Customer Review

56 of 66 people found the following review helpful
1.0 out of 5 stars Misleading!, March 18, 2008
This review is from: Preferred Stock Investing, 5th Ed. (Paperback)
This book's advice is misleading, and this is unfortunate given that it's one of the only publications available on preferred stocks.

1. The author fails to point out the major underlying risks of preferred securities. Preferreds are only one step above regular stocks in credit safety, should the issuing firm declare bankruptcy. Firms that issue preferreds can and do fail, often wiping out the preferred investors. And yet the author suggests that the risk of preferreds is "CD-like" (FDIC insured up to $100,000) throughout the book. Not true!

2. The author conveniently ignores the reverse "cannonball" price curve in his visual graphics, thereby implying that most preferreds rise in price after issuance and then recede back down to par at the redemption or call date. When rates rise and/or the issuing firm suffers in performance (think Countrywide!) prices will fall and may stay low, NOT recovering to par at the first call date. An investor may not be able to "upgrade" without a loss. Again, the author is not being truthful about what actually can of often does occur.

3. The author fails to point out that investors can often purchase preferreds at well below par, taking advantage of market price drops when the issuer's health has not deteriorated. By acquiring only at/near IPO prices, investors who follow his advice may severely limit their upside.

4. The book reads like one long, and cheesy infomercial peddling the author's "subscriber" services. If you want to avoid the pain of losing money in preferred stocks: don't buy this misleading book or his services!
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Tracked by 3 customers

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Showing 1-5 of 5 posts in this discussion
Initial post: Nov 21, 2009 5:34:03 PM PST
Last edited by the author on Nov 21, 2009 5:42:33 PM PST
Dean says:
I have to second this discouraging review. I just bought and read the book because 1. there is so little literature on this subject and 2. most of the reviews were positive. The book reads like a first grade primer, repeating everything dozens of times (See Spot. See Spot run.) and taking simple concepts (interest rates up, prices down) and turning them into pretentious sounding RULES. He makes a big deal out of the fact that unlike bonds, there is no "accrued dividend" with preferreds. So he urges buying them after the dividend is paid so you get the lowest price. But he doesn't tell you its a wash. If there is a .50 dividend the share price will be .50 higher the day before it is paid than the day after. So what? If you pay .50 more and get .50 in dividends the next day, the net price is the same. He also makes a big deal about getting capital gains if you buy below the liquidation price of $25. Again, so what? The price of the stock is going to reflect the present value of its stream of dividends. If you sell for a capital gain, you are giving up that stream. Since the tax rate on most preferred dividends is the same as capital gains........15%, its also a wash. And if you buy for your IRA, it doesn't make any difference. But my biggest beef is that he doesn't tell you how to analzye the safety of the preferred. He talks about Moody's ratings but doesn't tell you that those ratings are as of the issuance date and are seldom updated. And you know who pays for the ratings? Right, the issuer. It would have been useful if he had discussed a commonly used financial ratio: earnings to fixed charges and preferred dividends. See the Graham and Dodd manual. (For your information, this ratio appears as Exhibit 12 to Form 10-K). This measures the issuer's ability to pay the dividend, the most important factor in deciding whether to invest. Another safety factor he doesn't mention is whether the issuer pays dividends on its common stock. Since the preferred is senior, the common stock dividends are available to the preferrd if the issuer has financial difficulties, which is a nice buffer. Also, I would refer you to an excellent website: www.quantumonline.com which provides most of the info that the author would have you pay for with a subscription. It is referenced in his appendix with an implication that you must pay to use it. Not true.

BTW, anyone one to buy this book? I'll sell it for less than retail and you might get a capital gain.

In reply to an earlier post on Dec 10, 2009 12:35:45 PM PST
Big Fella says:
Dean, your post reflects some good points, but also ignorance. When the author talks about buying preferred stocks after the ex dividend date, he is referring to the tendency for the preferred shares to go down MORE than the amount of the dividend, which I have seen happen the majority of the time. So yes, you do usually come out ahead by buying soon after the ex dividend date. Also the tax rate on SOME preferred stocks is the 15% maximum dividend rate. However, this tax rate DOES NOT APPLY to any of the type of preferred stocks he recommends in the book, so the difference in capital gains very much applies. Also, when it comes to major issuers, Moody's most certainly does update the ratings on these preferred stocks--I see it all the time. Lastly, I use quantumonline.com regularly and it doesn't have nearly all the information that you get with his service. All quantumonline gives you is the information contained in the prospectus of each preferred stock--nothing about current yield, news, prospects for upgrade/downgrade, what the current preferred market looks like, etc.

Posted on Dec 13, 2010 2:22:45 PM PST
I doubt that Paul or Dean have really studied the book and tried the process based on their reviews. I've been using this process for about 4 years and have found it the most consistently rewarding investment in my portfolio. During the financial crisis of 2008-2009 I was certainly nervous to see the value of the preferred stocks go down but this was also happening (even more so) with everything else I owned. Since that time the values have all returned to the $25.00 par value or more range and I've yet to lose any money on any CDX3 investment.

Posted on Jul 29, 2013 2:40:14 PM PDT
D. Brunone says:
I too have been practicing the principles in this book for several years and am very pleased with the results. While it is true that that period does not include the 2007-2009 debacle, the author states that preferred stocks selected according to his published guidelines all continued to make their payments throughout this period, with one exception that eventually paid the accumulated dividends owed at a later date. Yes, preferreds do have risk. But, eg, if I own a portfolio of fifty preferreds and two get hammerred very hard over a three year period, that is still a very tolerable and manageable loss to absorb. The key is to set yourself up for potential capital gains, but do not expect them if we get a protracted bear market in bonds. Especially for retirees like myself who took a fixed mortgage at three percent a little while ago, getting 7% coupns to make my payments with is wonderful, even if interest rates do go up. Like any other investment, you have to understand how this fits into your overall portfolio.

In reply to an earlier post on Mar 6, 2014 8:28:28 PM PST
brightlight says:
" He also makes a big deal about getting capital gains if you buy below the liquidation price of $25". If you paid say $27.00 and it is called by the company they will pay you the IPO price of $25.00 therefore you lose $2.00 on each share. If you bought it below par say at $23.00 you've earned $2.00. Why isn't buying below par important? Also many of the preferreds are taxed at the ordinary rate.(Quantumonline)
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