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Essential Takeaways From Chapter 17 of The Intelligent Investor: Four Extremely Instructive Case Histories and more

The main point discussed in Chapter 17 of "The Intelligent Investor" is to highlight four case histories of companies that failed and how investors can learn from these examples to avoid making similar mistakes.

Graham uses the cases of Penn Central Co., Ling-Termco-Vought Inc., NVF Corp., and AAA Enterprises to emphasize the importance of conducting thorough research and analysis before investing in a company. 

He also stresses the need for investors to have a margin of safety, which involves buying stocks at a significant discount to their intrinsic value to reduce the risk of losing money.

Case History 1: Overpriced business on its last legs - Penn Central Railroad Corporation

Penn Central Railroad Corporation was formed in 1968 through a merger between the Pennsylvania and New York Central railroads, becoming the largest railroad company in the US and the sixth-largest publicly traded company.

However, by 1970, the company had entered bankruptcy proceedings, and its stock price had collapsed from $86.50 to $5.50/share. This mispricing was caused by the neglect of warning signals of financial weakness and inadequate interest coverage, suspicious earnings, overpriced bonds, low profitability relative to competitors, and accounting anomalies.

Case History 2: Reckless "Serial Acquirer" - Ling-Temco-Vought Inc.

Ling-Temco-Vought Inc. (LTV) was a conglomerate that experienced a rapid rise in revenues through a series of acquisitions, peaking at $3.75 billion in 1969 before collapsing to $374 million the following year.

The mispricing of LTV's shares was due to the reckless expansion strategy and the ignorance of warning signals of accounting anomalies, excessive debt, and insufficient earnings.

Case History 3: Absurd Hostile Takeover - Bendix Corporation and Martin Marietta Corporation

The Bendix-Martin Marietta takeover battle in 1969 was a classic example of an absurd hostile takeover. Bendix, with a market capitalization of $1.3 billion, launched a hostile takeover bid for Martin Marietta, a company six times its size.

This mispricing was caused by the unrealistic expectations of Bendix's management and the ignorance of warning signals of excessive leverage and inadequate earnings.

Case History 4: Ethically Questionable IPO - Computer Usage Corporation (CUC)

Computer Usage Corporation (CUC) went public in 1969, touting itself as a provider of data processing services to Fortune 500 companies.

However, the mispricing of CUC's shares was due to questionable accounting practices, such as recognizing revenue before it was earned and overstating profits, as well as the ignorance of warning signals of accounting anomalies and insider trading.

Conclusion:

The value investing tradition is based on the belief that the stock market is not perfectly efficient and is prone to the mispricing of securities.

The examples of market mispricing from the late 1960s provide important lessons for investors, such as the importance of paying attention to warning signals and avoiding reckless expansion strategies.

By understanding these lessons, investors can avoid falling victim to market mispricing and make better investment decisions.



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