Surviving the Great Crash

The Benjamin Graham joint account ended 1928 up 60% (the Dow had risen 51% for the year), and this after paying Ben’s personal share which itself amounted to $600,000. The crash of 1929 put paid to a proposal made to Ben to manage a $25 Million investment trust company, but nevertheless he found himself busy enough with the joint account.

The market started to drop steeply in the final months of 1929. The joint account had several arbitrage positions that were made up of long holdings in preferred shares, and short positons in the equivalent common stock. The idea was that in a weak market, the common stock would drop faster than the preferred so the hedge could be unwound profitably. In late 1929, Ben found himself covering a lot of short positons, but not selling the related preferred stock because he thought it too low-priced.

In 1930 there was a slight recovery up until April, and then the market started to fall again. Still holding the preferreds on margin, Ben had his worst ever year, losing more than the indices from 1929 to 1931, and realizing he had to reduce the margin debt from the 44% at the beginning of this bear period to much less in order to keep the account alive. Fortunately he succeeded at this task and the account survived the great bear market more or less intact, actually doing much better than the indices in 1932.

Parallel to this, Ben had in 1928 started working at Columbia teaching a course on security analysis which was, as could be expected, eminently practical. The course was also extremely popular, and those who attended or were connected with it in some way include such legendary value investors as Warren Buffet, Bill Ruane (later to manage the Sequoia Fund), Walter J Schloss, Irving Khan, Charles Brandes, and David Dodd. It could be said that Ben’s classes, which continued until his retirement from Wall Street in 1956 actually made the reputation of Columbia Business School

Presumably the instruction Ben gave in these classes over the years led him, in 1932, to begin working on the textbook Security Analysis in collaboration with David Dodd. This weighty tome was first published in 1934 and has sold steadily ever since, being currently on a sixth edition. Security Analysis literally laid down the foundation and rules of value investing at the time and many of the tenets within are still valid today although – later in his life – Ben no longer advocated what he had written as being still valid partly due to the markets becoming more efficient and stocks moving more as a group than as individual entities.

On the business side, the Joint Account eventually morphed into the Graham-Newman Corporation at the start of 1936, mainly for tax reasons, and this corporate arrangement between Ben Graham and Jerome Newman was to continue until Ben retired in 1956 and moved to California.