Graham-Newman's Historical Investment Methods

Key Insight

Between 1926 and 1956, Graham-Newman Corporation employed specific investment operations that consistently yielded satisfactory results. These methods were chosen based on a calculated annual return of 20% or more and a high probability (at least four out of five) of successful outcomes. The operations included Arbitrages, which involved purchasing a security and simultaneously selling others, expecting an exchange under reorganization or merger plans, and Liquidations, which entailed buying shares set to receive cash payments from a company's asset liquidation.

Another core strategy was Related Hedges, where convertible bonds or preferred shares were bought, and the corresponding common stock was simultaneously sold at near parity. This aimed for a small maximum loss if conversion was necessary, but significant profit if the common stock declined more than the senior issue. The firm also pursued Net Current Asset, or 'Bargain', Issues, acquiring companies at a cost less than their net current assets alone, typically at two thirds or less of this 'stripped down' asset value, often diversifying across at least 100 different issues.

The firm discontinued two fields after follow-up studies revealed unsatisfactory overall results: purchasing generally attractive issues not obtainable below their working capital value, and 'unrelated' hedging operations where securities were not exchangeable. From 1939 onwards, operations focused on these 'self-liquidating' situations, related hedges, working capital bargains, and a few control operations. Notably, related hedges performed well in bear markets, even when undervalued issues were struggling. While these professional techniques are not suitable for defensive investors, enterprising investors with the right temperament could adopt a selective, disciplined approach to a small portion of the securities market.