The Snowball_ Warren Buffett and the Business of Life - Alice Schroeder [80]
After this episode, Columbia’s Dean Keppel recommended Graham for a job at the brokerage house Newburger, Henderson & Loeb. Graham said of Wall Street, “I knew it only by hearsay and in novels as a place of drama and excitement. I felt the urge to participate in its mysterious rituals and momentous events.”
He started in 1914 on the bottom rung of the Wall Street ladder, earning $12 a week as a runner. Then he worked as an assistant board boy, scurrying to and fro in a customer’s room, changing stock prices on a chalkboard. Graham parlayed these jobs into a career through a classic Wall Street maneuver: He did research on the side, until one day a floor broker gave a report he had written—negatively appraising the bonds of the Missouri Pacific Railroad—to a partner at Bache & Company, which hired him as a statistician.7 Later, he returned to Newburger, Henderson & Loeb as a partner, where he remained until 1923. Then, a group of financial backers, including members of the Rosenwald family (early partners in Sears), lured him away by providing him with starting capital of $250,000, which enabled him to go out on his own.
Graham closed this business in 1925 when he and his backers disagreed over his compensation, and established the “Benjamin Graham Joint Account” on January 1, 1926, with $450,000 from clients and his own money. Shortly afterward, Jerome Newman, the brother of one of his clients, offered to make an investment in the firm and join Graham as a partner at no salary until he learned the business and added value. Graham, however, insisted on paying him, modestly at first, and Newman brought to the partnership a broad general knowledge of business as well as management skills.
In 1932, Graham wrote a series of articles in Forbes, “Is American Business Worth More Dead Than Alive?” in which he chastised company managements for sitting on troves of cash and investments, and investors for overlooking this value, which was not reflected in the prices of stocks. Graham knew how to dislodge the value, but his problem was capital. Through its stock-market losses, the firm’s account was down from $2.5 million to $375,000.*13 Graham felt responsible for recouping his partners’ losses, but that meant he would have to more than triple their money. It would take some doing even to keep the Joint Account alive. Jerry Newman’s father-in-law saved it by putting in $50,000. And by December 1935, Graham did triple the money, and earned the losses back.
For tax reasons, in 1936 Graham and Newman reorganized the Joint Account into two businesses—Graham-Newman Corporation, and Newman & Graham.8 Graham-Newman charged a fixed fee and had issued shares to the public which now traded on an exchange. Newman & Graham was a “hedge fund,” or private partnership with a limited number of sophisticated partners, that paid Graham and Newman based on their performance as managers.
The two men remained partners for thirty years, although in his memoir, Graham cited Jerry Newman’s “lack of amiability,” his demanding, impatient, and fault-finding personality, and his inclination to be “too tough” in negotiation. Newman, said Graham, was “far from popular, even among his friends, of whom he had many,” and “had numerous quarrels with close associates,” which he always made up in the end. He and Graham got along because of Graham’s protective coating; other people’s behavior never seemed to disturb Graham’s equanimity.
The one exception to this was Graham’s penchant for taking on established business figures in a fight. Through diligent research digging through a report published by the Interstate Commerce Commission, he had discovered that Northern Pipeline, an oil transmission company whose stock sold for $65, owned railroad bonds worth $95 per share in addition to its pipeline assets. However, the Rockefeller Foundation, which controlled the stock, was doing nothing to release the value of the railroad bonds to shareholders. The stock traded at a depressed price that did not reflect the value of the bonds, so Graham began quietly accumulating