The Intelligent Investor_ The Definitive Book on Value Investing - Benjamin Graham [99]
Several of the circumstances surrounding the “performance” phenomenon caused ominous headshaking by those of us whose experience went far back—even to the 1920s—and whose views, for that very reason, were considered old-fashioned and irrelevant to this (second) “New Era.” In the first place, and on this very point, nearly all these brilliant performers were young men—in their thirties and forties—whose direct financial experience was limited to the all but continuous bull market of 1948–1968. Secondly, they often acted as if the definition of a “sound investment” was a stock that was likely to have a good rise in the market in the next few months. This led to large commitments in newer ventures at prices completely disproportionate to their assets or recorded earnings. They could be “justified” only by a combination of naïve hope in the future accomplishments of these enterprises with an apparent shrewdness in exploiting the speculative enthusiasms of the uninformed and greedy public.
This section will not mention people’s names. But we have every reason to give concrete examples of companies. The “performance fund” most in the public’s eye was undoubtedly Manhattan Fund, Inc., organized at the end of 1965. Its first offering was of 27 million shares at $9.25 to $10 per share. The company started out with $247 million of capital. Its emphasis was, of course, on capital gains. Most of its funds were invested in issues selling at high multipliers of current earnings, paying no dividends (or very small ones), with a large speculative following and spectacular price movements. The fund showed an overall gain of 38.6% in 1967, against 11% for the S & P composite index. But thereafter its performance left much to be desired, as is shown in Table 9-2.
The portfolio of Manhattan Fund at the end of 1969 was unorthodox to say the least. It is an extraordinary fact that two of its largest investments were in companies that filed for bankruptcy within six months thereafter, and a third faced creditors’ actions in 1971. It is another extraordinary fact that shares of at least one of these doomed companies were bought not only by investment funds but by university endowment funds, the trust departments of large banking institutions, and the like.* A third extraordinary fact was that the founder-manager of Manhattan Fund sold his stock in a separately organized management company to another large concern for over $20 million in its stock; at that time the management company sold had less than $1 million in assets. This is undoubtedly one of the greatest disparities of all times between the results for the “manager” and the “managees.”
A book published at the end of 19692 provided profiles of nineteen men “who are tops at the demanding game of managing billions of dollars of other people’s money.” The summary told us further that “they are young…some earn more than a million dollars a year…they are a new financial breed…they all have a total fascination with the market…and a spectacular knack for coming up with winners.” A fairly good idea of the accomplishments of this top group can be obtained by examining the published results of the funds they manage. Such results are available for funds directed by twelve of the nineteen persons