The Intelligent Investor_ The Definitive Book on Value Investing - Benjamin Graham [268]
* Graham’s argument is no longer valid, and today’s investors can safely skip over this passage. Shareholders no longer need to worry about “having to break up” a stock certificate, since virtually all shares now exist in electronic rather than paper form. And when Graham says that a 5% increase in a cash dividend on 100 shares is less “probable” than a constant dividend on 105 shares, it’s unclear how he could even calculate that probability.
† Subscription rights, often simply known as “rights,” are used less frequently than in Graham’s day. They confer upon an existing shareholder the right to buy new shares, sometimes at a discount to market price. A shareholder who does not participate will end up owning proportionately less of the company. Thus, as is the case with so many other things that go by the name of “rights,” some coercion is often involved. Rights are most common today among closed-end funds and insurance or other holding companies.
* The administration of President George W. Bush made progress in early 2003 toward reducing the problem of double-taxation of corporate dividends, although it is too soon to know how helpful any final laws in this area will turn out to be. A cleaner approach would be to make dividend payments tax-deductible to the corporation, but that is not part of the proposed legislation.
1 Benjamin Graham, The Intelligent Investor (Harper & Row, New York,1949), pp. 217, 219, 240. Graham explains his reference to Jesus this way: “In at least four parables in the Gospels there is reference to a highly critical relationship between a man of wealth and those he puts in charge of his property. Most to the point are the words that “a certain rich man” speaks to his steward or manager, who is accused of wasting his goods: ‘Give an account of thy stewardship, for thou mayest be no longer steward.’ (Luke, 16:2).” Among the other parables Graham seems to have in mind is Matt., 25:15–28.
2 Benjamin Graham, “A Questionnaire on Stockholder-Management Relationship,” The Analysts Journal, Fourth Quarter, 1947, p. 62. Graham points out that he had conducted a survey of nearly 600 professional security analysts and found that more than 95% of them believed that shareholders have the right to call for a formal investigation of managers whose leadership does not enhance the value of the stock. Graham adds dryly that “such action is almost unheard of in practice.” This, he says, “highlights the wide gulf between what should happen and what does happen in shareholder-management relationships.”
3 Graham and Dodd, Security Analysis (1934 ed.), p. 508.
4 The Intelligent Investor, 1949 edition, p. 218.
5 1949 edition, p. 223. Graham adds that a proxy vote would be necessary to authorize an independent committee of outside shareholders to select “the engineering firm” that would submit its report to the shareholders, not to the board of directors. However, the company would bear the costs of this project. Among the kinds of “engineering firms” Graham had in mind were money managers, rating agencies and organizations of security analysts. Today, investors could choose from among hundreds of consulting firms, restructuring advisers, and members of entities like the Risk Management Association.
6 Tabulations of voting results for 2002 by Georgeson Shareholder and ADP’s Investor Communication Services, two leading firms that mail proxy solicitations to investors, suggest response rates that average around 80% to 88% (including proxies sent in by stockbrokers on behalf of their clients, which are automatically voted in favor of management unless the clients specify otherwise). Thus the owners of between 12% and 20% of all shares are not voting their proxies. Since individuals own only 40% of U.S. shares by market value, and most institutional investors like pension funds and insurance companies are legally bound to vote on proxy issues, that means that roughly a third of all individual