The year was 1926, and Benjamin Graham was sitting in the Interstate Commerce Commission (ICC) reading room in Washington, D.C., studying Northern Pipeline Company’s balance sheet. Nobody on Wall Street—not even the brokerage houses that had followed Northern Pipeline for years—had bothered to look up the company’s public ICC report.Read more at location 260
At a time when the stock market was little more than a betting pool, Benjamin Graham developed a value investing style based on rigorous analysis of company fundamentals. By focusing on companies’ intrinsic values, Graham and his followers were hugely successful at capitalizing on market inefficiencies created by the more speculative investing public.Read more at location 266
Why was shareholder activism so rare in the early twentieth century? First of all, ownership at public companies was concentrated into very few hands—usually founders, family owners, or entrepreneurial financiers. This made it hard for outside shareholders to have any influence.5 Second, public companies shared very little financial information with shareholders. This limited investors’ ability to value companies objectively.Read more at location 278
Graham saw both of these forces at play at Northern Pipeline. None of the other shareholders knew the company was hoarding so much capital, and the Rockefeller Foundation effectively controlled Northern Pipeline’s management through a 23% equity stake.Read more at location 280
As for etiquette? When real money is at stake, etiquette goes out the window.Read more at location 285
Graham was also one of the first professional investors to regularly employ shareholder activism as part of his investing strategy. Northern Pipeline was his first attempt at actively engaging a company’s management.Read more at location 292
Almost forty years after his death, Benjamin Graham remains a towering figure in the investment world. While his investment partnership made him famous—Graham-Newman beat the market significantly over its twenty-one years of operation—Graham’s writings about investing and the tremendous success of his former students are his legacy.Read more at location 305
Security Analysis (written with David Dodd) is a dense seven-hundred-page textbook with outdated accounting discussions and mind-numbing railroad bond analyses. But for some value investors, choosing between the 1934, 1940, 1951, and 1962 editions of Security Analysis is an act of self-expression in the same way music geeks identify with their favorite Velvet Underground record.Read more at location 313
more than anything else, volatile markets are the downfall of aspiring investors. It’s easy to learn how to value companies, but you’re in trouble if you don’t understand markets and risk.Read more at location 319
Mr. Market, lets you know every day what he thinks your share is worth. Sometimes he puts a sensible value on your share, but often he gets carried away by greed or fear and offers you a price that is far too high or far too low. Two things are certain: He is always willing to buy your stake or to sell you his at the price he quotes, and he never gets offended if you say, “No thanks!” Mr. Market will be ready with a new quote the next day.Read more at location 323
There’s no reason that Mr. Market’s prices should influence your own view of what your share is worth. Yet in the real world, investors often buy and sell at the wrong times, because the market’s fluctuations affect their judgment. In rising markets, we are easily seduced into speculative buying. In falling markets, we risk losing our conviction to the prevailing pessimism of the moment.11 Graham wrote, “[P]rice fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.”Read more at location 328
This notion of a stock having an “intrinsic value” might seem trivial today, but in Benjamin Graham’s time it was a revolutionary idea.Read more at location 339
WHEN GRAHAM ARRIVED on Wall Street in 1914, markets for corporate bonds and preferred stocks dwarfed trading in common stocks. TheRead more at location 340
Instead, as Graham wrote in his memoirs, “this mass of financial information was largely going to waste in the area of common-stock analysis.”16 What really drove markets were rumors and inside information. A company’s stock might shoot up on speculation about an anticipated large customer order.Read more at location 349
“To old Wall Street hands it seemed silly to pore over dry statistics when the determiners of price change were thought to be an entirely different set of factors—all of them very human.”Read more at location 352
And before he decided to pursue a career in business, he weighed separate offers for teaching posts at Columbia University’s departments of philosophy, mathematics, and English.Read more at location 361
Graham hadn’t known that pipeline companies submitted financial information to the ICC, and he assumed none of his peers on Wall Street knew, either. He quickly boarded a train for Washington, D.C.Read more at location 376
They were horrified at the idea of just giving away their cash hoard to shareholders. After dismissing all of Graham’s arguments, they told him, “Running a pipeline is a complex and specialized business, about which you can know very little, but which we have done for a lifetime. You must give us credit for knowing better than you what is best for the company and its stockholders. If you don’t approve of our policies, may we suggest that you do what sound investors do under such circumstances, and sell your shares?”Read more at location 389
Pennsylvania, a small town located ninety miles north of Pittsburgh. Not surprisingly, Benjamin Graham was the only company outsider to attend.Read more at location 401
After the meeting’s regular business was completed, Graham stood up and asked the chairman if he could read a memorandum about Northern Pipeline’s finances. The chairman responded, “Mr. Graham, will you please put your request in the form of a motion?” Graham then made a motion that he be allowed to give his presentation.Read more at location 402
The chairman asked the room, “Is there any second to this motion?” Graham had come alone via an overnight train to Pittsburgh and then via an uncomfortable local train to Oil City. Nobody in the room seconded his motion. Graham recounted their reply: “I’m very sorry, but no one seems willing to second your motion. Do I hear a motion to adjourn?” In a few seconds the meeting was over and Graham was sent packing to New York City.Read more at location 405
Over the next year he would personally meet with every stockholder who owned more than 100 shares to discuss Northern Pipeline’s finances. If Graham could win the proxies of enough shareholders, he would control two board seats and would have a clear mandate in favor of distributing the company’s excess capital. His primary target was the company’s largest shareholder, the Rockefeller Foundation.Read more at location 410
Graham said that he was not trying to interfere with Northern Pipeline’s operations, and that this was merely a question of allocating surplus capital. Cutler listened politely to Graham’s points but did not waver.Read more at location 426
In proxy fights, shareholders can vote multiple ballots, but only the most recent one counts. Graham later described the scene: “The management group was surprised and discomfited to see how many of their own proxies had been superseded by later-dated ones given to us.Read more at location 431
At the 1928 Northern Pipeline shareholder meeting, Graham and his lawyer won two of the company’s five board seats. They were the first outsiders ever elected to the board of a Standard Oil affiliate.26 Still, they held only a minority position on the board. Despite the strong message from shareholders in support of returning capital, Graham prepared for a hard fight with the other three board members about the company’s finances. No such fight materialized. Within weeks of the annual meeting, Northern Pipeline’s management presented a plan to distribute cash to shareholders.Read more at location 437
In 2006, the Home Depot’s board of directors skipped the annual meeting altogether. On top of that, the company’s embattled CEO, Robert Nardelli, limited shareholders to one question each, with a sixty-second time limit enforced by goons in Home Depot aprons.27Read more at location 447
Northern Pipeline featured a classic breakdown in the checks and balances of corporate power: a disinterested shareholder base combined with a board of directors dominated by key members of the management team. The company’s five-person board consisted of three members of senior management, including the president, plus two directors who were directly affiliated with the Standard Oil system.Read more at location 461
Until Benjamin Graham started sniffing around, Northern Pipeline’s management was accountable to nobody. The company’s pile of cash and securities gave its managers a huge cushion that protected their jobs, and the income and status that came with them.Read more at location 474
Northern Pipeline’s response to Graham was straightforward. A letter to shareholders signed by the board of directors stated, “We believe the whole position may be summed up in one question to stockholders—for the promise of an immediate distribution of cash assets, do you wish to place your Company’s management in the hands of those who have had no experience whatever in the management of such a technical business?”Read more at location 483
Managers will be biased toward self-preservation, while shareholders are easily persuaded by short-term profits. In an ideal world, the board of directors is able to negate these biases, but, in reality, it often just defers to one side. The results can be ugly.Read more at location 491
After he retired, Graham read Bernard Baruch’s memoirs, in which the famous financier describes his decision to quit his job and focus solely on investing his own capital. Graham wrote, “I recall smiling somewhat disdainfully in reading what I considered a lame and egoistical conclusion. How discreditable, I thought, for a highly gifted and enormously wealthy young man to dedicate himself totally to making a lot more money, all for himself.”Read more at location 553
Benjamin Graham lived twenty full years after his retirement from the investment business. He traveled the world, testified before Congress on a variety of issues, served on the board of GEICO, and gave lectures about investing. He updated Security Analysis once, The Intelligent Investor three times, and published a translation of a Uruguayan novel. Graham even invented a slide rule and a clever system for memorizing Morse code. He kept in close touch with Warren Buffett, who helped organize regular retreats for Graham and his former students. In his later years, Graham lived part-time in France, where he died in 1976.Read more at location 565
