My Meeting With Benjamin Graham
Marshall Delano
Benjamin Graham and to make this information available to this
discussion group.
In order to make my discussion of the meeting meaningful, it is necessary
to briefly discuss what had led up to my meeting. On September 23, 1974
Barrons had published an interview with Mr. Graham under the title,
Renaissance of Value. In that discussion Mr. Graham described how he and
others had made money in the stock market for many years.
He had formed a small hedge fund (assets $5 million) to invest in
undervalued stocks. They mostly bought shares in companies which were
selling below net net working capital. To determine net net working
capital, current liabilities, long term debt (if any) and any preferred
stock are subtracted from current assets. The remainder is net net
working capital. Let's say that net net working capital per share is
$20. If you can buy the stock at, say, $15 you almost certainly have a
bargain. If you bought an entire company at that price you would get the
fixed assets free, the fact that it was going business free and the use
of the company name (if it is valuable) free. That is what his fund, the
Graham-Newman fund did. They also were involved in arbitrage. Remember
that this was before many people had access to computers. Let's say the
same company shares trade in London and New York. If there was a price
difference they would lock that difference in hoping to perhaps earn 15%
on their money with no risk. For example, if Imperial Chemical sold at
$21.50 in London and for $20 in New York you could short the London stock
and go long the U.S. stock and make the spread.
I understood instantly how they had made a lot of money and began
investing in net net working capital stocks myself. The difference was
immediately apparent. I had winners and some which didn't do much but I
didn't have any serious losses in the companies which did poorly after
purchase. For the first time, I began to make quite a lot of money in
the stock market. We had just come through a two year drop which did not
hurt either. I contacted Mr. Graham through Forbes and flew out to meet
with him in La Jolla in the spring of 1976 (he died later that year).
I was a stock broker at the time and was full of the usual questions.
When do you sell? Can you predict the stock market? How many stocks
should you own etc.? In each case he would cite their experience. He
thought it a waste of time to try to predict the stock market and found
such questions foolish (his pupil, Warren Buffet and Peter Lynch would
agree). He advised selling if a stock went up 50% or at the end of two
years. His reasoning was that a depressed stock ought to rise in a
couple of years or perhaps the company problems were insoluable. If is
important to note that net net working capital purchases tended to be in
companies with lots of problems that were not suitable to long term
holding. When Warren Buffet bought Berkshire Hathaway he was following
in Mr. Graham's footsteps but later, apparently under the influence of
Charles Munger, he began buying better companies and holding. Mr. Munger
and Mr. Buffet had the better idea. Finally, he thought ought to buy
shares in at least 15 companies. Some of his followers bought shares in
dozens of companies and still earned great returns. Charley Munger, on
the other hand, when he ran his partnership owned shares in very few
companies.
All of his ideas were mechanistic by which I mean he had mechanical
rules for buying and selling, etc. The reason was that he feared emotion
overruling an investor's judgement. The rules forced the investor to act
rationally. Warren Buffet's method of investing is much more flexible.
You may know that Warren Buffet studied under Mr. Graham at Columbia
University and worked for him at Graham-Newman for three years.
For a great picture of Benjamin Graham (and Warren Buffet), you may want
to read, Supermoney by Adam Smith and the chapter, Lessons of the Master
(the Master being Ben Graham). Sorry this response is so long but even
this discussion is cursory. Hope this is what you had in mind.
Marshall Delano