The art of value investing has a reputation as a boring, unadventurous activity that used to work a long time ago back before we had streetlights and indoor plumbing.
The exciting stuff is the growth and tech companies that are going to change the world or die trying (by die, I mean fail spectacularly taking all shareholder money to the financial graveyard).
Even better is the lightning-fast trading that whips up triple-digit short term winners. We stumble across these tall tales in the back pages of the National Enquirer and on Facebook.
That’s where the money is today. Pattern trading and formula trading. That’s the ticket.
Value investing is for old men or Ivy League business students who graduated near the bottom of their class. All the real brainpower is doing all the exciting things that can make us instant gazillionaires.
You go right on believing that.
Value investing is about discovering or unlocking or the value of a corporation that is trading at a substantial discount to its book value. Sometimes market and economic cycles accomplish that for us, but often it takes a more aggressive approach…
Call it whatever you want, but not boring.
You see, value investing is the genesis of activist investing. If the value is not truly there to unlock, then rattling the management cage or threatening to take over an overvalued business would be pointless.
Let’s take a look at one of the very first activist campaigns done by Ben Graham back in 1927…
Northern Pipeline had cash and securities equal to the price of the stock and the pipeline itself. Graham discovered this in a regulatory filing that pipeline companies had to make with the Interstate Commerce Commission (There was no SEC at the time). He began to buy shares of the company and demanded that the Board declare a special dividend to unlock the hidden value of the company.
At the time, shares were trading around $65, and by Graham’s calculations Northern Pipeline should pay out at least a $90 special dividend to return unneeded cash to shareholders. He knew that even after these distributions, Northern Pipeline would remain a debt-free and profitable company.
Wall Street was a country club back in the late 1920s, and management politely suggested that if Graham did not like the way they ran their business, he could go pound sand. Pipelines were a specialized business, and they knew far more about such things than some little pissant.
When Graham asked to speak at the annual meeting, he was told he had to make a motion. He made one, and it died for lack of a second. The Board suggested that Graham sell his stock.
But that didn’t stop him. After that, he began seeking out and talking with other small shareholders…
Once he had the votes, he waged a proxy fight and gained two board seats. Northern Pipeline eventually realized the futility of continuing to fight and finally paid out all its excess cash. This gave Graham massive gains.
All the other pipelines operators saw this and rather than put up the fight that was surely headed their way, they paid out their excess cash as well.
Shortly before Graham died, he published the third and final revision of the Intelligent Investor. In this edition, he included the words “Ever since 1934, we have argued in our writings for a more intelligent and energetic attitude by stockholders towards their management.”
Ben Graham is not just the Founding father of value investing. He is the founder of activist investing as well.
His most famous student also got into the activist game early. Warren Buffett waged many activist campaigns in the 1950s all the way through the 1970s. Berkshire Hathaway (BRK) itself came into Buffet’s control when he waged an activist attack on the undervalued textile company.
Today Buffett does not need to wage campaigns. If he sees something at a company that he can be changed, resulting in huge profits, he can buy the whole damn company.
Carl Icahn is known as a corporate raider and activist investor. In truth, he was just a value investor with a Queens accent and Rockaway Beach attitude. He buys stock in undervalued companies and sells them when they are fairly priced.
Value Investing is a lot like sex.
It’s only boring if you are doing it wrong.