Chit Chat Stocks - Ben Graham: Learning From The Dean of Wall Street (Warren Buffett's Mentor)

Episode Date: October 21, 2026

On this episode of Chit Chat Stocks, Brett and Ryan discuss the life and investing journey of Ben Graham, who is considered the inventor of modern financial analysis and value investing. We discuss: (00:00) - Introduction (02:48) - Ben Graham's early life, overcoming the Panic of 1907, and entering Wall Street. (10:33) - Breaking down Graham's famous "net-net" framework and margin of safety approach. (16:35) - The Graham-Newman Corporation's track record and teaching legendary investors at Columbia. (20:47) - Case Study 1: General Motors and the DuPont Stub risk-free investment. (30:02) - Case Study 2: Montgomery Ward as a deep-value net-net during the Great Depression. (36:10) - Case Study 3: GEICO and how a massive compounder drove the majority of his career returns. (40:56) - Case Study 4: Northern Pipeline and launching one of Wall Street's earliest proxy fights. (49:12) - Core lessons learned from Graham, The Intelligent Investor, and dealing with the psychology of "Mr. Market". (55:47) - Searching for modern "GEICO candidates" in the hosts' portfolios and episode wrap-up ***************************************************** Subscribe to our newsletter and join our interactive chat community: emergingmoats.com  ********************************************************************* Chit Chat Stocks is presented by Interactive Brokers. Get professional pricing, global access, and premier technology with the best brokerage for investors today:  https://www.interactivebrokers.com/  Interactive Brokers is a member of SIPC.  ********************************************************************* Fiscal.ai is building the future of financial data. With custom charts, AI-generated research reports, and endless analytical tools, you can get up to speed on any stock around the globe. All for a reasonable price.  Use our LINK and get 15% off any premium plan: ⁠https://fiscal.ai/chitchat  ********************************************************************* Disclosure: Chit Chat Stocks hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Learn more about your ad choices. Visit megaphone.fm/adchoices

For the past three years, interactive brokers individual clients average 24.3% annually beating the SMP 500. Lower costs and access to 170 plus global markets matter. Visit IBKR.com slash performance. Welcome to Chit Chat Stocks. On this show, host Ryan Henderson and Brett Schaefer analyzed businesses and riff on the world of investing. As a quick reminder, Chichet Stocks is a CCM Media Group podcast. Anything discussed on Chit Chat Stocks. by Ryan, Brett, or any other podcast guest is not formal advice or recommendation.

Now, please enjoy this episode. Welcome into the Chichat Stocks podcast, a podcast to help you find your next great investment. My name is Brett Schaefer. I'm back from my vacation. I appreciate the listeners who listened last week on the power hour with Ryan and Jason Hall from Investing Unscripted. I am joined today by my co-host, Ryan Henderson, for another. Super Investor episode. We're actually going to wrap up the series with three episodes covering

who I might call the big three in the historical investing world or three of the biggest out there, Graham, Ben Graham, Warren Buffett, and Charlie Munger. We are starting today with Ben Graham, who has been called the Dean of Wall Street. He actually called himself that in an autobiography, which I thought was funny, but I think is well-designed. He was the mentor of Buffett back in the early days of the post-depression stock market era. In this episode, we were going to look at Ben Graham's investing style, how he did as an investor, some case studies that will be fun, including one that is a quintessential stub investment, a compounder that worked out for him that was outside of his style that relates to Buffett as well,

some deep value stuff. We're going to get into it as well as what we learned from the book, the famous book, the intelligent investor and Ben Graham himself. First, I want to mention, and they may be listening right now. I met two listeners in Prague. I had some 50% vodka local vodka with them, which was quite interesting, but definitely a local cultural experience, some nice pilsners. It was great to meet them.

We talked for a few hours there. And as well, I'm in Tenerife on the Canary Islands now. So if any listeners are here, I know it's a smaller area, but there might be reach out. Maybe we could grab a beer. Maybe not some 50% vodka from the Czech Republic. But that was very, very fun. They said they would wish they could meet Ryan someday as well. But before we begin, I'm going to kick it off to Ryan to talk about who Ben Graham was.

Let's get some housekeeping items. If you enjoy this podcast, give us a five-star review on Spotify or Apple Podcasts, as well as join our chat community, which is linked in the show notes. I believe on every episode we will toss out essentially, hey, what shall we talk about in relation to X? You know, on this one we did, what should we talk about in relation to Ben Graham? You can ask your questions there.

We'll maybe answer them on the episode. Well, Ryan, that's enough introduction. Tell the listeners, who was Ben Graham? We'll go through his style of investing, his returns, all that good stuff. Yeah, Ben Graham, the dean of Wall Street.

this will be a different history because, well, for one, it was, I think this is the oldest investor we've ever spoken about. I don't think anyone predates Ben Graham. He was originally born in London in 1894 to a Jewish family. First of all, it's pretty amazing that people still talk about an investor who was born in 1894. I think it goes to show how impactful his thinking ended up being. But anyways, when he was only a year old, his family moved to New York City. Fun fact, his original name was actually Ben Grossbaum, but his family changed their surname to Graham to better assimilate and to avoid

apparently some of the anti-Jewish sentiment that was common at the time. It's kind of weird to imagine this, but your results as an investor, in this era could have actually been very dependent on what religion you were because access to the dominant investment houses were like social clubs like you know you had to have the same religion same views stuff like that to even get access so basically sorry i was going to say j p morgan only hired protestants that's one of the reasons why golden sacks actually started and i believe some of the other ones that folded into that later so it's a part of wall street history uh whether whether it's, you know, a nice part of it or not.

Yeah. No, it is, I spent a weird amount of time reading about that part of Ben Graham's life. But, yeah, basically they changed their name, assimilated. I believe his father was pretty intelligent as well and sort of an academic. But Ben Graham's childhood ended up being sort of full of hardship. His father actually passed away when Graham was nine years old. and desperate to maintain appearances, Graham's mother bought stocks on margin to try to make money. But when the panic of 1907 came, for those of our, for those of you market historians that might remember the panic of 1907, it destroyed basically all of her remaining savings.

The family had to sell most of their tangible assets. And according to Graham, that period was very formative for him and seen his mom go to the bank. bank and I guess there was some point where she went to the bank, was in line, couldn't withdraw money. It was very embarrassing for her. And it kind of instantly put a picture or it was the birth of his sort of conservative investing ideology. Like he wanted to not have to go through that. Throughout his entire childhood, though, he was always very bright, like exceptionally. bright student. He enrolled at Columbia University at the age of 16 and graduated as salutatorian in just three and a half years at the age of 19. For those of you who haven't been to college in a while, that's an early time to be graduating from college. Columbia was so impressed with him that upon graduation, they offered him teaching positions in three different departments, mathematics, philosophy, and English. So keep in mind there. Offering this 19-year-old kid basically. his pick of the litter to be a professor. However, instead of staying in academia, he decided to take an entry-level job as a chalkboard boy at a firm called Newberger Henderson,

eh, there we go, and Loeb, where he made $12 per week. Chalkboard boys were the people, usually younger, I guess that's implied with the name chalkboard boys, that would physically write down and update stock price quotes on a giant blackboard in the brokerage. boardroom as it came in via the ticker tape.

The analog fiscal AI, Ryan. You're putting chalkboard boys out of business. That's a dying industry. Yeah, well, maybe we could use some chalkboard boys for the podcast. Get some tickers up there. Yeah, interns. Feel free to apply. Shortly after he started at Newberger, Henderson, and Loeb,

the partners quickly noticed how to do that. partners quickly noticed how talented and Brighty was. So they promoted him to financial analyst position and gave him access to corporate filings. That was huge back then. Like not everyone had access to corporate filings. The big senior partners in this case did. And they let Graham sort of tinker and come up with his own sort of methodology. In this role, he started writing articles about securities that he thought were undervalued.

And by his mid-20s, he had earned a reputation. as basically a prodigy on Wall Street. And it's worth taking a second here to really think about the time frame he was in. Ben Graham was revolutionary to investment thinking. At this time, stocks were seen as a speculator's game. It was all about who had the best access

or insider tips or momentum. Keep in mind the big trader, everyone talked about at this time was Jesse Livermore, and it was all sort of momentum-based. Graham came in and brought these mathematical quantitative frameworks to valuing stock prices, and it was genuinely innovative, and it's lasted for a century. And that was sort of the famous one was comparing market prices against a company's tangible net assets. That was his famous net net investing approach.

We'll dig more into that in a second. But yeah, I mean, it's he was and is like the godfather of modern investing. And obviously modern investing is a little different, but it's all sort of one derivative or another of value investing. And he really kind of introduced it. Yeah, it's exactly right. I will mention at the time, stop. were seen as nothing more than speculation, as Ryan mentioned. But the preference for investors what to do with their savings or even mom and pop what to do with their savings were bonds.

Civil Railroad bonds. Those were huge in the day. I think utility bonds were maybe bigger. Well, that would have been getting to 1910s, 1920s, but that and preferred stock. That's actually what was focused on the most in the book security analysis that Graham wrote. I think co-authored with what was his name, David Dodd. I think you're about to get into him. David does, yeah. They talk about those a lot in that book. I wouldn't recommend reading it.

I started, didn't really even finish it. I don't think it's much applicable to the modern times, but Graham for the time, even if he's considered like, oh, deep value, that's really old school today. Back then it was like, wow, can someone even do this? Can you value a stock? There wasn't, there was a lot of skepticism of him during that time. Yeah, I mean, it seemed.

people I don't think people really thought of them as shares of like as ownership of a business until Graham came along and maybe I'm overstating his role well back then people a lot of companies lied so maybe maybe there's some to that but he yeah I guess had access to confirm everything so to dig into kind of this net net approach a little more Graham would assess businesses assuming that he was able to get filing access based on their tangible assets and earnings power and would specifically target companies whose total valuation was trading at two thirds or less of their net current asset value. The formula here for net current asset value is current assets. So he's, that's like cash, uh, maybe bonds that they own, um, anything that's like liquid. He would, it's very important. He would exclude long term assets like land or buildings or, you know, you know, brand value.

And then he would subtract the total liability. So all liabilities and subtract out the preferred stock. So that was your net current asset value per share. In simple terms, buying a net net at two-thirds or buying a company at two-thirds of its net current asset value was like paying $60 to buy a wallet that contained $100 in cash while also getting the wallet or the rest of the business for free. Now, sometimes investors in this era were being just pessimistic and all it took was a little mean reversion. But other times, and most times, I believe, Graham took it upon himself to realize the value of the securities.

He would regularly engage with management to try to get cash distributed or he would write publicly about a security to try to get other investors to notice it as well. he would be a substack author in today's world. Yeah, this is what the activist substack authors would have been doing. Then the avenues would have been, what, flyers, newspaper articles, probably newspapers the most. I mean, radio was even in its infancy during these days. So I don't know. He wrote for Forbes a couple times. A lot of these early magazines and things like that, yeah, that makes the most sense.

I guess at the time most, like, most, like, all. almost everyone in the business world and Wall Street would be reading these magazines. So everyone would be able to see it. The management team would get pressured. And the goal is right to get management to liquidate some of the excess value on that balance sheet. Yeah. And sometimes management would just, you know, sure, let's do it. And they just, I guess, needed an outside investor to tell them to do it.

And then other times Graham would go full activist. and he would run a proxy fight and challenge management if he thought the situation called for it. This is why I think many of the value investors today like Japan because there's a lot of management teams that are similar. Conservative balance sheets, a lot of things trading below net asset value. You can find some hidden gems in there where you can get a nice, when we call it risk-free, but as we're going to do later,

margin of safety in trying to get an above-market return. Let's talk about his partnership days in 1923. So this was Graham's late 20s. He broke away from Newberger, Henderson, and Loeb, and opened up his first investment partnership. He had a financial backer named Louis Harris, who gave him $250,000 to invest. Part of that was from him and part of it was from other investors as well. I will calculate for the listeners, Ryan, what that is in today's dollars. Because I actually don't think compared to the billion dollar funds launched,

day. It's not actually that big. No, I mean, it's meaningful enough to start a partnership, but yeah, it's probably not, you know, this is still a guy in his late 20s, first time partnership. So do you have the number for us bread? What is the A-U-M? Yeah, it's going to take five more seconds here, 250. Okay, let's do a little math. Let's call it five million. That's about it. Sizable, but not. considered an emerging manager in the game called. Ben Graham, the emerging manager.

All right. Under the partnership structure, the investors received, and this is interesting, the investors received a fixed percentage return, and then Graham received a share of the profits above that threshold as his managing fee. So even if the returns were poor, they got this fixed return? I guess. That's tough. And Graham apparently did quite well in those early years because the main investors were tired of just getting this fixed return and they wanted a larger share of the profits, which apparently led to a compensation dispute.

So they decided to liquidate and dissolve the fund. But Graham, who had already established a very solid track record and keep in mind he was already seen as this prodigy on Wall Street, inventing these quantitative frameworks, had now proven it a bit with. this first partnership, he was, I think, by this time, sort of a hot commodity. So a year later, Graham teamed up with broker Jerome Newman to start the Graham Joint Account, which later became the famous Graham Newman Corporation. This is the fund. He went on to run for the rest of his life, essentially, until he retired. He ran it from 1926 to 1956. So even while he was a professor of Columbia later on. He was running his fund. And during that time, they made a ton of famous investments, which we'll talk about some of them here in a second. And he was able to put his

net net strategies into practice. It is estimated that the Graham Newman Corporation delivered an average annual gross return of approximately 20%. Now, keep in mind, that's gross, but again, the fee structure is made indifferent. The day is different. The day is was not the cleanest data on the Graham Newman Corporation going back a century. That's true. That's true. This is before the advent of computers, even. I think, like, even before the first transistor. What's fascinating is that, of course, Buffett in his earlier is better than this, but, you know, everyone knows about Buffett. Yeah, this type of stuff, the deep value, but then a lot of other things as what is kind of undisputably the best investor ever.

but if you look at someone who followed this very, very closely, which is Walter Schlaas, he delivered 20% returns for, I think, 50 or 60 years, much smaller size. I don't think Graham and Newman got that large either, but I kind of feel like if you're very smart about this strategy, that sort of target return can be that 15 to 20% range, and that's obviously fantastic, but you're not going to get those, you know, explosive, high risk, high reward returns that a lot of the other investors that we study have been able to do. this is still fantastic, you know, top percentile ways to do. It's just with that deep value strategy, there's always that ceiling of what you're going

to get from any sort of investment. Yeah. In 1928, so two years after starting his fund, Columbia Business School asked him to teach a class on value investing, which goes to just show, I think, just how innovative he really was. This was the first course, I think, in America of its kind. and Graham would just teach students basically his own self-developed methods. And during his lectures, I think actually in his first year at Columbia, one of his students was David Dodd.

I believe Dodd went on to become sort of a professor of his own or maybe an assistant professor. But Dodd would take very detailed notes. And in 1934, they compiled those notes to publish the first edition of the famous book, Security Analysis. This is also the famous Graham in Dodsville, if you've ever heard of that. Some of the students that went through his classes included, Brett mentioned it, Warren Buffett, Walter Schlos, Bill Ruehain, Irving Con, John Templeton, and a bunch of other investors that went on to have outrageous track records. he he really is the godfather of value investing uh and it's i think buffets talked about this before there were a number of students that went on to consistently outperform the market for decades that came from graham and dod's classes and the i remember uh they kept saying it's not

possible to do it. It's not possible to consistently outperform the index. It's just there's just these outliers. And they all happen to come from the same classroom. And there's all seven standard deviations or whatever they kept saying away from the average. Yeah, it's hard to argue with that fact versus the efficient market people, especially during that time. I know a lot of this type of stuff has dried up a little bit. but you still see some very, very strong performance, even into the present day, maybe outside of the United States. You've got to go international, as we mentioned,

a lot of people going to Japan now. There's a lot of emerging markets you can do with that. I will also mention, for any younger listeners, the class is still being taught today. Now by Ben Graham, he's not 150 years old, but I'm forgetting the name, but there's guests that come in all the time to that class, Even Lee Lou went.

He has a famous lecture from there where he kind of just starts yelling at the students. It's actually quite hilarious. It was about the Timberland investment, the shoes. But it's still there. They still have the value-invested course. And, yeah, best coaching tree, I guess, if we're going to use sports barlands there in the investing world. Should we get to the case studies, Ryan, unless you have anything else broadly on Graham? No, let's talk his.

best investments ever or some of his most famous investments where do you want to start you research your investments you analyze markets you manage risk but have you researched your broker for the past three years interactive brokers individual clients averaged an annual return of 24.3 percent compared to 23.1 percent on the s mp 500 iBkr's lower trading costs competitive rates efficient execution and access to 170 plus global markets help investors keep more of what they earn and put more capital to work. Over time, the broker you choose matters. Interactive brokers member SIPC. If you care about performance, find out why the best informed investors choose interactive brokers at IBCR.com slash performance. Again, visit IBCR.com slash performance.

Unlock unlimited free grocery delivery with PC Express Pass. Shop online and get the same low, no frills prices delivered. Get your first year of PC Express pass for just $2.50 a month. Learn more at no-frills.ca. Let's do this first case study here, General Motors and DuPont Stub. I will go

through a little bit for the listeners that don't know the intelligent investor philosophy as then what happened here, because it's kind of a simple investment, but it's one that I think we can learn a ton from. So Graham loved risk-free investments. This is kind of a,

well, it's just a hallmark of the value investing world. And this one specifically is a quintessential investment. He found that virtually guaranteed positive returns and was well ahead of its time. We can put this case study into the, you know, as we call the margin of safety or chapter 20 category that Buffett talks about for introductory investors. As a reference, Buffett has mentioned before that he says introductory investors, and it may be wasn't Buffett to be probably implied it. He should not try to read the full on intelligent investor book written by Ben Graham. cover to cover because it can discourage you and some of the stuff is not applicable today.

I remember, I'm sure Ryan did as well, having the same thoughts skimming the book. I was doing it at a lecture in college and you kind of go, some of these chapters, you're like, what is this about railroad bonds? I don't know if I could buy these anymore. However, chapter 8, which is about Mr. Market and chapter 20 are applicable here. For this thread, it's really about chapter 20 on margin of safety. He defines it as in a few ways, but one of them is in the ordinary common stock, and this is from the book, bought for investment under normal conditions, the margin of safety lies in an expected earnings power

considerably above the going rate for bonds. And for those that roll your eyes and think that he was just a deep value guy, here's another quote that would make people at the Motley Fool sing for anyone that thinks, oh, Ben Graham, you know, we can't. He's just old Ben Graham. Here's the quote. The philosophy of investment in growth stocks parallels in part and in part contravenes the margin of safety principle. The gross stock buyer relies on an expected earnings power that is greater than the average shown in the past. Thus, he may be said to substitute these expected earnings for the past record in calculating his margin of safety and investment theory.

There is no reason why carefully estimated future earnings should be a less reliable guide than the bare record of the past. In fact, security analysis is coming more and more to prefer a competently executed evaluation of the future. I'll close it out there. Ryan, that's, that's modern compounders. That was, that's well said, honestly. Hey, he's a smart guy. We call him an intelligent investor.

Yeah. Sorry, go ahead. And I think it also shows like an open-mindedness from Graham. that is, you know, for someone who got famous, basically valuing businesses on what they were today and what they've earned in the past, and I think a lot of these traditional value investors are skeptical to price in too much growth or anything like that,

for him to be able to say, there's no reason why carefully estimated future earnings should be a less reliable guide than the bare record of the past, shows a willingness to keep learning. Yeah, I agree. All right. I guess the first theory on the yield being above the bond yield.

Like if bonds are yielding 10% for 5%, you probably want to buy an earnings yield of 10%, because it's specifically on this. He says you want a big gap. You know, you don't want 6% versus 5%. And a 10% earnings yield would be a PE of 10. It may be one higher. However, it can be difficult to find a durable business training

of this low multiple, especially today. I think this is the big argument people have against the high-flying stocks or compound or stocks trading at 20 to 30 times earnings right now when bond yields trade at 5% or higher. Or really, more simply, you want some safety because your assumptions are going to be uncertain. There's not 100% guarantee that when you buy X industrial stock, it's going to keep being this niche winner in that industrial place. This is why we like to rate for our own investing, our conference in the management and business quality, along with the combination of the margin of safety, which is the valuation.

And when those two align, you find, you know, attractive business quality and attractive margin of safety. That is kind of where the investing fat pitch comes from. But let's talk about General Motors and DuPont. The idea here was fairly simple. But again, as I mentioned, pretty revolutionary for the time. When Graham was starting up this fund that Ryan talked about, he took a look at the five, for the giants GM and DuPont. DuPont had become a giant in chemicals, industrials, and explosives.

After World War I, they were trying to diversify, and GM was riding the automobile wave. DuPont invested in GM because they had a lot of excess cash, and they eventually owned a stake above 20%, maybe even higher. If not, you know, it's not relative to the lessons learned here. Graham saw this, calculated that DuPont's current stake in GM was worth more than DuPont's total market cap. This was done because GM was a customer of DuPont, and DuPont

Pond had a massive cast position after the war, and GM was a financial mess. The founder of GM, Will Durant, was actually very reckless, but was ambitiously trying to dominate the new automotive space in the United States. His story is quite fascinating. It's kind of the rise and fall and rise and fall again, honestly, extremely similar to some of the entrepreneurs. Today, Graham did not like Durant, was not confident in him, felt there was a lot of risk with GM stocks, so he bought DuPont and simultaneous.

shorted an equal amount of GM to net out the GM position, affecting Lee letting him buy DuPont at a price of zero. That's one of the biggest companies of the day, huge diversified earnings power, and again, chemicals, industrials, explosive, all sorts of things. Yeah, I guess explosives would probably be in a down market after World War I, but you look at one of the input players for the second industrial revolution, I forget maybe it's the third industrial revolution.

Either way, the automotive growth was going to be massive here. He then earned a risk-free profit when the quote-quote stub diverged. So pretty much, unless you thought DuPont was going bankrupt, it was guaranteed not to lose money, which is, you know, this type of stuff gets priced in today. For the most part, it's harder to find, or maybe it only materializes quite shortly. it reminds me a little bit as it's not nearly as risk-free,

but people are talking about with Zoom, potentially owning a huge stake in Anthropic, that could net out if somehow anthropic goes up to a massive market capitalization, and Zoom doesn't get that realized in its own share price. But today, just with the automated training and things like that, I feel like this is a little bit outdated, unless you can play in the tiny areas of the market

that no one's looking at. Yeah, it is a good point. Like paying attention to the investment portfolios of publicly traded companies is probably something that gets. Yeah, people maybe overlook it myself included with Zoom. Cat might be out of the box on that. I don't think the stock's gone up too much. Let's check. Let's do a quick 30-second detour.

It's still below 100. Still below 100. It's a little bit higher than it was earlier this year. or sorry, earlier this month. Market caps 29 billion. I mean, that stake inthropic, there's uncertainty there, but let's say they went public. They had a huge stake in them relative to their own market cap.

They had a huge cash position and Zoom stock price didn't reflect it. That's kind of a similar philosophy here. But I just think in the lesson here is in modern times, almost everyone's going to see that. The Algos see that pretty quickly. It's more competitive today. That was something, reading about Ben Graham in general, something I kept thinking is the investment world is certainly more competitive today.

However, I'll also reverse that and say that there's a lot more securities out there available. And there's a lot more access, global access for investors today. So there's more fish to fish for. Let's talk my first case study. I'm talking about Montgomery Ward. I can't imagine most of our listeners have ever heard of this. I certainly had not. And I put here, if you were given a list of every investment Graham ever made,

I would guess that most listeners today would not recognize 90% of them. I guess that was kind of the, well, part of it's that these companies are a century old. But the other part is that's sort of a byproduct of the strategy. Graham didn't care. He wasn't buying the best businesses. He was buying the best securities, almost regardless of the business. Not entirely.

Like, he obviously cared about the earnings power for each of these businesses, but if he had enough margin of safety, he didn't really care what it was. The Montgomery Ward was a massive catalog and retailing franchise. And following the 1929 crash, many investors sold their show

simply because they needed the money. So this was a prime example. 1929 in general was a great example of indiscriminate selling. Like you can look across the whole universe of equities in 1932 if you're able to get the data and think, wow, these valuations are outrageous. But part of that is no one had money to buy stocks for the most part. And this was actually the central case study in the 1932 article that, that Ben Graham wrote for Forbes, and it's kind of a famous article now where he wrote, is American business worth more dead than alive and just went through a list of companies

that were trading below their net current asset value and basically saying, if you, if you shut these businesses down today, investors would be richer. Yeah, maybe better for the economy to just dividend out stuff to stimulate some spending, but technically in that in that thought exercise he is right yeah after looking over the financial statements graham came to the conclusion that montgomery ward was worth about $16 per share or there was $16 per share worth of just quick assets that was cash accounts receivables and liquid inventory minus all of their corporate liabilities meanwhile shares were priced at $6.50 so $16 in net current asset value $6.50 price.

This wasn't even factoring in all its warehouses, real estate, brand name, anything like that. Now, keep in mind, 1931, the business had lost $8.7 million. So investors were probably quite worried that it would continue. And I think a retailing business in 1931, if you didn't tell me the price and you said, would you like to buy a retailing business in the heart of the Great Depression? The answer is probably no. They're probably struggling, especially one that has this many buildings and is fairly asset heavy. But he had enough margin of safety.

So keep in mind, him writing that article was kind of a form of activist investing, you could say, or at least drawing attention to his investments. By 1935, the stock had. rebounded to around $35 to $40 per share. So that was probably somewhere around a 5x to 10x off the 1932 low. So no need necessarily to go activist here. You just benefited from mean reversion and the business had become profitable again. But I guess this is maybe a discussion question. If you have a business like this where it's trading well below net current asset value, but it's hemorrhaging money. what do you do investors usually discount that a lot I hate those situations

the thing is you have to see some sort of catalyst for recovery because even if you just get to break even the potential for multi-bagger returns in a year are fantastic so I think you have to look back

over the last 12 months or however long and say all right what happened here I mean for example 1932, probably that, maybe it was early 33 is the worst. The U.S. economy has been, like, relative to where it was at a prior peak in history. And Graham could have said, well, it could get worse, but you go back to the dark ages, or maybe this is a cyclical low. I have no idea how good of a franchise Montgomery Ward was at the time, but I'm assuming it was solid.

There was probably the protection with the real estate that he wasn't even factored. in case there was a liquidation. That's probably how you have to look at it because look here, you have $16 in quick assets. Again, this is not long-term assets. This is stuff that they can easily distribute theoretically versus $6.50 share price. You can lose money for a couple of years before that impacts you. So I think that's probably how I look at it. Yeah, I'm saying I'm probably tend to stray away from investments like this, but it's a slogging percentage.

And part of it too is like management in this situation. Like are they willing to rein in the business if it's hemorrhage in money? Like if they aren't seen a viable way to generate earnings, will they sell off buildings, dispositive assets, stuff like that? It's all in this situation, I'm guessing it was just because the economy rebounded by 1935. I'm guessing that. Yeah. Yeah, which worked out. How far was business management there.

In this case, I think part of it was just the economy got better. And maybe it was, it's frustrating because we don't have that much data around what the company was really earning back then. But it, I mean, still, 1935. you're still kind of in the heart of the Great Depression. So there must have been more Ernie's power than... Ben Graham must have realized that there's a lot more Ernie's power there than what they showed in 1931. The funny thing is, and this leads to our next case studies, it probably would have been better to buy a stock like Coca-Cola at the lows,

even if it wasn't as objectively cheap at the time because of the growth prospects. That brings me to my case study. number two, Geico as a compounder investment. I think this is a fascinating study because it is woven into the story of both Buffett and Graham. For those that do not know, Geico is now fully owned by Berkshire Hathaway today and has been for many years. In the 1940s, Geico was an upstart insurance disruptor that had lower costs because it sold directly to customers without sales agents. You could therefore offer lower prices on its insurance contracts, which was allowing it to gain a lot of market share. Ram's story with Geico's an interesting study because the more public analysis really comes from Buffett and his famous article, The Security I Like the Best from 1951.

Before that, 21 years old, Buffett went down to Geico's offices in Washington, D.C. and spoke to an employee for four hours about the business. As a side note, the employee said, it was a strange kid and, you know, kind of right, 21 years old, going to talk about insurance for four hours. That's why I guess he became the best investor ever. everyone else focused on partying at sports and women at the time of 21. He then put most of his $20,000 in savings at 20 years old, which is about $300,000 in today's money into Geico. I believe this was in the 40s before the article was published in 51, but the timeline is generally late 40s, early 50s in the article.

Buffett outlines the thesis, which says there's a premium cost advantage that is sustainable, which I mentioned before. They had better underwriting profits than their peers. There's huge earnings growth and earnings growth potential ahead for market share gains, and they traded eight times earnings in a down year for the industry because of the – there was something about inflationary inputs. Not important to this podcast. Graham came into Geico first.

Earlier on in the story, it was actually on the board of directors at the time the article was published. That was a part of Buffett's thesis. As you mentioned, Ryan, maybe if you have some management alignment there, or board a director alignment that can be helpful for you, although this is not a net net investment. But Graham put 25% of the Graham Newman Fund into GEICO in 1948, not, you know, blowing by his diversification rules,

and he acquired 50% of the outstanding stock for $712,000. Within 25 years, this would grow into $400 million or a 500 beggar, and it contributed more to Graham's return, than all other investments he ever made were combined. What's the lesson, Ryan? I'm kind of leaning on here, but what's the lesson? So, yeah, I try to figure this out a little bit. If you stripped out Geico, Graham's returns still would have been good.

Yeah, the AI. Yeah, the AI checking along, working for you on that one. Trying, yeah. I feel like the inputs are too difficult, though. Yeah, they would not have been anywhere near, 20% a year, annualized over 30 years. So Geico was what drove his outperformance largely. And this was late in his career, too.

The, I guess the lesson here is that you only need one winner. And one winner can sized. And was sized largely. Yeah. Yeah. That's the key. If you find what you think is a home run, very high quality business, trading and attractive earnings multiple.

This isn't a net net for him. And you size it appropriately, you can drastically outperform. My guess is the lesson there. Yeah. I want to, the closing one, we'll see if in our portfolio, there's no guarantee that there's a Geico type investment that's come around few and far between. But we maybe take a look if there's any similar. similar characteristics within current portfolio holdings.

I think that's kind of a fun exercise to do, especially because I think this Geico one is applicable to today. I was reading things about, you know, cyclical downturn is trading at a trough earnings multiple. There's room for market share gains that relates to a lot of things we've discussed about with the Peter Lynch style, the David Gardner style investment. So I think there's a lot that's applicable for individual investors nowadays, but let's get to your second and final case.

Ryan. Pipelines. Pipeline assets. Unlock unlimited free grocery delivery with PC Express Pass. Shop online and get the same low, no frills prices delivered. Get your first year of PC Express Pass for just $2.50 a month. Learn more at no frills.ca. Okay. When I sell my business,

I want the best tax and investment advice. I want to help my kids, and I want to give back to the community. Ooh. Then it's the vacation. of a lifetime. I wonder if my head of office has a forever setting. An IG Private Wealth Advisor creates the clarity you need with plans that harmonize your business, your family, and your dreams.

Get financial advice that puts you at the center. Find your advisor at IGPrivatewealth.com. I guess before I get to that, one last comment on Geico, if you have a 500 backer and you made it a quarter of your fund, it would be very hard to underperform. That's fair. Well, 500, over how many years? But yes, yes, over 20 years or 25, however long it was. Yeah. Okay. Case study number two for me, number four overall is the Northern Pipeline. This was one of his most famous early activist investments. In 1926, just after launching the new partnership, Graham traveled to Washington, D.C. to inspect public corporate reports that had been filed with the Interstate Commerce Commission. Among them were reports for eight former subsidiaries of John D. Rockefeller's standard oil trust. So this was after the big breakup. One of them was the Northern Pipeline Company.

The ICC, which, again, this goes to show, like, I think a lot of people look at this and they see Ben Graham, they think, well, yeah, okay, I could have generated great returns when there was no other investors out there or when companies were trading at 30% of their net current asset value. he had to go to D.C. just to get reports, and he had no idea whether or not these reports would be of any value. It took a ton of work to get the earnings that we now get on fiscal AI in seconds. So it's, yeah, I think it shouldn't be understated how much effort he put in. Anyways, the ICC filing revealed that Northern Pipeline held roughly $3.6 million. in high-grade railroad bonds and liquid assets. That came out to about $90 in value on a per-share basis. So $90 in basically railroad bonds and cash.

And the business itself was generating about $2 to $3 per year in per share operating earnings. Meanwhile, shares traded at just $65. So for $65, you could get $90 worth. of cash and high grade bonds, along with $2 to $3 a year in earnings. Yeah, when you read stuff like that, it makes you think it would have been a nice time to be an investor, but I don't know if I would have been taking the train down to D.C. to check out these filings either. So, Brett, anything to add about taking trips to find filings? Yeah, it would have been harder. It would have been harder.

That's for sure. I don't think many people would have. have even known this type of stuff existed. Yeah, this was a long ways away from the average trading strategy of the time. This was Jesse Livermore wasn't going to DC to find company filings. Like the, it was just a totally different approach, a novel approach to finding what businesses were worth. Anyways, Graham's partnership immediately began acquiring shares.

equivalent to about 5% of the company, making him the second largest shareholder behind the Rockefeller Foundation. Graham reached out and requested a meeting with the company's president to propose that management sell off the unneeded railroad bonds and distribute the $90 per share in cash in cash back to shareholders. Management rejected his proposal, stating that pipeline operations were a complex business that Graham knew nothing about, and they suggested that if Graham didn't like the way the company was run, he could simply sell his shares. My question, and this maybe hints at some of the collusion going on at the time, why did the Northern Pipeline Company own these bonds in the first place?

Yeah, let's draw it back to the, what do they go? The preferential stuff for standard. Pricing. Yeah, yeah. Yeah, maybe they were getting preferential pricing from the railroads, which maybe Maybe to the president of this company's credit at the time, maybe the railroad was like, look, we're not going to give you the same pricing if you sell it or bonds. That's fair. It could have been some backroom deal.

Yeah. That's fair. Yeah. But instead of selling, Graham launched one of Wall Street's earliest organized proxy fights. He spent the next two years personally reaching out to hundreds of individual retail shareholders, explaining the math and requesting their vote. He even attempted to enlist the subcontest the subcontest. of the Rockefeller Foundation, though they remained neutral. By the time the 1928 annual meeting came around, Graham had successfully amassed proxies for roughly 15,000 shares, or 37% of the shares outstanding.

That was enough to elect him and an associate to the Northern Pipelines Board of Directors. Given that Graham had the power to now fire the president, the president thought it was a great idea to distribute those bonds to shareholders. They sold it off and distributed $70 per share in cash dividends. Keep in mind, Graham bought the shares for $65. So if you can buy shares for $65 and get a $70 dividend, yeah, that's probably going to be a pretty dang good return. I do wonder if maybe there was some backroom dealing here that Graham didn't know about and that maybe hurt the business in the long term, but yeah.

Either way. These are good stories, but I worry. Don't worry. But I get concerned when I see two years of reaching out to shareholders what the return on time is. Look, the returns are positive. Like you get $70 in cash. There's some probably value left over in the business and you originally bought for $65. But, okay, that took so much work.

I guess. If it's a big chunk of the fund, like let's say this was, you know, 30% of the fund. I don't know what it was. But he never did that outside of Geigo. His whole thing was diversify. I can't imagine.

I can't imagine if you own 20 companies that you'd be spending all this time on one of your 5% positions going and getting retail shareholders to side with you to add you to the board. honestly it goes to show the work ethic in a way yeah very good work ethic of the case studies i don't like this one the most just because it takes a lot of work i mean the best case study is geico yeah that's the one we all love yeah you don't have to do anything uh borrow buffett's work and

size up gigo fell apart in the 80s i believe buffett had to come and rescue them it allowed him to come in and buy a share, get 50% stake at a very cheap price, but still, like most of the time it's a set and forget investment. I like more the General Motors DuPont stub because you don't necessarily need to do anything. However, in those situations, sometimes the value discrepancy never materializes. Yeah, that's the big thing. I mean, now keep in mind, this is 1926. So we had just started. So maybe there was reluctance from company executives to really make any changes. And Graham had to show that he could make the changes himself. But I would guess that he's 20, he's probably 30 by this point. 30 at the time. 30s. But he, I would guess that after he had done this, after he had, you know, had a few proxy fights,

activist battles, he would just be able to tell management teams, like, hey, you should distribute the cash. Reputational. Yeah, that's fair. That's fair. Probably made it a lot easier for him down the road. All right. Lessons. Ryan, what have you learned? I guess we, really a lot of people start out reading this book as their first one. It's kind of a terrible one to read first. I'd recommend kind of jump it in the deep end

with some stupid stuff like that'll actually get you excited and just losing money on AI stocks or something like that. And then coming back to more of the fundamentals of accounting because really it can't be boring at the start. But Ryan, what have you learned

and then I'll talk about mine from Ben Graham and maybe the book, The Intelligent Investor, which again, Ben Graham wrote. Well, I mean, you learn a lot about Graham, I guess. Maybe not specifically from the Intelligent. investor, but studying him. And some of these things, these quantitative frameworks, though I probably want to put them in, like, it's not how I invest anymore.

I mean, part of it's that, you know, I'm not investing for a living. So chasing down retail shareholders to try to garner a proxy battle is certainly not the way I would, anything I would implement. But it is still like some of the. these frameworks are still applicable today. And I know people probably think it's outdated, but Brett talked about the Japanese market. There are, if you are on interactive brokers, you have access to markets all over the world. There are microcaps. There are small caps. There are businesses that are trading at liquidation type prices. Now, it's a different game today. and you might not be able to,

you might not have the firepower to go activists, like grabbed it in some cases, but that net net framework can still be applied. So I think the lesson there is pay attention to the ballot sheet, pay attention to any sort of hidden assets, especially for like the companies I own. I think I'm probably going to walk away from this and maybe look at the investment portfolio,

what's actually in there, where they, what do they have? Again, it's not going to make a difference in the valuation or how I value those businesses, but it's worth knowing. Any, I mean, any takeaways for you that you will actually put into practice in terms of your own strategy? Just from this episode, nothing new, I guess. It's a lot of, he was really more of the beginner stuff. It's another example of

We've talked about this plenty of times With all these super investors Because time and time again There are these examples is hitting You know playing that singles game can make you money But you always want to look for the home runs That can keep you know scoring for you over and over and over and over again Because in investing

Everyone has heard this you could hit a thousand run Home run if we talk about you know 100 beggar thousand beggar returns Even though people know grand four's deep value stuff he actually made his money in the Buffett-style investment. Peter Lynch or David Gardner style. That's where the returns come from. Like, fool, NVIDIA, Amazon, and Netflix.

Yeah, Buffett, Apple, American Express, Geico, a few others, Coca-Cola, you know, things like that. I think that's the lesson. You'll have a couple of home runs, and you should try to be searching for those. And I kind of, my philosophy is not to put 30% of the portfolio owned to one of these, but a lower percentage and kind of see if given something, you know,

I'd hope, similar characteristics, you know, big market share gainer, not, you know, reasonable valuation, management TV can trust, a, yeah, big market opportunity out there, maybe in a growing sector, those type of things, if you have that with a couple of different stocks, it's not going to make up my entire portfolio, but when you have that, I think you can maybe, you know, increase your odds of finding these type of investments and hold the winner for the next 20 years. That's the plan. But the other thing we should mention is Mr. Market talked about in Chapter 8. That is what we talk about all the time.

It's when the broad mood of the market, when we saw this over the last month or so, it's gone from euphoric to depressive quite quickly. Now it's maybe recovering again. and we're recording this on October 20th. Mr. Market is someone we mentioned on the show, and it's generally just, again, the broad opinion of what the market is saying about something. And a lot of the times it just goes into both extremes.

And I think that is the key, because you see something you own, and you think, like, or on your watch list, and it goes down 80%, and usually something is wrong, but if you think the management team and the company can get through it, Most of the time, the stock price is getting way, way, way too priced in for this danger. You saw that with a lot of software stocks this year.

And I think that's something I've always taken away is kind of one of the most important things from Van Graham, who was the first one to pioneer. This, what do they call that, the psychology? Yeah, psychology of investing. Yeah, I think Mr. Market is helpful framing. for investors, even if, because you see this all the time, like, ooh, Mr. Markets feeling grumpy this morning for my stocks, but in reality- We like to do jokes about it too. Yeah. In reality, maybe it's an analyst that's paid really well at a firm that has better data than me, uh, that got some report on, uh, intracorder. Yeah, sure, but that's still going to be like, all right, if you hold it for 20 years,

who cares? Exactly. even if that investor has a data advantage on you and knows something that's going to maybe materialize in the next quarter, that might not actually matter in the long run. So the Mr. Market being grumpy or the Mr. Market being euphoric, it might sound simplistic, but I do think it's actually helpful framing for the individual investor. And it's more extreme today. It's way more extreme. There's way more, way many, you know, as we all know, way more voices out there. New spreads, way faster.

New spreads way faster. You have Algos going crazy. All right. As we close things out, Ryan, let's play a fun game. Best Geico candidate. I'm saying it's going to be a hundred beggar, a best Geico candidate from your own portfolio. I can go first if you want 30 seconds to think.

Go for it. All right. I thought about this because I wanted to. to come up with a question to end the episode. And I was like, I was looking at, you know, you see the 500 bag of returns. We've seen these type of examples before. And I was like, well, do I have any candidates in my own portfolio?

And I have a few, but I think, honestly, the one that made the most sense for this was one that earlier this year has been my best performer this year. And it's Oscar Health. It's in health insurance. So it was a similar category. And they had the cyclical downturn. It was training on a forward earnings multiple, even though the trainings were negative. at a very, very cheap forward earnings multiple, and given the disruptive nature of their model,

which is going for the individual payer market outside of the employer payer market, you can see some analogies working there of being a market share taker over the long term. We'll see if they can execute that vision. But that's the one that makes the most sense to me. There's a few others. It's not the entire portfolio. I mean, these type of opportunities are few and far between. but I think it's hopefully promising.

Yeah. 500 bagger... Well, it's over 25 years. You know, things evolve. Things evolve. Yeah. What's the criteria for a 500 bagger over two decades? I think maybe the most important factor would be reinvestment runway.

So if I'm thinking about it with that framing, I'd maybe say coupon or coupang. If they can continue to grow within South Korea and outside of South Korea and Taiwan and other adjacent markets, maybe there's the capacity to earn a lot more than they are today. They may be a little big, but inflation is a thing. Yeah, that's fair. Already quite large. But it doesn't have to be.

Okay. If anyone can predict what a 500 bagger is going to be over 25 years, you couldn't have predict Geico was going to do. that it's more of like all right they have some of the ingredients and maybe if things go well they could get there or or in that ballpark do you know coupons market cap today bro uh what's the stock price 14 30 good thing i tax less harvested smart decision on a on a loser of 2026 i guess picking up a little pennies there uh 20 25 or 30 see it's it's it's it's it's it's it's it Yeah, it's $25 billion.

All right. So 500 backer maybe seems a little unrealistic. Capital returns can help with this. Yeah, that's true. All right. Yeah, I don't know. Remitly could be too. I think they have a little bit of an opportunity.

Remitly and wise. Yeah, I just, maybe. Yeah, maybe. For a 500 bagger, there's probably things that develop and happen to the business that you're not even thinking about. That aren't even a part of the business today. Yeah. Especially modern times.

Yeah, I always say look for, you know, look for things that you think can be five baggers and maybe in the long run they can turn into the 50, 100 or 500 backers. It's difficult, well, possible to forecast 25 years. So really what you're doing, and this is what I think Buffett was doing in that article, what Graham was doing is you're kind of just stacking three-year, periods on top of each other. And with a massive winner like Geico, they just keep proving to you, like, there's no reason I need to sell. And it just slowly adds up over time. Yeah. All right. I think that's going to do it. Any party and thoughts on Ben Graham?

I don't think so. I do not think so. A lot to learn, especially, I will recommend this. If you are a beginner listening to this podcast, his stuff is kind of the foundation for a lot of value investing. Yeah, absolutely. And there's, even if stuff feels outdated, his work is worth reading. And it also just develops like, like you said, it builds a foundation for how to value a business. So I think that's going to do it. Thank you, everyone, for tuning in.

What else do we have coming up here, Brett, in terms of new episodes? Ernie. Ernie power hours. Sorry? Buffett and Munger eventually here. Eventually, yes. a lot of earnings power hours we're going to be doing maybe if Anthropic launches the rest one

maybe we'll do an emergency one we'll see if they ever do yeah what else do we have do you have the calendar up I don't have it in front of me I don't have it Ryan's research episodes a lot of good interviews maybe in the month of December if we figure something out I think we'll have a lot of good there

and besides that yeah hopefully kind of the same yeah I'll tease it we are Brett and I are pondering doing the 12 stocks of Christmas this year for the month of December. But at the moment, we're, there's no formal game plan yet. But that is kind of to it. Thank you all for tuning in.

We want to remind listeners that Brett and I are not financial advisors, anything we say or discuss here on Chit Chat Stocks is not formal advice or recommendation. We may buy, sell, or hold, any of the securities discussed on this podcast. Thank you once again. We'll see you all next time. Unlock unlimited free grocery delivery with PC Express Pass. Shop online and get the same low, No Frills prices delivered. Get your first year of PC Express Pass for just $2.50 a month.

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