How Should We Read Investor Letters

In 1926, Benjamin Graham, a professional investor in his early thirties, was working in the Washington, D.C., record room of the Interstate Commerce Commission when he came across something he considered “treasure.” It appeared in the prosaic form of a twenty-page document detailing the financial condition of Northern Pipeline, one of eight pipeline companies established when the Supreme Court broke up Standard Oil, the monopoly created by John D. Rockefeller. Northern Pipeline’s shares were trading at sixty-five dollars, and the company generated an annual six dollars of earnings per share. That was generally known. What Graham discovered was that Northern Pipeline was sitting on a fat pile of holdings in other companies. According to his calculations, the company could make a one-off payment of ninety dollars per share to all its stockholders, without having any impact on its ongoing earnings. That’s as sweet a deal as you’ll ever find, so Graham, after an unsuccessful attempt to persuade the company’s senior managers to distribute the cash, loaded up on shares and travelled to the Northern Pipeline annual shareholders’ meeting, in Oil City, Pennsylvania.

investor letters

The location should have been a warning. Why would a company whose offices were in New York, at 26 Broadway, and most of whose shareholders were also in New York, choose to have its annual meeting in a place that most New Yorkers could get to only after taking an overnight train to Pittsburgh and then a cold, rickety local train ninety miles north? Graham found out when he arrived. Of the six people present, he was the only one who wasn’t an employee. He asked the chairman if he could read a memorandum. The chairman asked him to put his request in the form of a motion. Graham did. “Is there any second to this motion?” the chairman asked. Silence. “I’m very sorry, but no one seems willing to second your motion,” the chairman said. “Do I hear a motion to adjourn?” Meeting over. Ben Graham went back to New York, humiliated and angry, and vowing revenge.

In the next six months, Graham bought more shares in Northern Pipeline, turning himself into the second-biggest holder of the stock, and then wrote a letter to the body that owned more shares than he did, the Rockefeller Foundation. The letter called the state of affairs at Northern Pipeline “absurd and unfortunate,” and made a cogent case for giving back the excess cash to its real owners, the shareholders: “The cash capital not needed by these pipe line companies in the normal conduct of their business, or to provide for reasonable contingencies, should be returned to the stockholders, whose property it is.” The Rockefeller Foundation listened to Graham politely, then told him that it did not interfere in the running of its holdings. Graham, who later taught economics at Columbia when he wasn’t managing his investments, wasn’t put off. He lobbied the other shareholders, collected their proxy votes for the next annual meeting, and won two of the company’s five board seats. Northern Pipeline caved in, and distributed the cash to its shareholders.

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