Chapter 41 of Security Analysis: Analysis of Low-Priced Common Stocks and Sources of Earnings (Part 1)

Chapter 41 of Security Analysis: Analysis of Low-Priced Common Stocks and Sources of Earnings (Part 1) (Reading notes) Reading to help others—and to remind oneself. Reading Notes: Security Analysis, 6th Edition, Chapter 41, 'Analysis of Low-Priced Common Stocks and Sources of Earnings' (pp. 652–663) This chapter focuses on the reasons why investments in low-priced stocks often fail, and explains how high production costs are equivalent to a speculative capital structure. First, the main reason most investors lose money buying low-priced stocks. Most investors purchase the wrong low-priced stocks—i.e., stocks that do not genuinely possess the advantages typical of low-priced issues. The reasons are either poor financial condition of the issuing companies, or stock prices that—relative to company size—are not actually low. (Two reasons) Second, market observation reveals that stocks of companies facing bankruptcy tend to be more actively traded than stocks of companies whose low prices stem solely from meager current earnings. This occurs because insiders attempt to unload shares before the company collapses. This explains why the public consistently buys the wrong low-priced stocks—and simultaneously misses genuine opportunities. (The danger of 'false' low-priced stocks. True low-priced stocks can only be acquired during market crises.) Third, the combination of low price and speculative capital structure. Proportionally, Mandell Brothers’ rental expenses far exceed those of Gimbel Brothers; these rents function substantially as senior securities. (Rents are equivalent to senior securities.) Fourth, high production costs are equivalent to a speculative capital structure. High operating or production costs reduce common stock earnings to the same extent as high senior security charges. (High production costs are equivalent to a speculative capital structure.) Fifth, contrary to the general Wall Street view, when product prices are poised to rise—and profits thereby accrue—buying stocks of high-cost producers may actually be the better choice. (High production costs are equivalent to a speculative capital structure.) I. Analysis of Low-Priced Common Stocks (A) Low-Priced Stocks 1. Topics discussed in preceding chapters all relate to low-priced stocks. Companies with speculative capital structures typically have most of their securities trading at low prices. 2. Of course, the definition of 'low-priced' is inherently somewhat arbitrary: stocks under $10 are clearly low-priced; those above $20 generally are not—so the boundary lies somewhere between $10 and $20. (B) Mathematical Advantage of Low-Priced Stocks 1. Low-priced common stocks appear to possess an inherent mathematical advantage, since their potential upside greatly exceeds their downside risk. Partly this stems from speculators’ preferences—they favor stocks priced between $10 and $40 over those priced above $100. 2. In its April 1936 issue, the Chicago Business Review published an article demonstrating that diversified portfolios of low-priced stocks outperform diversified portfolios of speculative high-priced stocks. The following excerpt presents the author’s conclusion: 'This study confirms a relationship between price level and price volatility: (1) Low-priced stocks exhibit greater volatility than high-priced stocks. (2) During bull markets, low-priced stocks rise more sharply than high-priced stocks; during bear markets, they decline less severely.'

Stock Investment Price Movement in the Stock Market: 20240819–20240920

Purchased a certain country’s high-tech stock (NVDA; earnings announced on 20240309) on 20240108; rose on 0816; surged on 0819; plunged on 0820; rose on 0821; plunged on 0822; surged on 0823; plunged on 0826; rose with oscillation on 0827; plunged with oscillation on 0828; crashed on 0829; rose on 0830; crashed on 0903; declined with oscillation on 0904; rose with oscillation on 0905; plunged on 0906; surged on 0909; rose on 0910; soared on 0911; rose on 0912; dipped slightly on 0913; declined on 0916; declined on 0917; declined on 0918; surged on 0919; declined on 0920—cumulative return: −15.10% (profit: +8190.43%). Leverage ratio: 106.106. Purchased a mistakenly selected stock (×1.08 × 3 × 09) on 20231101; added positions on 0816 amid decline; surged on 0819; declined on 0820; rose on 0821; plunged on 0822; dipped slightly on 0823; declined on 0826; declined with oscillation on 0827; dipped slightly with oscillation on 0828; surged on 0829; surged on 0830; declined on 0903; rose on 0904; rose on 0905; flat on 0906; surged on 0909; plunged on 0910; plunged on 0911; rose on 0912; declined on 0913; rose with oscillation on 0916; surged on 0917; declined on 0918; rose on 0919; declined on 0920—cumulative return: +8.66% (profit: +3333.09%). Leverage multiple: 78.751; target return: 100–200%. Purchased a certain country’s financial stock on 20231207; rose on 0816; rose on 0819; declined on 0820; declined on 0821; edged down on 0822; surged on 0823; declined on 0826; declined on 0827; edged down with oscillation on 0828; rose on 0829; rose on 0830; declined on 0903; declined on 0904; declined on 0905; plunged on 0906; rose on 0909; plunged on 0910; declined on 0911; edged up with oscillation on 0912; rose on 0913; rose on 0916; rose on 0917; rose on 0918; soared on 0919; declined on 0920—cumulative return: +1.45% (profit: +1133.34%). Target return: 30–50%. Leverage multiple: 36.876. Purchased a low-P/E gold stock on 20240422 (price: 8.40 × 5754); began surging from the crash-buy point (27.906×); surged on 0816; surged on 0819; surged on 0820; declined on 0821; crashed on 0822; declined on 0823; declined on 0826; edged up with oscillation on 0827; declined with oscillation on 0828; rose on 0829; crashed on 0830; crashed on 0903; declined on 0904; declined on 0905; declined with oscillation on 0906; rose on 0909; declined on 0910; flat on 0911; surged on 0912; surged on 0913; surged on 0916; flat on 0917; plunged on 0918; rose with oscillation on 0919; surged on 0920—cumulative return: −1.45% (profit: +4543.46%). Target return: 100%. Leverage multiple: 98.425.

ASP Isotopes Director Buys 8,000 Shares at $2.70 Average Price

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ASP Isotopes Inc. director Robert John Andrew Ryan purchased 8,000 shares at an average price of $2.70 per share. The transaction was reported via Form 4, signaling positive insider sentiment.

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