As the founder of value investing and a hugely influential figure in the world of investing in general, you could be forgiven for thinking that Benjamin Graham was too intelligent to fall for stock promotion schemes or any of the get-rich quick schemes that usually accompany raging bull markets. But that was not the case.
In the post-war bull market of 1919, Benjamin Graham, still in his mid-20s, was not immune to such scams, and he fell foul of one that year.
Get rich quick
According to this publication on Graham's life, in 1919, a friend had been in a syndicate that brought Ertel Oil common stock privately at $3 per share. After a few weeks, the stock began trading publicly in the over-the-counter market at $8 per share, netting a massive return for the stock's original investors. Graham asked if he could be involved in the next such deal that emerged to get his hands on these seemingly risk-free profits.
In April 1919, the next deal came along, with Savold Tire being formed to exploit a patented process for retreading automobile tires. The still-unknown value investor put in $2,500 into this deal hoping to make a large profit (this works out at around $37,335 in today's money). The rest of the syndicate subscribed at $10 a share and a few days later, the stock went public for $24 before leaping to $37. The syndicate sold out around this level, netting Graham $7,500, or $122,000 today.
With the promoters of Savold Tire not content with just one IPO, the company decided to licence its process to affiliates in various states, and then these companies would then go on to sell their own stock to the public. Four weeks after the initial IPO, New York Savold Tire was created. Benjamin and his friends once again decided to participate and put together $20,000 to subscribe to shares at $20. Once again, this deal went off without a hitch. The stock went public at $50 and rose to $60. The syndicate cashed out, booking 150% in profits ($50,000 in 1919 or just under $750,000 today. Clearly this was a very wealthy group).
The bubble bursts
Eager to get in on more similar deals, Graham and team subscribed to the IPO of Pennsylvania Savold, the last such deal of this Savold group covering the remaining 46 states (the original management had decided that it would be cumbersome to manage one company for each state as first planned). Graham "neither understood nor approved of this artistic restraint, but prepared to profit to the hilt from this last gorgeous opportunity," the article said, which should have been enough of a warning to him.
To make the most of this one final opportunity to get rich, the team gathered a total of $60,000, an enormous sum of nearly $900,000 today, to invest. All seemed to be going well until the shares of the original Savold IPO lost 30% in a week. Then, the promotors of the Pennsylvania deal told their investors that there would be a slight delay in pushing forward the IPO. This delay continued for a few weeks and until, in what must have been a complete surprise for this group of wealthy investors, all the Savold issues collapsed completely, disappearing forever.
They say that the best lessons you learn come from your biggest mistakes, and this must have been one of Benjamin Graham's most significant experiences in his career. It is unclear exactly how much the future founder of value investing lost from this debacle, but from the sums involved we can assume that it was quite a significant amount.
Still, Graham was able to learn from his mistakes and then impart his wisdom to a generation of investors who have gone on to warn others about the dangers of being sucked into stock promotion scams that arrive with all bull markets.
Even the best investors make mistakes sometimes. They’re only human after all.
Disclosure: The author owns no stock mentioned.
