Everybody can be rich

The One Lucky Break or The One Supremely Shrewd Decision

What can we learn from the two partners who spent a good part of their lives handling their own and other people's funds on Wall Street?

These two partners Graham coyly referred to were Jerome Newman and Benjamin Graham himself.

• Some hard experience taught them it was better to be safe and careful rather than to try to make all the money in the world.
• They established a rather unique approach to security operations,which combined good profit possibilities with sound values.
• They avoided anything that appeared overpriced and were rather too quick to dispose of issues that had advanced to levels they deemed no longer attractive.
• Their portfolio was always well diversified, with more than a hundred different issues represented.
• In this way they did quite well through many years of ups and downs in the general market; they averaged about 20% per annum on the several millions of capital they had accepted for management, and their clients were pleased with the results.

In 1948, an opportunity was offered to the partners' fund to purchase a half-interest in a growing enterprise. For some reason the industry did not have Wall Street appeal at the time and the deal had been turned down by quite a few important houses. But the pair was impressed by the company's possibilities; what was decisive for them was that the price was moderate in relation to current earnings and asset value. The partners went ahead with the acquisition, amounting in dollars to about one-fifth of their fund. They became closely identified with the new business interest, GEICO, which prospered.

• In fact it did so well that the price of its shares advanced to two hundred times or more the price paid for the half-interest.
• The advance far outstripped the actual growth in profits, and almost from the start the quotation appeared much too high in terms of the partners' own investment standards.
• But since they regarded the company as a sort of "family business," they continued to maintain a substantial ownership of the shares despite the spectacular price rise.
• A large number of participants in their funds did the same, and they became millionaires through their holding in this one enterprise, plus later-organized affiliates.

Ironically enough, the aggregate of profits accruing from this single investment decision far exceeded the sum of all the others realized through 20 years of wide-ranging operations in the partners' specialized fields, involving much investigation, endless pondering, and countless individual decisions.

Are there morals to this story of value to the intelligent investor?

• An obvious one is that there are several different ways to make and keep money in Wall Street.
• Another, not so obvious, is that one lucky break, or one supremely shrewd decision - (can we tell them apart?) - may count for more than a lifetime of journeyman efforts.
• But behind the luck, or the crucial decision, there must usually exist a background of preparation and disciplined capacity.
• One needs to be sufficiently established and recognized so that these opportunities will knock at his particular door.
• One must have the means, the judgment, and the courage to take advantage of them.

Of course, we cannot promise a like spectacular experience to all intelligent investors who remain both prudent and alert through the years. We are not going to end with J.J. Raskob's slogan that we made fun of at the beginning: "Everybody can be rich."

• But interesting possibilities abound on the financial scene, and the intelligent and enterprising investor should be able to find both enjoyment and profit in this three-ring circus.
• Excitement is guaranteed.

Ref: Intelligent Investor by Benjamin Graham

Commentary:

Successful investing is about managing risk, not avoiding it.

At first glance, when you realize that Graham put 25% of his fund into a single stock, you might think he was gambling rashly with his investors' money. But then, when you discover that Graham had painstakingly established that he could liquidate GEICO for at least what he paid for it, it becomes clear that Graham was taking very little financial risk. But he needed enormous courage to take the psychological risk of such a big bet on so unknown a stock.

(Graham's anecdote is also a powerful reminder that those of us who are not as brilliant as he was must always diversify to protect against the risk of putting too much money into a single investment. When Graham himself admits that GEICO was a "lucky break," that's a signal that most of us cannot count on being able to find such a great opportunity. To keep investing from decaying into gambling, you must diversify.)

"Investors don't like uncertainty."

But investors have never liked uncertainty - and yet it is the most fundamental and enduring condition of the investing world. It always has been, and it always will be.

At heart, "uncertainty" and "investing" are synonyms.

In the real world, no one has ever been given the ability to see that any particular time is the best time to buy stocks.

Without a saving faith in the future, no one would ever invest at all. To be an investor, you must be a believer in a better tomorrow.