Way before Amazon, Apple, and Google there was the Computing-Tabulating-Recording Co (CTR). CTR had the hippest new tech in town.
The merging of four companies combined together into one in 1911, put time clocks, punch card equipment, and weighing scales (and a few other bits of new tech) all under one roof.
A few years later, a budding young investor on Wall Street felt CTR was a worthy recommendation:
In 1915, while just a beginner on Wall Street, I suggested that the firm recommend a low-price stock, the Computing-Tabulating-Recording Co. But my employer, a conservative fellow, pointed out that the company’s bonds weren’t covered by its assets. He said, ‘How can you touch such a speculative stock?’ And I returned to my desk a very chastised young man. Years later the public company changed its name to IBM.”
CTR, now IBM, was the “Amazon” of its time. Graham recommended what became IBM when it was a measly $4 million market cap stock.
This is about the time everyone starts asking, “What if?” What if Graham bought it then? What if you bought Apple at its IPO? Or Amazon?
These questions get played out time and again whenever a popular company hits an all-time high. The headlines like “If You Put $1,000 in ________ at the IPO You’d be a Zillionaire!” make it seem so easy.
That’s because it ignores the plot of the story. It tells us the starting price and the ending price but ignores the crazy adventure in between.
Graham explains just how difficult that adventure is:
He was wrong about the stock. But he was right in terms of an overall investment policy. Look at what could happen. A man could buy a stock like that at, say, $40 a share, and it goes to $100. Then people would say, ‘Don’t be a fool. Take the profit. Trees don’t grow to heaven, etc., etc.’ So he sells out, and then spends the rest of his life watching IBM go up and up, while looking vainly for another IBM. To make a fortune in one stock you almost have to be an insider. For mere traders, there are very, very few IBMs. That’s the vital point.
Hindsight plays tricks on us.
First, as Graham points out, holding on is hard. To hold onto a stock over a 10 or 20 year period, with a highly volatile price and the nagging urge to take profits, is a feat of endurance. Hindsight makes it seem like a walk in the park.
But it’s more than just holding on. What seems obvious in hindsight is nearly impossible to measure or even guess at accurately at that moment in time.
Was it obvious in 1915 that CTR would become the dominant computer company called IBM?
No more obvious that there would be a second coming of Steve Jobs and it would create the Apple we know today. Or that an online bookstore would eventually sell everything under the sun and become the leader in web services, by funneling every penny it earned into growth and R&D.
Because high growth companies attract competition. For every Amazon, there are dozens of companies that see their growth falter as competition and overexpansion eat into their share of growth.
Because accurately estimating future earnings growth is hard. It’s especially hard when investors discount the impact of future competition. And even if the growth estimates are close, estimating what the market will do is equally hard.
You’re introducing factors which may be real but which are very difficult to measure. A hot stock, like a hot stove, should be handled with care…
Probably the largest aggregate losses are suffered by people who invest overenthusiastically in a basically sound company. I favor companies selling at about ten times average earnings. And I would add that when the multiplier moves beyond, say, 35 times earnings — even for the best companies — I think the buyer is giving hostage to fortune. That is, he may be looking too far into the future to be on sound ground today. Take the fall of IBM from 387 to 219. The market didn’t change its view of the company, nor even of its long-term prospects. It simply lost confidence in its own multiplier. But the fall was enormous, way over $10 billion in market value. Heavy, heavy losses for somebody.
Ironically, Graham discovered his “next IBM” in a little-known company called GEICO. He bought GEICO in 1948 only to watch it soar over 200 times the original price. He got involved at the start and held on.
Our experience was contrary to everything we preached. But it was an exceptional experience.
Situations like this are almost impossible to identify. the ones that seemed the easiest to pinpoint in the Fifties, the airlines, the computer companies, turned out to be full of pitfalls as investments.
In the postscript to The Intelligent Investor (revised 4th edition) he shared the important morals to his story:
An obvious one is that there are several different ways to make and keep money in Wall Street. Another, not so obvious, is that one lucky break, or one supremely shrewd decision — can we tell them apart? — may count for more than a lifetime of journeyman efforts. But behind the luck, or the crucial decision, there must usually exist a background of preparation and disciplined capacity. One needs to be sufficiently established and recognized so that these opportunities will knock at his particular door. One must have the means, the judgment, and the courage to take advantage of them.
In the end, the deal with GEICO was turned down by several other firms before it was placed in front of Graham. And the deal was saved by “dumb luck” (Graham’s words) after almost falling through because Graham’s partner wanted certain assurances. In the end, he paid a “moderate price” and treated it like a family business. And one more thing, the deal was for 50% of GEICO and accounted for 20% of the Graham-Neuman portfolio.
Sometimes you get lucky. Most of the time you don’t. Because it’s hard to be that lucky consistently.
Take Your Dreams Elsewhere – Forbes 1972
The Stock Market is Like a Pendulum – Forbes 1975
The Intelligent Investor
Ben Graham on Investing, Speculating, and Thinking in Probabilities
Ben Graham on the Risk of Bull Market Optimism