Graham-Newman Corporation

• The Bottom Line: Graham-Newman was the investment firm where Benjamin Graham and Jerome Newman not only made a fortune but also forged and battle-tested the core principles of value investing, creating a blueprint for rational investment that is still used today.
• Key Takeaways:
• What it is: The legendary investment partnership, operating from 1926 to 1956, founded by the “father of value investing,” benjamin_graham, and his partner, Jerome Newman.
• Why it matters: It served as the real-world laboratory that proved a disciplined, quantitative approach to stock selection could generate extraordinary, low-risk returns, and it trained a generation of “Superinvestors,” including Warren Buffett. It is the proof-of-concept for the entire philosophy of value_investing.
• How to use it: While the firm no longer exists, investors can study its strategies—like net-net_investing, special situation “workouts,” and cigar_butt_investing—to build a robust, risk-averse investment framework.

Imagine the world of investing is a vast, untamed wilderness. Before Graham-Newman, most people navigated it with crude maps based on rumor, speculation, and gut feelings. The Graham-Newman Corporation was the equivalent of Lewis and Clark's expedition: it systematically mapped the territory, identified safe passages, and established reliable, scientific principles for navigating the market that are still followed today. Founded in 1926 as the Graham Joint Account, and later incorporated, the Graham-Newman Corporation was the investment vehicle of Benjamin Graham—a brilliant Columbia University professor often called “The Dean of Wall Street”—and his sharp, business-savvy partner, Jerome Newman. It wasn't a modern hedge fund or a mutual fund open to the public. It was a private partnership that managed the money of its founders and a small group of associates. For thirty years, through the roaring twenties, the Great Depression, a World War, and the post-war boom, this small firm quietly went about its business. But what was that business? It was the methodical, almost scientific, process of finding and buying securities for far less than their real, underlying worth. Graham wasn't trying to predict the next hot trend or guess which way the market would go. He was acting like a meticulous business appraiser, asking a simple question: “What is this entire business worth, and can I buy a piece of it for a ridiculously cheap price?” Think of Graham as a master antique dealer. While others were chasing fashionable new furniture, he would be in the dusty backrooms, finding a solid oak chest hidden under a pile of junk. He'd know that, with a little polish, the chest was worth $500, but the owner, unaware of its true value, was willing to sell it for just $150. That $350 difference was his profit and, more importantly, his protection against error. This, in a nutshell, was the philosophy that drove Graham-Newman. The firm's strategies were born from Graham's deep-seated skepticism and his insistence on mathematical proof over market narrative. This disciplined approach not only allowed Graham-Newman to survive the Great Crash of 1929 (though not without losses), but to thrive in its aftermath, achieving one of the greatest long-term investment records in history. It became the living, breathing embodiment of the ideas Graham laid out in his seminal books, “Security Analysis” and “The Intelligent Investor.”

“The investor's chief problem—and even his worst enemy—is likely to be himself.” - Benjamin Graham

This quote perfectly captures the spirit of the Graham-Newman enterprise. It was an organization built to protect investors from their own emotional impulses by relying on a strict, quantitative framework. It was less of a company and more of a philosophy put into practice, a working model that proved that patience, discipline, and a focus on intrinsic_value were the true keys to long-term wealth.

For a value investor, learning about the Graham-Newman Corporation is like a future architect studying the Roman Colosseum or a modern physicist studying Newton's laws. It's not just a historical curiosity; it is the foundation upon which everything else is built. Its importance can be broken down into three critical areas: 1. The Ultimate Proof of Concept: Talk is cheap, especially on Wall Street. Anyone can have a theory about how to beat the market. Graham-Newman did it. Over its 30-year lifespan, the partnership generated average annual returns of around 20%. To put that in perspective, a $10,000 investment would have grown to over $2.5 million. This wasn't achieved by taking wild risks on speculative ventures. It was achieved through a painstakingly conservative process during one of the most volatile periods in economic history. For value investors today, who are often told their methods are “outdated” or “boring,” the Graham-Newman record is the definitive counterargument. It is the empirical proof that value investing works. 2. The Birthplace of Core Value Strategies: Graham-Newman was an “idea factory” that systematized several powerful investment techniques that are still relevant today.

• General Undervaluations (The “Cigar Butt” Approach): This involved buying shares in publicly traded companies for significantly less than their easily determined intrinsic_value. Often, these were mediocre businesses selling at wonderful prices—what Warren Buffett would later call the “cigar butt” approach: finding a cigar on the ground with one good puff left in it. It costs you nothing, and you get a free puff. The most famous variant of this was net-net_investing, where Graham would buy stocks for less than their Net Current Asset Value (current assets minus all liabilities). This meant he was essentially getting the company's fixed assets (buildings, machinery) for free.
• Workouts (Arbitrage and Special Situations): This was a cornerstone of the firm's success. Graham sought out investments whose outcome depended on a specific corporate event—like a merger, acquisition, liquidation, or spin-off—rather than the whims of mr_market. For example, if Company A announced it was buying Company B for $50 per share, and Company B's stock was trading at $45, Graham-Newman might buy the stock. Their profit would come when the deal closed, regardless of what the overall market did in the meantime. These were high-probability, low-risk bets that provided a steady stream of income for the partnership.
• Controlled Companies: At times, Graham-Newman would buy up a majority of a company's stock to influence management to unlock value for shareholders, for example by selling off undervalued assets and distributing the cash. This is an early form of the shareholder activism we see today, but conducted with the goal of realizing underlying value, not corporate raiding.

3. The Training Ground for Legends: Graham-Newman's most valuable product wasn't its returns, but its alumni. A handful of bright young men who worked at the firm absorbed Graham's philosophy and went on to become some of the greatest investors of all time. This group, later dubbed the “Superinvestors of Graham-and-Doddsville” by Warren Buffett, includes:

• Warren Buffett: The most famous disciple, who worked for Graham from 1954 to 1956 and has called it the most formative experience of his career, after working with his own father.
• Walter Schloss: Left Graham-Newman to start his own partnership, which generated a 15.3% compound annual return over 47 years using a simple, diversified Graham-style approach.
• Irving Kahn: Worked with Graham and continued investing well past his 100th birthday, sticking to the same value principles for over seven decades.

The success of these disciples proves that the Graham-Newman method was not due to the unique genius of one man, but was a transferable, teachable framework for rational thinking that could be successfully replicated.

You can't invest in the Graham-Newman Corporation today, but you can invest like the Graham-Newman Corporation. Its entire operation was built on a set of timeless principles that form the bedrock of value investing.

Here is a step-by-step method for applying the firm's core philosophy to your own investing.

1. Step 1: Adopt a “Business Ownership” Mindset

Never forget that a share of stock is a fractional ownership of a real business. Before you invest, stop looking at the ticker symbol and start looking at the company's financial statements. Ask the questions a business owner would ask: How much cash does it have? How much does it owe? Are its assets real and valuable? The daily price fluctuations are just the noise of mr_market; the underlying value of the business is the signal.

1. Step 2: Insist on a Margin of Safety

This is the central tenet of the entire philosophy. A margin_of_safety is the difference between the intrinsic value of a business and the price you pay for it. Graham-Newman would only buy securities when this gap was massive. For example, they might only buy a stock trading at $10 if they calculated its liquidating value was at least $15 or $20. This buffer protects you from bad luck, unforeseen events, and, most importantly, your own errors in judgment. It is the single best way to minimize the risk of permanent capital loss.

1. Step 3: Be Quantitative and Unemotional

Graham believed that emotions were the investor's greatest enemy. To combat this, he relied on simple, powerful formulas and strict criteria. His most famous was the “net-net” screen:

  `Price < (Current Assets - Total Liabilities)`
  If a company passed this test, it was a buy. It didn't matter if the industry was unpopular or the headlines were negative. The numbers provided the discipline. You can do the same by creating a checklist of criteria for any potential investment (e.g., P/E ratio below 15, debt-to-equity below 0.5, consistent earnings history) and sticking to it rigidly.
- **Step 4: Diversify, But Intelligently**
  Graham was a strong believer in diversification, but not in the way many people think of it today. He didn't just buy a little bit of everything. He bought a large basket (often 100 or more stocks) of securities that //all met his strict criteria for undervaluation//. This was "statistical investing." He knew that some of his "cigar butts" would fail, but he was confident that, as a group, the winners would far outweigh the losers. For the individual investor, this means owning at least 15-30 different companies that each, on their own merits, offer a significant margin of safety.
- **Step 5: Search for "Special Situations"**
  Beyond simply buying cheap stocks, keep an eye out for corporate "workouts" or special situations. These are less common for individual investors to exploit today, but they still exist. This could involve looking at companies that have announced a merger, a spin-off of a division, or a plan to liquidate. The key is that the investment's success is tied to a specific, high-probability corporate event, insulating you from the madness of the broader market.

To see the Graham-Newman method in action, there is no better example than its investment in Northern Pipeline Co., a classic case study of finding hidden value on the balance sheet.

In the late 1920s, Northern Pipeline was a company whose primary business was transporting oil. Its stock was trading on the market for $65 per share. On the surface, it looked like a boring, unassuming industrial company. Most analysts and investors likely looked at its earnings from the pipeline business and moved on.

Benjamin Graham, however, was a financial detective. He didn't just look at the income statement; he pored over the balance sheet. In the company's annual report, he discovered something incredible. Northern Pipeline Co. owned a portfolio of high-quality railroad bonds. Graham did a quick calculation and valued this bond portfolio alone at $95 for every share of stock. Think about that. The market was selling the entire company for $65 a share, but the company held a pile of safe, liquid bonds worth $95 a share. This meant that an investor was not only getting the pipeline business for free, but was actually being paid ($95 - $65 = $30) to take it!

This was a textbook margin_of_safety. The risk was virtually non-existent. Graham-Newman bought a significant stake in the company. Eventually, other investors recognized the absurdity of the situation, and the company's management was pressured to unlock this value. They did so by distributing the bond portfolio to shareholders. Graham-Newman received dividends of $70 per share from this distribution. They had already made a profit on their $65 investment, and they still owned the shares in the pipeline business, which continued to operate and generate earnings. This simple, real-world example perfectly illustrates the Graham-Newman way: ignore the story and the market chatter, read the primary documents, find the hidden value, and let the numbers guide your decision.

Applying the classic Graham-Newman strategies today has both powerful advantages and significant challenges. Understanding both is crucial for the modern value investor.

• Superior Risk Management: The unwavering focus on margin_of_safety provides a powerful defense against permanent capital loss. By buying assets for far less than they are worth, you create a buffer that protects you when things go wrong.
• Removes Emotion from Investing: A quantitative, rules-based approach acts as an antidote to the twin poisons of fear and greed. When the market is crashing, a Graham-style investor can calmly buy more, knowing they are getting an even better bargain. When a bubble is inflating, they are kept on the sidelines, protected from the inevitable crash. This is closely related to managing one's own behavioral_finance biases.
• A Timeless and Proven Framework: The core logic—buy something for less than it's worth—is as true today as it was in 1930. While the specific types of bargains may change, the underlying principle is eternal. The firm's incredible track record is a testament to its enduring power.

• “Net-Nets” are an Endangered Species: In Graham's time, information was scarce. One could find deeply undervalued companies simply by reading financial reports that others ignored. Today, with computer screens and thousands of professional analysts, classic “net-nets” are extremely rare in major markets like the US and Europe. They are more commonly found in smaller, less-followed international markets.
• Doesn't Fully Capture Modern Value: The classic Graham approach is heavily focused on tangible, balance-sheet assets. It can struggle to accurately value modern, high-growth companies whose primary assets are intangible—like brand power, network effects, or software code. A pure Graham analysis might have undervalued companies like Coca-Cola in the 1980s or Google in the 2000s, which is why Warren Buffett evolved the philosophy to focus more on an economic_moat.
• Requires Extreme Patience and Contrarianism: Graham's strategies often lead you to invest in unpopular, ignored, and seemingly “broken” companies. These stocks can stay cheap for years, testing an investor's patience. It requires a strong stomach to buy what everyone else is selling and to potentially underperform the market for extended periods while waiting for value to be recognized.

• value_investing
• benjamin_graham
• margin_of_safety
• net-net_investing
• cigar_butt_investing
• mr_market
• intrinsic_value