Benjamin Graham is considered the father of value investing. He was also one of the first to write in detail about fundamental equity analysis and the principles of valuing securities based on their financials. Before his work, it was common for investors to just buy securities based on hot tips and price spikes instead of detailed analysis.
As well as his work on these topics, Graham was also an activist investor. This part of the dean of value investing's career is often left out because details are relatively limited.
Graham's highly publicized battle with pipeline operator Northern Pipe, and its majority owners, the Rockefellers, receives the most attention because he described it in-depth before his death.
Graham the activist
I recently stumbled across an article on Graham's activist activities. The article, which was titled "When to Mount a Corporation," seems to have been published in the late 1940s. It provides an interesting insight into his approach to activist investing as well as a profile of the Graham-Newman Corp. as it was at the time.
The article describes Graham's investment strategy as having four components:
"First, buy into a company priced well below its net current asset value provided its past earnings and future prospects are reasonably good. Second, if management takes inadequate interest in the market price of its shares, initiate criticisms or even a proxy fight as an alert shareholder. Third, sell out if the price rises above the liquidating value. Fourth, in the extreme case, where the beast can't be put back on its feet, finish it off and mount it, that is, sell and liquidate the business and pocket the difference."
This is a very different approach to the one people usually think about when discussing Graham. However, as the rest of the article went on to explain, while Graham did not often take an activist stance, he did in the most extreme scenarios.
According to the article, in the 11 years from 1936 to the time of publication, across 300 different investments, Graham "mounted only three corporations." That excluded businesses where he managed to persuade management to instigate change before for becoming aggressive.
One of these was the aforementioned Northern Pipe, which, the article noted, "reluctantly forked over $70 for every share value shortly before at $50." Is also reported he attacked several other pipeline companies and "did taxidermy job on several textile companies."
Another activist situation was Lincoln Warehouse Corp.:
"When the Lincoln Warehouse Corp. had in its cash balance money realized from the highly profitable sale of the Manhattan site of the present Lincoln Building, the Iselin and Vanderbilt interests were willing to sell their controlling equity at a discount, thus getting the benefit of capital gains provisions in the tax law... Graham-Newman then sold the warehouse business and distributed the excess in the company's treasury, thus clearing for itself $228,000."
The article also covered Graham's attack on American Tube:
"When it [Graham-Newman] got hold of American Tube Works -- then (1933) the oldest of U.S. seamless drawn brass and copper tube mills -- it managed operations for a year and a half and increased the company's share of U.S. dealings in the field from 5% to 16.5%. The going concern was then sold to Phelps Dodge."
Conclusion
Graham-Newman followed a value investing approach, but it didn't wait for the value to come to it. Where it thought it could make a change, the founders attacked companies to do the right thing.
Graham was a vocal supporter of shareholder rights and believed that if companies traded at a discount to book value in the market, then management should be doing everything in their power to drive up the stock price. If not, he believed the corporation should be liquidated. This approach only added to his reputation and is a reason why he is still revered to this day.Â
Read more here:
- Learning From Value Investing Legend Walter Schloss
- What Passive Investing Does Not Teach You
- 4 Cheap Value Stocks Trading Below Book Value With Net Cash
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