Blast from the Past

Firstly,apologies for the lack of recent posts.I came across this interview and just wanted to share with the rest of the value investing community.Here is an old message board post dated Feb 24,1996.An old stockbroker recounts a chance meeting with the legendary Benjamin Graham.


You asked me to elaborate on a meeting I had some years ago with the late 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

Scouring Ben Graham Stocks in Singapore!

Scouring for Ben Graham stocks is a hard thing to do these days. It not only is rare but some feel it is ever to a certain exten extinct already. Now, what is a Ben Graham stock. If you would like to know, during the time when Behjamin Graham was spectecularly successful, Ben Grahan bought into stocks that were trading very much below book value. He would buy a stock if it was trading at 2 thirds the net current asset value. The net current asset value can be calculated by taking the total current assets of the company and subtracting the total liabilities of the company. This figure is finally divided into the number of shares outstanding for the company and you get the Net Current Asset Value per share. This also means that the company's very liquid assets could pay off all its liabilities if the figure is positive. He then compares it to the per share price of the company and if it trading below 2 thirds of the NCAV per share, he would have bought it.

The problem with using this approach is that the method has been so popularised in the US that stocks of such nature are extinct. Any company trading near book value would have been spotted by value and vulture investors eyeing its debt, equity and assets and not allowed to trade below book value. Theoretically, a company that trades below book value could be bought over and liquidated and a decent profit would be realised. For example, if a company was trading at half of book value, a vulture realising that it is worth double could buy over the company and liquidate its assets, leaving a decent return for him. Furthermore, plant property and equiptment may only be reflected at cost and not market values. Upon liquidations, the true book values may be worth far more.

That being said, where can one find Ben Graham stocks? I did a detailed study of the Singapore Stock market, an emerging market and found several. The most notable of which is Matex International, a company selling dyestuffs, a rather 'Unsexy' company largely ignored by the ignorant investors.

Check this out. The company is selling at 12 cents per share and has 178000000 shares outstanding. It has a current asset value of 63.36 million and total liabilities of 27.73 million. The NCAV per share equates to 20 cents a share. Buying it at 12 cents a share would imply a discount of 40% to the NCAV, trading well below 2 thirds of the NCAV.

Just to add to the confirmation that the company is undervalued, i called the company and spoke to management and they claimed that the stock is fairly undervalued and they have no idea why. Insiders confirm that the company is even expanding in China by adding more plants and the tone of the conversation seemed positive.

So there you go.... An extinct stock by Graham's standards found in the tiny Island of Singapore. Bottom line: If you look hard enough, you will find it! And one place to start looking is : Singapore and many other emerging markets if and only if youwere confident of accounting and governance standards.


Written by: Lucas Lim

Margin of safety

In 1972, Ben Graham gave a lecture and summarised the concept of margin of safety. It is the difference between the percentage rate of the earnings on the stock on the price you pay for it and the rate of interest in bonds and that margin of safety is the difference which would absorb unsatisfactory developments. If a company was selling at a PE of 11, the earnings yield would be 1/11 which is 9% while a bond yield of 10 year maturity is 4 %. Here in this case, the margin of safety is (9-4)/4 x 100 = 5/4 x 100 = 125%

Also if the intrinsic value of a company is estimated to be between a $100 and $120.(The variation in intrinsic value is due to pessimistic and optimistic growth rates and variations in discount rates. Note: Intrinsic value is an approximation and not an accurate figure) And if the market value is $60 , we say that the stock has a margin of safety of (100-40)/100 x 100 = 40%. For purposes of conservatism, we should take a lower value of $100 of the intrinsic value to calculate the margin of safety.