Leithner Letter No. 1
26 January 2000

Eight Investment Rules That Have Stood the Test of Time

Leithner & Co. adheres strictly to the traditional “value” approach to investment pioneered by in the 1930s by Professor Benjamin Graham of the Columbia University Business School. Although it has been practiced with enormous success since then by his colleagues and students, including Warren Buffett, value investing is distinctly unfashionable today.

It shouldn’t be. Its cautious and constructively sceptical approach, emphasis on the analysis of financial statements and disdain for fads and fashions provides (I believe) a sound basis for investment in uncertain times.

And these are uncertain times. Most investors see naught but blue skies and calm seas ahead, and in some quarters – particularly Internet and other technology sectors – a gold-rush mentality has taken hold. At the same time, however, to a minority of investors the parallels between the Roaring Twenties and the past several years are too close for comfort. At all times, but perhaps particularly in frenetic times such as these, investors should take a step back, check their bearings and review sound principles which underlie the slow but steady accumulation of sustainable wealth.

It is therefore pleasing that Forbes published 8 Investing Rules That Have Stood the Test of Time in its 27 December 1999 edition. It is pleasing because, as acknowledged by Thomas Easton, the article’s author, no fewer than seven of these eight rules are drawn from Ben Graham. It is also reassuring, since these rules (such as “Don’t trust the market to value a stock properly”; “Don’t think that it is easy to beat the market”; “You can’t time the market”; “Base your expectations not on optimism but on arithmetic”; “Buy old public offerings, not new ones”; “Buy cold industries”) lie at the heart of Leithner & Company’s approach to investing.

Three Cheers for Ben Graham

It was a gutsy decision – and as it turned out, one of the most prescient market calls of the twentieth century. In June 1932, only weeks before the nadir of the Great Depression (as measured by Dow Jones Industrial Average), Forbes began a three-part series which made the case that unprecedented bargains existed on Wall Street. At that time, the shares of approximately one in three industrial companies could be bought at less than their per-share net working capital. Many companies, in effect, had $1.00 per share of cash in the bank (to say nothing of plant, equipment, goodwill, talented staff and experienced management); but shareholders, traumatised by the unprecedented severity of the economic slump and the fear of even worse times to come, were ignoring these assets and selling these shares for $0.75 or less. The articles’ author, who had warned that buying many companies’ shares in the euphoria of the late 1920s was more akin to speculating than investing, now stated that some companies’ shares in the despondent early 1930s constituted rock-solid investments (indeed, not until the mid-1970s would shares be available at such attractive prices). The author reminded readers that investment is a matter of both price and value. In the ’20s, overcome with greed, people were prepared to pay any price; and in the ’30s, consumed with fear, they forgot about value. The articles’ author? Professor Benjamin Graham.

Today, when Internet and technology stocks are selling at unprecedented multiples of their earnings, when many of these companies have no earnings and when many investors are convinced that nothing can go wrong, it is salutary to revisit a time when everything that could do wrong did go wrong. Forbes, in its 27 December 1999 edition, has republished these three classic articles by Ben Graham:

Chris Leithner


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