What is his view on Preferred Stock?

Alright, let's talk about Benjamin Graham, the "father of value investing," and his views on preferred stock.

If you've read his The Intelligent Investor, you'll find that his attitude towards preferred stock is, overall, quite cautious — one could even say he "doesn't recommend it" for the vast majority of ordinary investors.

Why is that? Let's understand his reasoning from a few angles, and I'll explain it clearly in plain language.

Why Doesn't Graham Recommend Preferred Stock for Ordinary Investors?

Think of preferred stock as a "hybrid"— half stock, half bond. But Graham believed it often inherits the downsides of both, not the upsides.

1. Lacks the "Growth Potential" of Common Stock

Common Stock: If you buy common stock in Company A and it becomes the next Apple or Tesla, with its stock price multiplying tenfold or a hundredfold, you stand to make a fortune. Your potential gain is unlimited.
Preferred Stock: The preferred stock you buy promises a fixed annual dividend (say, 5%). Even if the company makes massive profits and its stock price soars, the return you get is essentially still that fixed 5%. Your upside is largely capped.

Put simply: Imagine you and a friend open a bun shop.

Common stockholders are like partners sharing the risks and profits. If the bun shop becomes wildly successful, making 10,000 yuan a day, you both split the substantial profits.

Preferred stockholders are more like someone who lent you money to open the shop, but they don't want interest. Instead, they get a fixed cut from the profits every year. Whether the bun shop makes 10,000 or 1,000,000 yuan a day, they only get the pre-agreed amount—not a penny more.

From this perspective, you bear the risk of the company performing poorly (albeit less so than a common stockholder), yet you don't enjoy the huge rewards if the company grows rapidly. Graham considered this a "bad deal."

2. Lacks the "Absolute Safety" of Bonds

Bonds: Especially high-grade corporate bonds or government bonds, represent debt the company owes you, with a clear repayment date. If the company goes bankrupt and liquidates, bondholders are among the first in line to get paid (after secured debts like bank loans). The safety is very high.
Preferred Stock: While the name includes "preferred," its priority in bankruptcy claims comes after all debt (including bonds) but before common stock.

Back to the bun shop analogy: If the bun shop goes bust and sells off its assets to repay debts: * First, the bank loans and the bondholders get paid back. * If there's money left after paying debts, then the preferred stockholders get to claim their share. * After the preferred stockholders are paid, if there are any scraps left, only then does the common stockholder (the partner) get anything.

Often, the pot is empty by the time debts are paid. Both preferred and common stockholders end up getting nothing.

Therefore, Graham believed the safety cushion provided by preferred stock isn't as solid as that of real bonds.

Summarizing: It's About "Falling Between Two Stools"

Graham's core argument is that preferred stock occupies an awkward position for ordinary investors:

It lacks the high-growth potential of common stock.
It lacks the robust security of high-grade bonds.

You take on significant risk for a fixed dividend while giving up the chance for substantial gains. For Graham, who emphasized "value and a margin of safety," this is clearly not a good investment.

Does This Mean It's Completely Off-Limits? – "Special Situations" in Graham's Eyes

Of course, Graham wasn't absolutist. He categorized investors as "Defensive" and "Enterprising." His recommendations above mainly targeted "Defensive" investors (that is, most ordinary people).

For "Enterprising Investors"—those who are professional, savvy, and willing to invest significant time in research—Graham pointed out that preferred stock could represent excellent investment opportunities under certain "special situations," such as:

Severely Undervalued Preferred Stock: Shares of a fundamentally sound company whose preferred stock price crashes due to temporary difficulties (e.g., a par value of $100 trading at $50 in the market). Buying in then gives you both an extraordinarily high dividend yield (based on the $50 cost) and the potential for capital gains when the price normalizes.
Cumulative Preferred Stock with "Dividends in Arrears": Some preferred stock is "cumulative," meaning if the company lacks funds to pay the dividend in a given year, it must accumulate those unpaid dividends and settle them fully before paying any dividends to common stockholders. If you can determine that such a company is poised for a turnaround, buying low allows you to potentially collect a large, accumulated back-payment of several years' worth of dividends—a significant windfall.
Convertible Preferred Stock: This type can be converted into common stock under specific conditions. It offers a "floor with upside potential," which is more appealing to Graham, but he would scrutinize whether the conversion price was advantageous.

However, please note! These opportunities involve deep research and precise judgment, resembling a "pro's game" far beyond the capabilities of most ordinary investors.

Final Conclusion

For Ordinary Investors: Graham's advice is crystal clear—steer clear of preferred stock. Your focus should be on building a portfolio of "high-grade bonds" and "quality common stocks acquired at reasonable prices."
For Professional Investors: Preferred stock can be a hunting ground for "special situations," but it demands meticulous detective work and analysis; it's not something to buy casually.

In short, within Graham's investment world, preferred stock functions more like an expert's tool, not part of the everyday kit for the average person.