A Prophet on Wall Street

8/12/2019 A Prophet on Wall Street

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Benjamin Graham was one of WallStreetk great innovators. Beginning hiscareer in 1914, he was a master atusing a companyk detailed and oftenoverlooked financial informationwhen determining the value of its common stock. In the process he inventedthe field of security analysis and be-came a millionaire before he was thirtyfive. In 1934 he co-authored the bookSecurity Analysis: Principles and Techniques, which quickly became the bibleof the investment community and isstill the standard text at many businessschools and universities.After retiring in the late 1950s, Gra-ham wrote an autobiography, tentatively titled Things I Remember, but

others that generally do not accompany the theoretical bent: first, a goodinstinct for what was important in aproblem or a situation and the abilityto avoid wasting time on inessentials;and second, a drive toward the practical, toward getting things done, toward finding solutions, and especiallytoward devising new approaches andtechniques.

I f I was fortunate in the assortmentof talents I brought to financial analysis, I was equally fortunate in the epochin which I entered Wall Street. When Istarted, investment was limited almostentirely to bonds. Common stocks, withrelatively few exceptions, were viewedprimarily as vehicles for speculation.

rophet Wall Streetfailed to publish it before his death in When Benjamin Nonetheless, a considerable amount of1976, at the age of eighty-two. His window-dressing began to be arrayedfamily recently released the manuscript, Graham entered around common stocks, to impart someand McGraw-Hill will publish it this aura of respectability to what was pre-fall as Benjamin Graham: The Memoirs the New York financial viously considered a near-relative ofof the Dean of Wall Street, from which the gambling casino. Detailed informa-this article is excerpted worldjust before tion on operations and finances wasbeginning to be supplied by corpora-I WAS DESTINED TO SPEND FORTY-TWO World War/, tions, either voluntarily or to conformyears my entire business l ife on he recognized a vast with stock-exchange requirements.Wall Street, beginning as a brokerage- The financial services had begun tohouse runner and ending as one of the potential or profits present this material in convenientheads of a substantial investment fund forms in their manuals and publica-and chairman of two major business in undervalued securities. tions. In addition, regulatory bodies,enterprises. Over the years I learned a such as the Interstate Commerce Com-lot from the teaching and example of n this excerpt mission (ICC) and various state public-others, though what I learned never utility commissions, were gatheringprevented me from making my own from his memoirs, enonnous quantities of data regardingblunders, large and small, nor did it the railroads and gas and electric com-contribute very much to whatever suc- he telu how he panies, all of which were open forcess I have achieved. This judgment inspection and -study.probably reflects the unconscious van- taught American But in 1914 this mass of financiality that makes even a veracious and infonnation was largely going to wastereasonably modest autobiographer con- investors new tricks. in the area of common-stock analysis.veniently forget what he owes to others.) The figures were not ignored, but theyWhat I brought into Wall Street was BY BENJ MIN GR H M were studied superficially and with lit-an academic viewpoint that was self- tIe interest. What counted most wasadjusting to practical considerations. inside information of various kinds,My school training had made me some of it relating to business opera-searching, reflective, and critical. I tions, new orders, anticipated profits,was able to add to these qualities two and the like, but most of it to the cur-

50 AUDACITY FALL 1996 P WIDE WORLD PHOTOS


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The expanded New orkStock Exchange buildil1ghere in 1922 was a

testament to the prosperityof the great bull marketwhere Benjamin Grahamopposite in 1951

first made his martl-

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~ ent activities and plans of the market between what was important and un- fair number of shares. I also recom-manipulators-the famous they who important, dependable and undepend- mended it to others in the office. I rewere held responsible for all the signif- able, even what was honest and dis- call that Harold Rouse [one of Graham'sicant moves, up and down, of every honest, with a clearer eye and better superiors in the bond department]important stock. To old Wall Street judgment than many of my seniors, proposed that I handle the entire operhands, t seemed silly to pore over dry whose intelligence had been corrupted ation for him in return for a 20 percentstatistics when the determiners of price by their experience. To a large degree, share of the profits. In that way I efchange were thought to be an entire- therefore, I found Wall Street virgin fected my first arbitrage, an operationly different set of factors, all of them territory for examination by a genuine, that was to prove one of my specialvery human. penetrating analysis of security values. fields of study and action. The dissolu-But for a variety of reasons-not the With my double good fortune-of in- tion plan went through without a hitch,least being the improvement in the ternal equipment and a favorable tide the profit was realized exactly as cal

dapper Graham inthe early 19165before the st rt ofhis career

financial strengthof large industrialcompanies that resulted from WorldWar I-intrinsicvalue and investment merit were destined to assume increasing importancein common-stock analysis after 1914.As a newcomer, uninfluenced by thedistorting traditions of the old regime,I could respond readily to the forcesthat were beginning to enter the financial scene. I learned to distinguish

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I could hardly miss be- culated, and everyone was happy, noting successful. Neverthe- the least myself.less, my career has hadmore than one setback.The real beginning ofmy career as a distinctivetype of Wall Street operator dates back to 1915,with the dissolution planof the Guggenheim Exploration Company. Thisconcern held large interests in several importantcopper mines-namelyNevada, Chino, Ray Con-solidated, and Utah-allof which were activelytraded on the New YorkStock Exchange. WhenGuggenheim proposed todissolve and distribute itsvarious holdings pro ratato its shareholders, I calculated that the currentmarket value of the various pieces together wouldbe appreciably higher thanthe price of Guggenheimshares. Thus there waspractically assured arbitrage profit to be had bysimultaneously buying shares of Gug-genheim and selling shares of Chino,

Nevada, Ray, and Utah. The possiblerisks lay in 1) failure of the stockholders to approve the dissolution, 2) litigation or other trouble occasioning a protracted delay, and 3) difficulty in maintaining a short position in the sharessold until they were actually distributed to the Guggenheim stockholders.None of these risks appeared substantial to me. I recommended the operation to the firm, which arbitraged a

A t the beginning of 1920 Iwas made a junior partner in the firm of Newberger, Henderson,Loeb, members of theNew York Stock Exchange, and myappointment was duly announced innewspaper advertisements. In additionto my salary the new arrangement gaveme an interest of 2.5 percent in theannual profits, without liability for anylosses. My share in the profits came toabout $5,000 per annum during thefour years that I enjoyed it.On January 1, 1926, I transferredmy services and my own funds to establish the Benjamin Graham JointAccount. Most of the capital was contributed by old friends, including FredGreenman [a high school classmate]and many others. The financial arrangements were exactly what I had proposedto an earlier group: I was to be paid nosalary but would receive a share of theprofits, on a sliding scale up to 50 percent. (Little did I think, in my egregious self-confidence, that six yearslater I should have to ask that a provision of the original Graham Corporationbe revised to pay me a modest salaryin difficult times.) The participants wereto receive quarterly payments at theannual rate of 5 percent, chargeableagainst their capital or profits.The Benjamin Graham Joint Accountstarted with $400,000. Three yearslater our capital was around $2.5 million, most of it addition from profits. Agood deal of it belonged to me as thereinvestment of most of my ample com-pensation plus the earnings on my

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growing capital. Each year new friendswere eager to place funds in the account, the fame of which was spreading by word of mouth. I made no effortto attract additional investors; in fact, Irefused to accept money from peoplewhom I did not know personally. Butthe number of my acquaintances keptgrowing.

Of the many transactionscarried out by the account,one is especially memorable. When the StandardOil monopoly was brokenup in 1911 by order of the U.S. Supreme Court, eight of the thirty-onecompanies emerging from the giantcombine were rather small operators ofthe pipelines, carrying crude oil fromvarious fields to refineries. Little wasknown about the finances of these concerns. They published only a one-line"income account," which stated netprofits for the year, and a balance sheetin the most abbreviated form possible.Only two Wall Street houses specialized in the markets for all the StandardOil subsidiaries. The firms publisheda monthly bulletincontaining newsitems and figuresregarding each subsidiary but nothingabout the companies' finances otherthan their highly inadequate incomeand balance sheets.

COMMONSTOCKS WEREVIEWED AS

VEHICLES FOR report filed by thepipeline compa-nies. A bulky envelope came backcontaining a formof some fifty pages,replete with tablescovering every detail of operationsand financial condition. I was especially interested in

One day I waslooking through theICC s annual reportfor certain data regarding railroadcompanies. At theend of the volume I

SPECULATIONRELATIVES

OF THEGAMBLINGCASINO.

came across somestatistics concern-ing the pipeline companies that thetables said were "from their annualreport to the Commission." It occurredto me that those reports might containinformation.not sent to the stockholders, and that such information mightbe interesting and valuable. I wrote theICC and requested a blank copy of theCORSISSETIMANN

a table that re -quired the companies to set forth alist of their investments at cost andmarket value. All the pipeline companies had listed a large number of investments in their annual statements,but since no details were given it wasimpossible to know what those investments consisted of.

The next day I rokers study thetook a train to Wash- boards or theington, hied me to curb exchangethe ICC building in 1919entered the recordroom, and asked to see the annual reports for 1925 of all eight pipelinecompanies. The reports were dulybrought to me, and I soon found that Ihad a treasure in my hands. To myamazement I discovered that all thecompanies owned huge amounts of thefinest railroad bonds; in some casesthe value of these bonds alone exceeded the entire price at which the pipeline shares were selling in the marketI found besides that the pipeline companies were doing a comparativelysmall gross business with a large profitmargin, and that they carried no inventory and therefore had no need what-

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The vaunted ever for theseStandard il building bon in est -looms ov rroadway in 1926 ments. Here wasNorthern PipeLine, selling atonly $65 a share and paying a $6 dividend-while holding some 95 incash assets for each share, nearly all ofwhich it could distribute to its stockholders without the slightest inconvenience to its operations. Talk about abargain securityHere I was, a stout Cortez-Balboa,discovering a new Pacific with my

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eagle eye. ImagineCarl PforzheimerCompany and other brokerage firmshad given years tothe study of theseStandard Oil companies, and apparently they didn'tknow what I knew

that no one in the brokerage businessthought of looking at the ICC data.)Not even counting its hoard of cashand bond assets, how could NorthernPipe Line e selling at 65 i it paid a6 dividend and continued to tum a

profit? The answer was that the pipeline stocks were completely out of favor.They had previously earned muchgreater profits and paid much largerdividends; but the new tankers hadtaken away much of their business.Wall Street, with its usual disregard ofdetails and concentration on the trend,seemed convinced that theSe companies had only a dismal future. Thehigh dividend yield-more than 9 percent for Northern Pipe Line-wastaken as a warning of trouble aheadrather than as a reason for buying.I ad copies made of the ICC reports for several years back andreturned to New York in highexcitement. I concentrated onc q u ~ r i n g Northern Pipe Lineshares, sine this company possessedthe largest amount of bond investmentin relation to its own market price. Bycareful but persistent buying I acquired2,000 shares out of the total small capitalization of 40,000 shares. This mademe the largest stockholder of record

NORTHERNPIPE LINE WASHOLDING 95

IN CASH ASSETSFOR EACH

SHARE. TALKABOUT ABARGAINSECURITY

after the Rocke-feller Foundation,which owned about23 percent of allthese companies.It now seemed timeto persuade Northern Pipe Line management to do theright and obviousthing: return agood part of theunneeded capital to the owners,the stockholders.Naively, I thoughtthat should berather easy to ac-complish.now for they surely would not have leftthe shares to sell at such low levelshad they seen the bond portfolios.(Mter all these years, I'm still amazed

I made an appointment to see D. S.Bushnell, the president of the company at his office in the impressive Standard Oil building at 26 Broadway. ItCORBISBmMANN


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was the first time I had ever enteredthose legendary quarters. Two old men,looking suspiciously alike, were waiting to see me. One was Bushnell, andthe other was his brother, general counsel to the company. (It is the custom inall areas of high finance to have morethan one company official present atsuch interviews, in case testimony as towhat was said might later be needed.)I spoke my piece and made my case.I pointed out that the company wasdoing only about $300,000 in grossbusiness, hence it was absurd for it tobe carrying $3.6 million in bond investments that had no relationship toits financial needs. I showed that this$95 per share in surplus cash assetscould not be properly reflected in thestock market, which had long beenvaluing Northern Pipe Line as a declining business, not as a repository ofrailroad bonds whose existence it didnot even suspect. Clearly, the stockholders' interest was that this propertybe distributed to them so it could havefull value in their direct possessioninstead of having less than half itsvalue while confounded with the otherpipeline assets.That's impossible, said the Bushnells promptly.Why?Because we haven't any surplus tospeak of, so we can't payout any morethan our earnings. Actually, our distributions are very liberal.Oh, I said confidently. That'seasy to arrange. All you have to dois reduce the par value of the stockfrom 100 to, say, 50 or 25 per share,and then you can payout the difference or payout 50 or 75..as a return ofcapital.A ew tack was taken by theBushnells. (They provedmuch more resourceful infinding reasons to hang onto the stockholders' pileof gold than in finding ways to increaseprofit.) The company can't afford todo that. It needs all its capital.But why? It can't need millions ofdollars of capital, practically all in cashassets, to do $300,000 of business.BOTH FROM Security Analysis: Principles and Techniques e McGRAW HIU

Analysis of the income account however, would havethe following division of the 80urces oj income:1

Income

Earned from:Pipe-lineoperationsInterest and rents.

1923 1924

Total

This income account is exceptional in that the greater'the profits were derived from sources other than the

~ < \ 1 . Northern Pipe Line Company. For the years 1923-1925 the~ i t i t . N o r t h e r n Pipe Line Company reported earnings and dividendsfollows:

Net earnings Earned per share Dividend paid$308,000214,0003l1,000

$7.705.357.77$10, plus $15 extra86

aPltlllizlatio'n. 40,000 ahares of common atock.1924 the shares sold as low as 72; in 1925 as low as 673-2;1926 as low as 64. These prices were on the whole 13Ome-

The bonds represent our depreciation reserve. They must be retainedfor the ultimate replacement of ourpipeline.When would that be needed,approximately?We can't tell exactly. (The Bushnells wouldn't even try to guess at apossible year. The fact is that thoseunderground pipelines last practicallyforever.)But you don't mean to tell me that

you would actually use the $3.6 million of the stockholders' money to replace a pipeline that was doing only$300,000 of gross business. That wouldbe crazy. (The Bushnells winced whenever I mentioned their volume of business, which they had so carefully keptfrom the stockholders' knowledge.)Still another tack was taken by myhosts, reminding me of the fable ofthe wolf and the lamb: They couldn'teat me, but they were determined

to send me away Two tables from ..empty-handed. the 1934 edition ofWe might decide ecurity nalysisto build an addi- reveal Northern Pipetion to our lines. Une's 1920sThere are a num- financial status.ber of possibil-ities, and we must be prepared for anyof them.But Mr. Bushnell, you have only alittle trunk-line segment, running fromthe Indiana border across the comer ofPennsylvania to the New York border.You are a small part of the old Standard Oil main line. How could youpossibly extend your plant in any logical way?

It was time for the coup de graceand my conge. The Bushnells wererunning out of arguments. So: Look,Mr. Graham, we have been very patient with you and given you more ofour time than we could spare. Runninga pipeline is a complex and special-

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ized business, about which you canknow very little, but which we havedone for a lifetime. You must give uscredit for knowing better than you whatis best for the company and its stockholders. If you don't approve of our policies, may we suggest that you do whatsound investors do under such circum-

stances and sellyour shares?A 932 chartsuggests how ti htlybound Americanbanks and

There it was,the complete storycorporations were I was to hear itagain, with onlyminor variations, countless times in mybusiness career. There was a reasonwhy this happened to me so often. Myoperations consisted largely of buyingcommon stocks that were selling wellbelow their true value as determinedby dependable analysis. The most reliable indication of a substantial undervaluation occurs precisely in the Northern Pipe Line kind of situation, inwhich there were large realizable assetsemployed at small profit and withheldfrom the stockholders. It was my policy


first to acquire a substantial interest insuch a company and then to endeavorby one means or another to bring aboutthe appropriate change in its capitalization or operating policies. Almost invariably management resisted my endeavors, utilizing the same argumentsas the Bushnells'. The favorite weapon

corporate policy from the outside, especially not in the stronghold of Standard Oil. If you don't like the management or what it's doing, sell yourstock had long been the beginningand end of Wall Street's wisdom in thisdomain, and it is still the predominantdoctrine. More than that, an outsider who tried to change anything wasdeemed either crazy or suspect. Manyyears before, a crafty character namedClarence Venner had made a lot ofmoney and an unenviable reputationby bringing many suits against managements for alleged financial misdeeds of various kinds, some entirelytechnical. So now if you just asked politely for something to be done, youwere rebuffed more or less courteously,but if you persisted and indicated anintention to institute a legal action orask for stockholders' proxies, your mo-tives were immediately impugned, withbroad intimations that the companywas being victimized by a holdupartist, another Venner. .In most of these cases the stockholder pressing for relief had not ownedhis shares for a long term. The reasonfor this is simple.

WALL STREET'SIf he had boughtthem in the olddays when theprice of the stockwas high, he wouldbe neither knowledgeable nor vigorous enough to seewhat needed to bedone and to workfor it The only people who were likelyto ,carry the ball forthemselves and theother stockholderswere knowledgeable professionals

ATTITUDE

in their arsenal wasthe claim that thebusiness was a veryspecial one, thatI knew very littleabout it, and thatthey were muchbetter qualifiedthan I was to judgewhat policies wererequired.

WAS: IF YOUDON'T LIKE

WHATMANAGEMENT

IS DOING,SELL YOUR

STOCK.

When, in all innocence, I made myfirst effort as a stockholder in 1926 topersuade a management to do something other than it was doing, old WallStreet hands regarded me as a crackbrained Don Quixote tilting at a giantwindmill. No experienced person wouldwaste his time trying to change any

who had boughtat low prices-i.e., fairly recentlyand were aiming at what they considered a legitimate profit in return fortheir efforts.Managements rarely failed to emphasize this fact of recent acquisition,suggesting that the troublemaker wasa Johnny-corne-lately and therefore a

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mere self-seeker. I have never had anyquestion or qualms about the ethics ofmy endeavors. What I accomplishedbenefited not only my own people butall the other stockholders, old and newwho were thereby getting only whatthey were entitled to as owners of thebusiness.In the early days the business ofWall Street was largely a gentleman'sgame, played by an elaborate set ofrules. A basic rule was no poaching

on the other man's preserves. Thismeant that no one who was in -amember of what we would now call theEstablishment-would think of making any move contrary to any othersimilarly situated person's vested interests. Banks and brokers always automatically turned over their annualmeeting proxies to management. Acorporation or a banking group wouldnever think of making a merger ora purchase offer to the stockholders

or some concern without first havingworked out the deal with managementand having made ample provision totake care of same. Since investmentbankers wanted to stay in the goodgraces of corporate managementsgenerally, none could afford to get areputation for not playing the game.In parallel fashion corporate officialsnever supported any move that wouldthreaten the jobs or perquisites of theofficers of another company, for they

The Shareholders Advocate

In 1932 Benjamin Graham found himself in aneconomic climate that was very different fromthe one in which he had pulled off his NorthernPipe Line coup five years earlier, but he still concerned himself with the inflated treasuries of America's corporations. That spring he wrote a series of articles on the topic for FORBES magazine, which called itone of the most amazing, far-reaching and importantsituations which business and financial America has

these rich American businesses are themselves poorthat the typical stockholder is weighed down by financial problems while his corporation wallows in cash.Treasurers are sleeping soundly these nights while theirstockholders walk the floor in worried desperation.True, the public has more stock certificates to represent the new shares which it paid for and each certificate carries ownership in the cash held by the company.But somehow this doesn't help the stockholder veryever witnessed. These passages appeared in the June 15 issue, under thetitle Should Rich Corporations Return

. _= __=:I much. He can't horrow from the bank, or

Stockholders' Cash?The total sale of corporate securitiesto the public [between 1926 and 1930]exceeded twenty-nine billion [dollars], ofwhich a small part perhaps was turnedover to private individuals, but the majorportion was paid into the businesses,and either expended in plant additionsor added to working capital.

, \Slal ....100 ....._HI. ;\1 . h .....

t . .

FA..... ';>I ...... ..eta

margin his existing loans, on the basis ofthe cash behind his shares. If he wantsto sell he must accept the verdict of theticker. If he should appeal to the officersof the company for a little of his owncash, they would probably wave himaway with a pitying smile. Or perhapsthey may be charitable enough to buyhis stock back at the current marketprice-which means a small fraction ofits fair value. . . .

It must not be forgotten that otherenormous sums have also been accumulated in the form of undistributed earnings. After this tremendous influx of

Sho.h. HI .h . .... r .. .. . &t corporations return to their stock-holders the surplus cash holdings notneeded for the normal conduct o theirbusiness.H u St ...kh .......?80 ..... In 1 1111.;> S ... k.

cash it is no wonder that corporate treasuries are stillbulging, despite all the money that has been spent, orlost, or paid in dividends.But what of the people who supplied the bulk ofthis money; the investor who hought new offerings; thestockholder who subscribed to additional shares? Theyare not rolling in wealth to-day, nor burdened with aplethora of idle funds. They stripped themselves ofcash to enrich their corporations' treasuries; they borrowed heavily in order that these corporations might beable to payoff their debts.The grotesque result is that the people who own

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The immediate result of such a movement would beto benefit the individual stockholder, by placing fundsin his hands to meet his urgent needs or to use as hesees fit. The secondary result would be to improve theprice of the shares affected and the stock market generally as the public is made aware in this forceful fashionof the enormous cash values behind American businessto-day. The third resuh would be to improve the balance of our banking structure, making for a larger proportion of sound commercial loans (especially whenbusiness again expands) and pennitting the repaymentof a certain quantity of frozen security loans.

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expected the same courtesies to beextended to them by all the other clubmembers. It was like the preferredtreatment always accorded to officerstaken prisoners of war. Their officercaptors made them quite comfortable because they expected the sameamenities for any of their own officerswho might be taken prisoner by theother side.Before I left the Bushnells' office,disappointed and exasperated, I toldthe brothers that I would like to cometo the next annual meeting to expressmy views in an oral memorandum tothe other stockholders and for therecord. They seemed surprised at thissuggestion but soon answered that ofcourse I would be welcome to come tothe meeting. With that I said good dayand left.The annual meeting was held inearly January 1927 in Oil City, Pennsylvania, a town truly in the sticks.One had to take the train to Pittsburghand then make a

We are sorry, Mr. Graham, but thereport won't be ready for several weeks.But Mr. Bushnell, I asked in bewilderment, how is it possible to approve a report that isn't ready andavailable ?A whispered conference with theother Bushnell.

rather poor con-nection for OilCity. I made theovernight journeyalone, first in aPullman berth andthen in a ricketylocal train, on abitterly cold andsnowy day. Thecompany's officesin Oil City weremeager but largeenough to hold theassembly, five employees and me. Ilooked in vain foroutside stockhold-

THE USHNELLMINIONS

SCRUTINIZED MEAS IF WERE

We have alwayshandled the matterin this way. Thosein favor say 'aye.'''SOME CURIOSITY

FROM ANOTHER All the proxiesexcept mine werevoted for the motion. After a fewmore formalitiesthe chairman saidthat a motion of adjournment was inorder. I rose again

PLANET WHICHPRACTICALLY

WAS.

ers. In the meantime Bushnell's minions scrutinized me as i I were somecuriosity from another planet, whichI practically was. After some formalities, an employee read a prewritten slip that moved for the adoptionand approval of the annual report for1926. Another employee immediatelyseconded the motion. I rose and wasrecognized.Please, Mr. Chairman, where is theannual report?CORBISBETTMANN

hurriedly.As we agreed in New York, I shouldlike to read for the record a memorandum relating to the company's financial position. Another brief conference.Mr. Graham, will you please putyour request in the form of amotion?I did so.

Is there any second to this motion? A pause of a few moments. Silence. I had not thought of this, andhad failed to bring anyone with mefrom New York to back me up.

But as you are well aware, Ithe long trip here just to put this memorandum in the record. You encouraged me, Mr. Bushnell. I think youowe me the courtesy of seeing that mymotion is seconded and carried.Another brief conference, and then:I'm very sorry, but no one seems will-

ing to second your The Oil City trainmotion. Do I hear a st tion in 1926motion to adjourn? just before GrahamIn a moment the made his first visitmeeting was over.With ill-concealed snickers, the BushneIls' minions filed out.I felt humiliated at being made afool of, ashamed of my own incompetence, angry at the treatment given me.I was able to control my feelings justenough to say quietly to the presidentthat I felt he had made a great mistakein not permitting me to have my say,for I would now come back the nextyear. Then I would have a second withme, and more.

mply justified and fulfilled mythreat. Actually, what I took tobe a dismal personal failure inJanuary 1927 turned out to be agreat piece of financial luck. Fornow I had a whole year to prepare aplan and enlarge my financial stake.With increased capital available I

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bopght more shares of Northern PipeLine. I committed as much of the partnership's funds as I could risk. I engaged Fred Greenman's highly regarded corporate law firm, Cook, Nathan,Lehman, as counsel. The senior

partner was Alfred A. Cook, a man ofgreat ability and prominence but, Imust add, of even greater pompousness and vanity.In my financial reading I had comeacross a fact that was little known atthe time. I discovered that a number ofstates had passed laws requiring corporations to elect directors by cumulative voting. By casting all proxy votesfor one director, a shareholder with

Ariv r vi w ofOil City, a towntruly in thesticks, in 1926

only minority support could insure hisown election. Pennsylvania was one ofthese states, and

Northern Pipe Line Company was incorporated in Pennsylvania. Given itssmall board of five directors, it took theproxies of only one-sixth of the sharesto elect one director, and of only onethird to elect two.I canvassed the stockholders andasked for their proxies in favor of aresolution to reduce the capital and forthe election of two of the directors torepresent the rank and file of the own-ers. We did not propose to elect a majority of the board, for that would havegiven us responsibility for operatingthe company, and we knew we had noright to assume that.


Alfred Cook asked for a list of stockholders, and we were allowed to makeour own copy from the company's records. Evidently the Bushnells thoughtwe had no chance of accomplishinganything; otherwise they might havemade us fight a costly legal battle toobtain the list. We prepared a lettersetting forth our case. Cook, Greenman, and I worked hard over it, and Imust say it was pretty good.The company replied in its usuallordly way dodging all the real issues,asserting its superior competence todecide what was best for it and e:r:goits stockholders, and impugning themotives of us interlopers with noH;o-

cent of the total. I was able to arrangean interview with Bertram Cutler, fi-nancial adviser to the foundation. Helistened courteously but said ratherdecisively that the foundation neverinterfered in the operations of any ofthe companies in which it had investments. (This statement as well I was tohear too often in my later career frominvestment managers who should havetaken their true responsibilities moreseriously.) I tried to establish that thequestion at issue had really nothing todo with the oper tions of the NorthernPipe Line; it was simply a decision tobe made by stockholders relating tothe use of their surplus capital. But Ireturned empty-handed.G reenman and I met Cookat the Recess Club to discuss strategy, particularlyin relation to the Rockefeller Foundation's proxy.By chance we espied John D. Jr. sittingat the very next table, having lunchwith a youngish man in a sport coat.(He turned out to be Andrew Mellon,Jr., son of the multimillionaire financialmagnate, art collector, and U.S. Secretary of the Treasury.) We were sostruck by this happenstance that for

WHAT TOOK a minute Alfredsubtle innuendo.

There were notmany large shareholders, and wearranged to visitpersonally all whoowned more thana hundred shares.Northern Pipe Linemade similar ef-forts through itsemployees and theBushnells. (Thiswas before the daysof the large organ-

TO BE A DISMALPERSONALFAILURE

TURNED OUT TOBE A GREATPIECE OFFINANCIAL

LUCK

Cook seriously considered approaching Rockefeller andasking him to discuss our proxy fightand solicit his foundation s support.But we soon dis-missed the idea asill-advised.

Nonetheless, wedid surprisinglywell in garneringour other proxies.In retrospect I amizations now used by many companiesto solicit proxies, even when there isno contest.)

amazed at our success, for further experience was to teachme that a strong, logical case does notgo very far when one is appealing tothe mass of feckless stockholders overthe heads of and in opposition to a company's entrenched management.Our most important objective wasthe proxy of the Rockefeller F oundation, owner of 9,200 shares, or 23 per-

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The day of the annual meeting arrived in January 1928. I went again toOil City, but this time not alone. I hadwith me three lawyers from ,Cook's outfit, including the redoubtable Alfredhimself, and also Henry Schnader,a partner in a prominent Philadelphia firm, our Pennsylvania counsel.(Schnader was soon to be elected attorney general of his state.) We also had agoodly store of proxies, enough to giveus what we wanted. To be sure thatnothing misfired we arrived in Oil Citya day in advance and installed ourselves in the best (or perhaps only)hotel. A pourparler with the Bushnellsresulted in an agreement to go over theproxies that evening, to save time atthe meeting.The management group was surprised and discomfited to see howmany of their own proxies had beensuperseded by later-dated ones givento us. Mter all this time I still remember old Bushnell's involuntary exclamation of pain when we establishedour right to one particular proxy forthree hundred shares. He's an oldfriend, he gasped, and I bought himlunch when he gave me his proxy.Before the meeting started the nextmorning, the management asked for aconference. We had proxies for morethan 15,000 shares, enough to entitle us to two directors. (Thus we hadobtained about half the votes otherthan those belonging to the Rockefeller Foundation, which we hopedmight at least be withheld from themanagement.) Bushnell was now verysuave. He saw no reason for an opencontest, with its accompanying embarrassments to everyone, at the meeting. He would be very happy to acceptthe nomination by our side of two directors and to put them on the company's slate, thus making the electionsunammous.Alfred Cook proposed Schnader andme as directors. Bushnell made someeffort to have Cook himself-or almostanybody-substituted for me, for whomhe evidently didn't care much. Without consulting me, Cook answeredwith a flat no. This had been my battle,he said, and I was entitled to the vic-

tory. The Bushnells gave in; the singleslate was duly nominated and elected,and the whole meeting went off quitesmoothly.I was now the first person not directly affiliated with the Standard Oil system to be elected a director of one of

its affiliates. Even though NorthernPipe Line was tiny compared to mostof the others, I was mighty proud of myexploit.D uring that truce conference in Oil City, Bushnell offered the conciliatory remark that it oughtto be possible, at an appropriate time, for us all to reach anaccord on the company's financial setup. We thought then that this was alittle soft soap, with no real significance. However, a few weeks later heinvited me to his office for a discussion. In dulcet tones the old hypocritesaid, You know, Mr. Graham, we werenever really opposed to your ideasabout returning capital to the stockholders; we merely felt that the timewas not appropriate. As matters nowstand we are ready to present a planthat we think will meet with your complete approval.The plan was to reduce the par value

from 100 to 10; to give 50 in cashand three new shares in exchange foreach old share, and to carry the balance of $20 per old share to capitalsurplus. Bushnell added that some additional distribution might be madelater out of that capital surplus. But

first some proper Benjamin Grahamprovision must be enjoying the fruitsmade for pensions of retirementfor the faithful em- in 1957ployees. In fact, thefull $70 per share were eventuallydistributed, and the a&,oregate value ofthe new Northern Pipe Line stock plusthe cash returned ultimately reachedan aggregate of more than $110 perold share.

We wondered what had broughtabout this sudden change of heart inour fonnerly obstinate opponents. Al-fred Cook later learned that the Rockefeller Foundation, through its proxiesmade out to management, had indicated that it would favor distributionof as much capital as the businesscould spare. (They could find goodphilanthropic uses for the money.) Thisexplanation is most likely true, because virtually all the pipelines laterfollowed Northern's example and madecorresponding distributions to theirstockholders.

A Prophet on Wall Street

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