The following analysis is purely hypothetical, but is nevertheless interesting with regard to Benjamin Graham. He began his investment career in 1914 and ended it in 1956. If Benjamin Graham had commenced his investment career with $1,000 and it had compounded at 20% per annum for 42 years, ignoring taxes and transaction costs, at the end of 1956 he would have accumulated $2,116,471.
See part I here
Of course, that’s nothing other than an abstraction, since he could not possibly have begun his career in 1914 with $1,000, because that was a fantastic sum of money in the New York City of that year. Similarly, as can be readily visualized from the tax tables on the preceding page, no one could possibly have compounded tax-free. In point of fact, Benjamin Graham did not earn a 20% rate of return per annum, though he certainly earned a very high rate of return.
The reader will find appended to this essay various of the Graham-Newman Corporation shareholder letters for the period from 1946 to 1956, the last year in which the company was in existence.1 It was in 1956 that the company voted its own liquidation. It is notable in these letters that Benjamin Graham derived a salary from the Graham-Newman Corporation. That firm was a regulated investment company under the then applicable laws, and it charged what are now called performance fees. As anyone can readily see by reading the footnotes of these reports, the performance fees embraced income and capital appreciation, both realized and unrealized. There was a very high concentration on preferred stocks that had fairly substantial yields. One can therefore calculate that Benjamin Graham earned a very considerable income, even in the absence of any capital appreciation.
Of course, during the years in question, the Graham-Newman Fund was usually appreciating, and it happened to be a fairly robust time for the securities markets as well. In 1946, the portfolio structure of the Graham-Newman Fund was 10.7% cash and government securities, 36.1% arbitrage, 12.2% liquidations, 20% hedges and convertible issues, 13% financial companies, and 8% what Graham describes in the report as “general portfolio.”
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