Exclusive reading of the transcript of the fascinating Government interview with Benjamin Graham, father of Value Investing, author of the book Intelligent Investor which was applied successfully by billionaire fund managers Charlie Munger, Warren Buffett, Walter Schloss and many other value investors.
Topics include how he values and selects stocks, intrinsic value, General Motors, monopoly, competition, methods of buying shares, secrecy, dividends, minimum holdings, insider trading, insider information, and much more.
New Exclusive Ben Graham – Warren Buffett’s Mentor – Senate Stock Market Study Interview
This is a recording of excerpts of the United State Committee on Banking and Currency hearings on the stock market and buying and selling equity securities. The person questioned by the committee is Benjamin Graham author of The Intelligent Investor the acclaimed book is the favorite of investor Warren Buffett who tribute set to changing his life and commencing his investment strategy which made him the greatest investor of all time. Your narrator is in Whittaker.
The Chairman: Thank you very much Mr. Graham in connection with your own company. Does it invest in a representative sample of the best stocks in the market or does it use some other guide for investment.
Graham: No we have not been purchasing the market leaders. Our business has been something of a speciality business. We have emphasized the purchase of securities selling under intrinsic value and have gone to what is generally known as a special situation.
The Chairman: Would you tell us what specialty situations are and how you approach it. How do you determine whether a special situation is undervalued or not.
Graham: There is a slight distinction between an overvalued security search and a special situation. I shall try and make that distinction clear in the first place with respect to a special situation as it is known in Wall Street. That is a security upon study is believed to have a probability of increasing in value for reasons not related to the movement of stock prices in general but related to some developments in the company's affairs. That would be particularly a matter such as recapitalization and reorganization merger or sorrowful.
The typical example of a special situation is a company in trusteeship undergoing reorganization because of the fact that it is in trusteeship. The securities tend to sell less than their intrinsic value. When the reorganization is completed the proper value is established and there will normally be a profit in the purchases of such securities. There are other examples of that kind. The public utility brakeless where a very interesting generic group of securities because we had an underlying situation in which these holding companies being in favor in general with the investing public tended to sell less than the value of the constituent companies. With respect to devalued securities in general not special situations that would be based upon a process of security analysis which shows by study of the company's balance sheet and income account that it is selling considerably less than its intrinsic value which in general can be defined as considerably less than the value of the company to a private owner.
The Chairman: How do you evaluate management.
Graham: management is one of the most important factors in evaluation of a leading company and it has great effect on the market price of secondary companies. It does not necessarily control the value of secondary companies for the long pull because if management comparatively is poor. Then there are forces at work which tend to improve the management and thereby improve the value of the company.
The Chairman: When you go into special situations and buy large blocks do you usually try to get control of the company.
Graham: No. That is very exceptional.
I would say that's out of about 400 companies that we may have invested in in the last few years that would be not more than eight or four in which we would have had an interest in acquiring control the Chamakh you would have if you thought the management was bad would you not. I mean that would be one of the principal elements in that case.
Graham: That could be a reason for us taking control hoping to improve the management situation.
The Chairman: How do you go about acquiring large blocks without disturbing the market too much. Do you do it in your own name or what is the procedure.
Graham: Well there are two procedures. One is to acquire shares in the open market over a period of time. The other is by making a bid for a specified or unspecified number of shares which is made public and which all stockholders have the opportunity to accept.
The Chairman: I seem that you specialize in special situations. You analyze it and after considerable work I take it you decide that it is undervalued and he's a good special situation. You start buying in the market and you reveal your interest and everyone knows what you are doing. I wondered how you proceed.
Graham: That could happen but very often it does not give you an example in a book wrote The Intelligent Investor. I gave an example of an undervalued security the North Pacific Railroad stock which at the time of my first analysis sold at 20 and later went down to 14. We decided to buy a fair amount of stock. I should say that after reading the book once or twice I convinced myself the shares should be bought. We went ahead and acquired about 50000 shares of that stock in the market with comparatively little.