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to people who think beta measures risk, the cheaper price would have made it look riskier. This is truly Alice in Wonderland. I have never been able to figure out why it’s riskier to buy $400 million worth of properties for $40 million than $80 million. And, as a matter of fact, if you buy a group of such securities and you know anything at all about business valuation, there is essentially no risk in buying $400 million for $80 million, particularly if you do it by buying ten $40 million piles for $8 million each. Since you don’t have your hands on the $400 million, you want to be sure you are in with honest and reasonably competent people, but that’s not a difficult job.

You also have to have the knowledge to enable you to make a very general estimate about the value of the underlying businesses. But you do not cut it close. That is what Ben Graham meant by having a margin of safety. You don’t try and buy businesses worth $83 million for $80 million. You leave yourself an enormous margin. When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000-pound trucks across it. And that same principle works in investing.

In conclusion, some of the more commercially minded among you may wonder why I am writing this article. Adding many converts to the value approach will perforce narrow the spreads between price and value. I can only tell you that the secret has been out for 50 years, ever since Ben Graham and Dave Dodd wrote Security Analysis, yet I have seen no trend toward value investing in the 35 years that I’ve practiced it. There seems to be some perverse human characteristic that likes to make easy things difficult. The academic world, if anything, has actually backed away from the teaching of value investing over the last 30 years. It’s likely to continue that way. Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace, and those who read their Graham & Dodd will continue to prosper.

Tables 1–9 follow:

TABLE 2 Tweedy, Browne Inc.

TABLE 3 Buffett Partnership, Ltd

TABLE 4 Sequoia Fund, Inc.

TABLE 5 Charles Munger

TABLE 6 Pacific Partners, Ltd.

2. Important Rules Concerning Taxability of Investment Income and Security Transactions (in 1972)

Editor’s note: Due to extensive changes in the rules governing such transactions, the following document is presented here for historical purposes only. When first written by Benjamin Graham in 1972, all the information therein was correct. However, intervening developments have rendered this document inaccurate for today’s purposes. Following Graham’s original Appendix 2 is a revised and updated version of “The Basics of Investment Taxation,” which brings the reader up-to-date on the relevant rules.

Rule 1—Interest and Dividends

Interest and dividends are taxable as ordinary income except (a) income received from state, municipal, and similar obligations, which are free from Federal tax but may be subject to state tax, (b) dividends representing a return of capital, (c) certain dividends paid by investment companies (see below), and (d) the first $100 of ordinary domestic-corporation dividends.

Rule 2—Capital Gains and Losses

Short-term capital gains and losses are merged to obtain net short-term capital gain or loss. Long-term capital gains and losses are merged to obtain the net long-term capital gain or loss. If the net short-term capital gain exceeds the net long-term capital loss, 100 per cent of such excess shall be included in income. The maximum tax thereon is 25% up to $50,000 of such gains and 35% on the balance.

A net capital loss (the amount exceeding capital gains) is deductible from ordinary income to a maximum of $1,000 in the current year and in each of the next five years. Alternatively, unused losses may be applied at any time to offset capital gains. (Carry-overs of losses taken before 1970 are treated more liberally than later losses.)

Note Concerning “Regulated Investment Companies”

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