue may be defined as an issue of a company long and favorably known to the investment public. (The security itself may be of recent creation so long as the company has a high reputation among investors.) Seasoned and unseasoned issues tend at times to follow divergent patterns of conduct in the market,
viz
.:
    1. The price of seasoned issues is often maintained despite a considerable weakening of their investment position.
    2. Unseasoned issues are very sensitive to adverse developments of any nature. Hence they often fall to prices far lower than seem to be warranted by their statistical exhibit.
    Price Inertia of Seasoned Issues. These opposite characteristics are due, in part at least, to the inertia and lack of penetration of the typical investor. He buys by reputation rather than by analysis and he holds tenaciously to what he has bought. Hence holders of long-established issues do not sell them readily, and even a small decline in price attracts buyers long familiar with the security.
    Example
: This trait of seasoned issues is well illustrated by the market history of the United States Rubber Company 8% Noncumulative Preferred. The issue received full dividends between 1905 and 1927. In each year of this period except 1924 there were investors who paid higher than par for this stock. Its popularity was based entirely upon its reputation and its dividend record, for the statistical exhibit of the company during most of the period was anything but impressive, even for an industrial bond, andhence ridiculously inadequate to justify the purchase of a noncumulative industrial preferred stock. Between the years 1922 and 1927, the following coverage was shown for interest charges and preferred dividends combined:

    In 1928 the stock sold as high as 109. During that year the company sustained an enormous loss, and the preferred dividend was discontinued. Despite the miserable showing and the absence of any dividend, the issue actually sold at 92½ in 1929. (In 1932 it sold at 31/8.) 1
    1 A more recent example of the same kind is presented by Curtis Publishing 7% Preferred, which sold at 114 in 1936 and 109½ in 1937, despite an exceedingly inadequate showing of earnings (and tangible assets). The high price of many railroad bonds in those years, notwithstanding their unsatisfactory earnings exhibit, illustrates this point more broadly.
    Vulnerability of Unseasoned Issues. Turning to unseasoned issues, we may point out that these belong almost entirely to the industrial field. The element of seasoning plays a very small part as between the various senior issues of the railroads; and in the public-utility group proper (
i.e.
, electric, manufactured gas, telephone and water companies) price variations will be found to follow the statistical showing fairly closely, without being strongly influenced by the factor of popularity or familiarity—except in the case of very small concerns.
    Industrial financing has brought into the market a continuous stream of bond and preferred stock issues of companies new to the investment list. Investors have been persuaded to buy these offerings largely through the appeal of a yield moderately higher than the standard rate for seasoned securities of comparable grade. If the earning power is maintained uninterruptedly after issuance, the new security naturally proves a satisfactory commitment. But any adverse development will ordinarily induce a severe decline in the market price. This vulnerability of unseasoned issues gives rise to the practical conclusion that it is unwise to buy a
new
industrial bond or preferred stock for straight investment.
    Since such issues are unduly sensitive to unfavorable developments, it would seem that the price would often fall too low and in that case they would afford attractive opportunities to purchase. This is undoubtedly true, but there is great need of caution in endeavoring to take advantage of these disparities. In the first place, the disfavor accorded to unseasoned securities in the market is not merely a subjective matter, due to lack of knowledge. Seasoning is usually defined as an objective quality, arising from a demonstrated ability to weather business storms. Although this definition is not entirely accurate, there is enough truth in it to justify in good part the investor’s preference for seasoned issues.
    More important,