WEBVTT - Interview With Jeff Gramm: Masters in Business (Audio) 0:00:03.120 --> 0:00:06.280 This week on the podcast, I have Jeff Graham. He 0:00:06.640 --> 0:00:10.360 is the author of a really interesting book of which 0:00:10.640 --> 0:00:14.040 I will pull out of my bag right now, and 0:00:14.080 --> 0:00:18.840 the title is Dear Chairman, Boardroom Battles and the Rise 0:00:19.320 --> 0:00:24.400 of Shareholder Activism. UM. Funny story those of you who 0:00:24.440 --> 0:00:27.880 listen to the show regularly. No, I've had the former 0:00:28.800 --> 0:00:32.600 SEC chairman Arthur Levitt as a guest twice, once just 0:00:32.720 --> 0:00:36.320 to talk about Arthur Lever type stuff and another was 0:00:36.360 --> 0:00:39.760 a segment dedicated to changes in regulation. They were both 0:00:39.800 --> 0:00:43.280 really interesting. Anyway, Um, one day I get an email 0:00:43.360 --> 0:00:46.880 from Arthur and he writes, I have an interesting young man. 0:00:47.000 --> 0:00:49.040 You should you should me that he wrote the book 0:00:49.479 --> 0:00:52.599 Dear Chairman. Right, Why does that sound familiar? Turns out 0:00:52.640 --> 0:00:54.520 to the guys in my office had already read it. 0:00:55.040 --> 0:00:57.920 Both of them really liked it, and so I right 0:00:58.000 --> 0:01:02.279 back to Arthur. Yeah, I'm interested. Didn't in speaking to him, 0:01:02.320 --> 0:01:06.440 but full disclosure, you know, in Bail Out Nation, I 0:01:06.560 --> 0:01:09.280 kind of trashed his dad, who happens to be Senator 0:01:09.680 --> 0:01:12.480 Phil Graham, and I've said stuff about his mom in print. 0:01:12.840 --> 0:01:16.319 Nothing ed homin him or anything. Just I've written critically 0:01:16.400 --> 0:01:20.520 about about what they've done professionally, and you know we 0:01:20.600 --> 0:01:24.200 really should is that okay? Is that gonna be a problem? 0:01:24.200 --> 0:01:27.760 Should we disclose that? And author writes back, That's not 0:01:27.800 --> 0:01:31.920 gonna be a problem. Okay, Fine, So instead of sending 0:01:31.920 --> 0:01:36.120 a separate email, Arthur just replies to that email with 0:01:36.319 --> 0:01:41.800 um my comments to Jeff, copies copies, May and um, hey, 0:01:41.840 --> 0:01:44.880 you guys should get together and and talk about the 0:01:44.880 --> 0:01:48.000 book on Masters and Business. And I kind of do 0:01:48.120 --> 0:01:51.440 a you know, a face palm. Oh, Arthur, you really 0:01:51.520 --> 0:01:55.760 don't have the email skills you should, But anyway, um, 0:01:56.240 --> 0:01:59.160 Jeff was a good sport about it, and growing up 0:01:59.200 --> 0:02:03.480 the son of Senator um it wasn't the first time 0:02:03.560 --> 0:02:06.280 someone had had been critical of his dad. So if 0:02:06.320 --> 0:02:09.880 you were at all interested in activist investing or the 0:02:10.000 --> 0:02:14.200 history of of value investing, I thought this was really 0:02:14.560 --> 0:02:18.480 interesting conversation. So, with no further ado, here is my 0:02:18.600 --> 0:02:25.800 conversation with Jeff Graham. This is Masters in Business with 0:02:25.880 --> 0:02:30.920 Barry Ridholts on Bloomberg Radio. My guest today is Jeff Graham. 0:02:31.000 --> 0:02:33.720 Let me give you a little background on Mr Graham. 0:02:33.800 --> 0:02:37.080 He is the founder of Bandera Partners, which is a 0:02:37.080 --> 0:02:39.840 hedge fund located here in New York City. He is 0:02:39.880 --> 0:02:43.639 a graduate of the University of Chicago, got his NBA 0:02:43.840 --> 0:02:47.240 from Columbia School of Business, where he is currently an 0:02:47.280 --> 0:02:50.760 adjunct professor. He is also on the boards of several 0:02:50.800 --> 0:02:55.200 publicly traded companies. He comes from an interesting family. He 0:02:55.360 --> 0:02:58.720 is the son of Senator Phil Graham and Wendy Graham, 0:02:58.760 --> 0:03:01.720 and most interesting to me, he is the author of 0:03:01.760 --> 0:03:05.600 the book Dear Chairman, Boardroom Battles and the Rise of 0:03:05.720 --> 0:03:10.480 Shareholder Activism. Jeff Graham, Welcome to Bloomberg. Thanks for having me. 0:03:10.560 --> 0:03:13.040 I'm a big fan of the show. Well, that's terrific. 0:03:13.120 --> 0:03:15.880 Thank you, And I enjoyed your book. I'm like halfway 0:03:15.880 --> 0:03:18.400 through it and and really enjoyed it. Several people in 0:03:18.480 --> 0:03:22.000 my office read it and recommended it. I love the 0:03:22.040 --> 0:03:24.480 origin story you tell in the very beginning of the 0:03:24.520 --> 0:03:29.760 book of William Schlensky, who got two shares of stock 0:03:29.960 --> 0:03:33.840 in the Chicago Cubs, and that led essentially to the 0:03:33.960 --> 0:03:36.840 rise of shareholder activism. For people who may not be 0:03:36.920 --> 0:03:40.080 familiar with the history of the Chicago Cubs, what happened 0:03:40.160 --> 0:03:43.600 with Mr Schlensky? Sure, well, so Bill Slensky got two 0:03:43.600 --> 0:03:45.880 shares in the Cubs as a birthday gift. How old 0:03:45.960 --> 0:03:47.880 was he at the time, I think he was eighteen 0:03:47.960 --> 0:03:51.400 or nineteen, and he decided like, look, you know, we've 0:03:51.440 --> 0:03:54.480 all been in, you know, enduring these these years of 0:03:54.600 --> 0:03:58.440 terrible baseball, and he thought it, you know, was driven 0:03:58.520 --> 0:04:01.040 by the fact that they did not have lights on 0:04:01.040 --> 0:04:03.960 Wrigley Field. So this is this is in the forties 0:04:04.040 --> 0:04:07.760 and sixties, most of Major League Baseball had moved to 0:04:08.000 --> 0:04:12.040 night games that were really popular. Crosstown rival White Sox, 0:04:12.400 --> 0:04:15.600 we're getting quadruple Oh yeah, they were getting like, you know, 0:04:15.760 --> 0:04:21.720 fifteen eighteen thousand people at night at the game. Yeah, 0:04:21.720 --> 0:04:24.520 because they're like on a Wednesday afternoon, you know, people 0:04:24.560 --> 0:04:28.240 have to work and so um. He thought, well, you 0:04:28.279 --> 0:04:32.839 know this is a feeding the poor performance of the Cubs, 0:04:33.080 --> 0:04:36.279 and um u um. He suited them as a shareholder, 0:04:36.720 --> 0:04:39.960 saying that, you know, you're neglecting your your shareholders by 0:04:40.000 --> 0:04:43.760 refusing to put lights onto onto Wrigley Field. So what 0:04:43.839 --> 0:04:47.240 was the outcome of the suit He lost. Basically, the 0:04:47.279 --> 0:04:50.640 defense of the Wriggley's was that, look, I mean, you know, 0:04:50.839 --> 0:04:53.480 we care about the shareholders, but we care about the 0:04:54.080 --> 0:04:59.120 stakeholders to including the community. So the business judgment rule 0:04:59.320 --> 0:05:02.799 basically married the day. Yeah, and which meant that they're 0:05:02.920 --> 0:05:05.839 they're not responsible for being correct. It just has to 0:05:05.839 --> 0:05:09.919 be an exercise of their judgment right or wrong. Well like, 0:05:09.960 --> 0:05:12.080 and they were very clear that they thought that it 0:05:12.120 --> 0:05:15.239 would be extremely bad for the neighborhood of Wrigley Field 0:05:15.400 --> 0:05:17.800 if they put lights on on Wrigley Field, and that 0:05:17.880 --> 0:05:20.520 the board you know, made the judgment that that was 0:05:20.560 --> 0:05:23.120 the right thing to do. But in the long run, 0:05:23.240 --> 0:05:26.720 economics sell wins, and eventually they had to, like the 0:05:26.880 --> 0:05:29.200 league essentially forced them to put those lights up. So 0:05:29.520 --> 0:05:33.719 shareholder activism goes long before the nineteen sixties. Use the 0:05:34.040 --> 0:05:38.720 example of the Dutch East India Company and shareholders were 0:05:38.800 --> 0:05:42.040 angry about self dealing about the directors. How did that 0:05:42.080 --> 0:05:45.919 manifest itself? Yeah, Well, I mean, like I think through history, 0:05:46.600 --> 0:05:51.400 like you've seen, uh, you know, will owners metal and 0:05:51.440 --> 0:05:54.960 then you know, like you do have this inherent problem 0:05:55.000 --> 0:05:59.120 in the system, the principal agency conflicts. So you have 0:05:59.160 --> 0:06:02.880 people running the management running a business essential in behalf 0:06:02.920 --> 0:06:06.040 of the owners, and that creates a little bit of 0:06:06.080 --> 0:06:10.719 conflict for the managers to enrich themselves at the owner's expense. Well, 0:06:10.760 --> 0:06:14.000 and when you think about the principal agent problem in 0:06:14.040 --> 0:06:18.520 this particular case, it's extremely thorny because the principle are 0:06:18.560 --> 0:06:22.080 the shareholders and that's a collective group that often have 0:06:22.279 --> 0:06:26.320 you know, differing in incentives and goals. And the agent 0:06:27.040 --> 0:06:29.919 is a board of directors where they're often you know, 0:06:30.000 --> 0:06:33.600 they're not that engaged in the business, like the information 0:06:33.640 --> 0:06:36.080 that that they get about the business is fed to 0:06:36.120 --> 0:06:39.520 them by management. You know. So it's a principle and 0:06:39.680 --> 0:06:43.640 agent problem. And there's also some inherent issues with the 0:06:43.680 --> 0:06:46.520 principle and the nature of the agent. So a lot 0:06:46.600 --> 0:06:48.800 of the letters that you published in the book have 0:06:49.080 --> 0:06:52.000 never been published before. How did you manage to track 0:06:52.080 --> 0:06:54.800 these things down? Yeah? I mean, you know, the the 0:06:54.880 --> 0:06:58.480 kind of hook of the book is it's all case studies, 0:06:59.000 --> 0:07:02.200 and each of the case his comes with an original letter. 0:07:02.680 --> 0:07:06.240 And so for lots of them, I knew the letter existed. 0:07:06.360 --> 0:07:09.080 Like in the in the Benjamin Graham chapter that's the 0:07:09.120 --> 0:07:11.880 first chapter in the book, he ran a proxy fight 0:07:11.920 --> 0:07:15.200 against the Northern Pipeline Company, and he had written, you know, 0:07:15.240 --> 0:07:18.520 there's a whole chapter about that proxy fight in his memoir, 0:07:19.040 --> 0:07:21.920 And so I knew the letter was out there. Um, 0:07:21.960 --> 0:07:24.280 it's just a question of of trying to find it. 0:07:24.320 --> 0:07:27.120 And like I talked to his family and his biographers 0:07:27.240 --> 0:07:30.440 and um, and no one had it. And ultimately I 0:07:30.560 --> 0:07:33.080 found it at the Rockefeller Archives, but lots of them. 0:07:33.080 --> 0:07:35.400 I just asked, I mean, like, you know, with Warren Buffett, 0:07:35.480 --> 0:07:38.960 like I knew from the Snowball that he wrote the 0:07:39.040 --> 0:07:42.720 letter Snowball about Buffett. Yeah, he famously wrote a letter 0:07:42.840 --> 0:07:45.960 to American Express in the nineteen sixties, And so I 0:07:46.000 --> 0:07:48.600 just wrote, Buffett, just explain the concept of the book, 0:07:48.600 --> 0:07:50.320 and can you share the letter. And I got to 0:07:50.440 --> 0:07:52.680 work one day and there's a there's an envelope with 0:07:52.720 --> 0:07:55.320 a letter in it, and and I want to take 0:07:55.480 --> 0:07:57.560 for that to get back to you from from the request, 0:07:57.680 --> 0:08:00.680 well weeks, you know, two weeks. There are lots of 0:08:00.720 --> 0:08:03.760 interesting stories about people making requests about the Buffett and 0:08:04.120 --> 0:08:07.960 things magically show up. It's uh, it's fascinating. So so 0:08:08.000 --> 0:08:10.720 what motivated you to write this book? What was your 0:08:11.280 --> 0:08:14.840 drive to to put this together? Well, I mean, I 0:08:14.920 --> 0:08:18.000 love writing, and I've always you know, thought that that 0:08:18.080 --> 0:08:21.080 I had like the writing chops to do a book, 0:08:22.160 --> 0:08:24.120 but really with this one, you know, I'm a full 0:08:24.120 --> 0:08:26.240 time fund manager, like I didn't have the time. I 0:08:26.680 --> 0:08:30.040 had two little kids. You know, when I got the 0:08:30.160 --> 0:08:33.120 letter from Warren Buffett, like it kind of you know, 0:08:33.240 --> 0:08:36.559 turned this idea that I had vaguely had, I'll write, like, 0:08:36.600 --> 0:08:38.599 I'll see if you'll do something. And then all of 0:08:38.640 --> 0:08:40.640 a sudden, like I had this up pressure of like, 0:08:40.679 --> 0:08:43.040 well I had this thing. I kind of burned a 0:08:43.040 --> 0:08:46.040 hole in my pocket. Like I got the Buffet letter 0:08:46.080 --> 0:08:49.199 and the Ross Paro letter like within weeks of each other, 0:08:49.360 --> 0:08:52.880 and you know, yeah, I mean the Parro and is 0:08:52.920 --> 0:08:55.160 a is a fabulous you know letter. It had not 0:08:55.240 --> 0:08:57.080 been published, and I just thought, well, I have to 0:08:57.080 --> 0:08:59.520 do this. Now. Let's talk a little bit about no relation. 0:08:59.679 --> 0:09:03.400 Ben Graham spelled with two a's and and one m. 0:09:03.520 --> 0:09:07.160 People think about Ben Graham and they obviously think about 0:09:07.200 --> 0:09:11.080 the intelligent investor and value investing in the whole school 0:09:11.120 --> 0:09:15.200 of thought that that comes out of that. Uh, But 0:09:15.360 --> 0:09:17.760 he also turned out to be a bit of an 0:09:17.800 --> 0:09:21.280 activist investor. Tell us about that, well, I mean a 0:09:21.320 --> 0:09:25.120 lot of the stocks that he bought were exceptionally cheap 0:09:25.320 --> 0:09:27.440 on a balance sheet basis, and he writes about that, 0:09:27.520 --> 0:09:29.680 you know that he likes these you know, net nets 0:09:29.679 --> 0:09:33.360 where like the cash and and you know, the current 0:09:33.360 --> 0:09:38.280 assets exceed all the liability classic value investing by ten 0:09:38.360 --> 0:09:41.760 dollars for eight bucks over the long run. Yeah, and 0:09:41.800 --> 0:09:46.000 I mean ultimately when you find those situations, like you know, 0:09:46.080 --> 0:09:48.319 the market like it's not always done, like a lot 0:09:48.360 --> 0:09:52.520 of times it has that valuation because of a governance problem. 0:09:52.559 --> 0:09:56.360 And very early in his career he found the Northern 0:09:56.400 --> 0:09:59.360 Pipeline company that's in my book, where like it was 0:09:59.559 --> 0:10:02.720 a trade in the mid sixties, and he discovered that, 0:10:02.800 --> 0:10:06.400 you know, they had over ninety dollars per share in 0:10:06.480 --> 0:10:09.440 liquid bonds. In other words, they held securities that were 0:10:09.440 --> 0:10:12.360 worth more on a pre share basis, you know, than 0:10:12.400 --> 0:10:17.079 the whole company. Sounds a little bit like Yahoo today, Yeah, exactly. 0:10:17.679 --> 0:10:20.320 And um, you know, like with like with Yahoo, there's 0:10:20.320 --> 0:10:22.840 a discount because of the tax problem, but there was 0:10:22.880 --> 0:10:25.559 also in that stock and lots of other stocks, there 0:10:25.640 --> 0:10:30.560 was a governance discount. And like with Northern Pipeline, he thought, well, 0:10:30.559 --> 0:10:33.640 this is easy. I'll go explain to this company, you 0:10:34.160 --> 0:10:38.160 have all this cash, just like return it to the shareholders, 0:10:38.200 --> 0:10:41.079 like you know, we'll all retain our ownership and your 0:10:41.120 --> 0:10:44.600 good company and we'll go from there, and they you know, 0:10:44.679 --> 0:10:47.840 they showed him the door. And let's let's you say 0:10:47.920 --> 0:10:50.360 they the some of the folks who were on the 0:10:50.400 --> 0:10:53.440 other side of the table included some pretty big names 0:10:53.440 --> 0:10:56.160 in the history of finance. Yeah. Well, the company was 0:10:56.200 --> 0:10:59.720 a part of you know, like the Standard Oil Company, 0:10:59.720 --> 0:11:03.040 which is owned by by you know, the Rockefellers, small 0:11:03.080 --> 0:11:05.800 little group that hadn't pasked a couple of a couple 0:11:05.800 --> 0:11:07.960 of dollars and a couple of shares of stock. Yeah, 0:11:08.000 --> 0:11:10.920 so when they broke apart, like the monopoly, you know, 0:11:11.000 --> 0:11:13.120 like they had a whole bunch of public companies. They 0:11:13.160 --> 0:11:16.680 were there were eight pipeline companies and you know, by 0:11:16.760 --> 0:11:20.200 the enties when Ben Graham began to poke around all 0:11:20.240 --> 0:11:23.880 of these things like we're very over capitalized, had these 0:11:23.880 --> 0:11:26.920 boards that like, we're not that engaged. And then their 0:11:26.920 --> 0:11:30.679 biggest holder is the Rockefeller Foundation, who at the time 0:11:30.760 --> 0:11:33.880 had a policy like to not get involved in the 0:11:33.920 --> 0:11:38.120 operations of their shareholdings. But but meanwhile, you have this pipeline, 0:11:38.200 --> 0:11:42.400 Northern Pipeline, trading at sixty five So so why couldn't 0:11:42.400 --> 0:11:46.719 Graham just quietly continue to accumulate as much of the 0:11:46.840 --> 0:11:51.400 ninety plus dollar per share company plus the operating company 0:11:51.400 --> 0:11:54.600 at sixty five and and not say anything and assume 0:11:54.679 --> 0:11:58.000 eventually the market would figure it out. Yeah, I mean 0:11:58.040 --> 0:12:01.360 I think that ultimately he thought that he like he 0:12:01.480 --> 0:12:04.560 possibly could do that, but you know, like the answer 0:12:04.640 --> 0:12:07.160 there was for them to return that cash, you know. 0:12:07.320 --> 0:12:09.920 So so you know, so he quietly bought all that 0:12:10.000 --> 0:12:13.600 he could until he reached his position limit and then 0:12:13.679 --> 0:12:16.280 nothing happened. What was his position limit? Well, he was 0:12:16.320 --> 0:12:18.680 a very diversified investor, so he's not going to have 0:12:18.720 --> 0:12:22.960 a concentrated portfolio. That's you would you would think you 0:12:22.960 --> 0:12:25.439 could today, you could raise a fund and just accumulate 0:12:25.800 --> 0:12:29.839 Northern Pipeline at stars with ninety dollars and yeah exactly, 0:12:30.040 --> 0:12:32.760 But like you know, it never was his m to 0:12:33.080 --> 0:12:35.600 like to buy to get control. So is that why 0:12:36.080 --> 0:12:39.160 even when when things worked out with Northern Pipeline, it 0:12:39.160 --> 0:12:42.280 really didn't impact is a fund all that much? Well, 0:12:42.320 --> 0:12:43.880 I mean it did in the sense it was a 0:12:43.880 --> 0:12:47.680 big home run and it helped his returns. It taught 0:12:47.760 --> 0:12:51.000 him about activism and governance and and and he did 0:12:51.160 --> 0:12:54.000 like a lot of activism after that. Like, but ultimately 0:12:54.559 --> 0:12:57.199 it was not like the investors that you see today 0:12:57.280 --> 0:12:59.160 that will have a third of their of their fund 0:12:59.200 --> 0:13:00.719 in one stock and then it's a big home run. 0:13:00.840 --> 0:13:03.559 So so what was the outcome with the Rockefellers in 0:13:03.559 --> 0:13:06.600 the Northern Pipeline. How did they resolve this? We are 0:13:06.640 --> 0:13:09.600 an operating company, plus we have ninety dollars per share 0:13:09.720 --> 0:13:13.760 in marketable security. Well, I mean it was a long slaga. 0:13:13.880 --> 0:13:17.800 So at first, like they basically told him to go away. 0:13:18.280 --> 0:13:20.800 He takes the train all the way out like, uh, 0:13:20.960 --> 0:13:23.160 you know, to Pittsburgh for the annual meeting, and like 0:13:23.200 --> 0:13:25.559 he tells him that he's like prepared like a statement, 0:13:25.559 --> 0:13:28.080 and they tell him, while, you're welcome to come and 0:13:28.080 --> 0:13:30.840 and he gets up to give the statement, and the 0:13:30.920 --> 0:13:33.400 chairman asked, um, you know, would you like to make 0:13:33.440 --> 0:13:35.480 a motion? And he said, so yes, I would like 0:13:36.080 --> 0:13:39.320 like to motion to give my statement. And the chairman asked, well, 0:13:39.440 --> 0:13:42.440 is anyone here uh to second that motion? And he 0:13:42.440 --> 0:13:44.920 didn't bring anyone and so no one seconded the motion. 0:13:44.960 --> 0:13:46.720 He had to go all the way back to Latina 0:13:46.800 --> 0:13:50.360 to New York. But but by doing that they really 0:13:50.400 --> 0:13:53.200 made him angry. And so by the next year he 0:13:53.320 --> 0:13:55.920 was extremely prepared. He ran a whole proxy fight. He 0:13:56.000 --> 0:13:59.839 won the proxy fight. He behind the scenes, through a 0:14:00.080 --> 0:14:03.000 very good letter that's in my book, he you know, 0:14:03.240 --> 0:14:07.560 ultimately convinced the rocket Fellers that the right thing to 0:14:07.640 --> 0:14:10.240 do here was to distribute this cash. And so not 0:14:10.400 --> 0:14:14.000 only did that happen at the Northern Pipeline Company, but 0:14:14.160 --> 0:14:18.400 after this episode, the Rockefellers pushed all of the other 0:14:18.440 --> 0:14:21.520 pipelines to return their excess cash. So he really had 0:14:21.560 --> 0:14:26.960 a significant impact on on shareholder value and activism. I mean, 0:14:27.000 --> 0:14:29.160 I'm not sure, because I do think that all of 0:14:29.160 --> 0:14:31.760 this was very under the radar, Like I mean it 0:14:31.800 --> 0:14:34.280 was not I mean, it wasn't on Twitter. I mean, 0:14:34.280 --> 0:14:37.360 it wasn't even in the newspaper like it's funny, And 0:14:37.440 --> 0:14:40.520 there was no financial press that covered this at all. Yeah, 0:14:40.560 --> 0:14:42.600 So when I did my book, I looked at all 0:14:42.640 --> 0:14:45.280 of the old proxy fights, and you know, there were 0:14:45.320 --> 0:14:48.680 a few like you know, like the Central Leather nineteen 0:14:48.720 --> 0:14:51.800 eleven that like had a very small article that's a 0:14:51.840 --> 0:14:55.960 fascinating story. Also tell us about the Central Leather story. 0:14:56.240 --> 0:14:58.880 Oh well, just that like their whole proxy fight there 0:14:59.680 --> 0:15:01.960 and this got what big news was just for them 0:15:02.000 --> 0:15:07.360 to disclose information better quarterly release your finances. How amazing 0:15:07.480 --> 0:15:09.800 is that that if you went back that far, you 0:15:09.840 --> 0:15:13.440 go back a century, companies didn't feel obligated to say, 0:15:13.520 --> 0:15:16.480 by the way, here here's how much revenue we have, 0:15:16.640 --> 0:15:18.800 and here's how much profit we have, and here's what 0:15:18.800 --> 0:15:22.200 we spent money on. Companies did not even release that now, 0:15:22.400 --> 0:15:25.080 and in the Ben Graham case, it's not clear that 0:15:25.120 --> 0:15:28.960 the that the Rockefellers even knew how cash rich the 0:15:28.960 --> 0:15:32.800 pipeline companies were, and so like it opened their eyes 0:15:32.840 --> 0:15:37.880 to that. So Warren Buffett famously one of Ben Graham's proteges. 0:15:38.120 --> 0:15:40.840 He had a big impact when he was an activist 0:15:41.280 --> 0:15:45.200 in the way companies deal with activists and even how 0:15:45.240 --> 0:15:49.120 their structured legally. What happened with with Buffett, Well, you know, 0:15:49.200 --> 0:15:51.960 so Buffett in his early career, I mean, well, first 0:15:52.000 --> 0:15:54.200 of all, you know, he worked for Ben Graham, and 0:15:54.360 --> 0:15:56.800 you know, so he worked at the Graham Newman shop 0:15:56.880 --> 0:15:59.760 that did lots of proxy fights and did lots of activism. 0:15:59.800 --> 0:16:01.840 And when he began his own fund in in the 0:16:01.840 --> 0:16:05.880 mid nineteen fifties in Omaha, he also did lots of 0:16:05.880 --> 0:16:09.160 buying big stakes in public companies, you know, joining like 0:16:09.240 --> 0:16:13.360 the boards and ultimately breaking apart the companies are driving 0:16:13.440 --> 0:16:16.520 them to you know, improve profits. And so he did 0:16:16.520 --> 0:16:21.440 buy lots of these like declining, mature, undervalued businesses. If 0:16:21.440 --> 0:16:24.760 you look at Berkshire Hathaway, that's effectively what happened there. 0:16:24.800 --> 0:16:28.120 Like it was a terrible like declining business, but it 0:16:28.200 --> 0:16:31.320 was a net net. He bought control of it and 0:16:31.320 --> 0:16:35.520 he ultimately like began to use their cash and they're 0:16:35.560 --> 0:16:39.600 declining cash flow to invest in other businesses. I'm Barry Ridholts. 0:16:39.680 --> 0:16:42.960 You're listening to Masters in Business on Bloomberg Radio. My 0:16:43.040 --> 0:16:45.600 guest today is Jeff Graham. He is the author of 0:16:45.600 --> 0:16:48.760 the book Dear Chairman and which is all about activist 0:16:48.880 --> 0:16:52.920 investing and how things have changed in the world of 0:16:53.000 --> 0:16:57.479 corporate governance. He also is an adjunct professor at Columbia University. 0:16:58.320 --> 0:17:01.720 So you run of funds and you you know what 0:17:01.760 --> 0:17:06.080 it's like to have investors who are looking over your shoulder. 0:17:06.720 --> 0:17:11.160 How do you deal with that in a concentrated portfolio? Yeah, 0:17:11.200 --> 0:17:13.919 I mean, how do I deal with the investors, like, 0:17:14.000 --> 0:17:17.040 you know, in my fund or in our target companies? Both? 0:17:17.119 --> 0:17:19.920 Let's let's let's take both. First, do you have your 0:17:19.920 --> 0:17:23.640 own investors's writing you ye do your chairman like, Yeah, 0:17:23.720 --> 0:17:26.320 I mean, ultimately, I think it probably has a lot 0:17:26.400 --> 0:17:29.399 in common with being a public company CEO in that 0:17:29.640 --> 0:17:33.120 like you have to communicate your strategy, Explain to them 0:17:33.200 --> 0:17:36.600 exactly what you're doing, Explain to them how you think 0:17:36.600 --> 0:17:39.000 about things, and so when things will do go wrong, 0:17:39.040 --> 0:17:41.000 if you have a bad quarter or a bad year, 0:17:41.640 --> 0:17:44.439 you know they can understand it. And I think that 0:17:44.800 --> 0:17:47.760 like that because ultimately an important job of a public 0:17:47.760 --> 0:17:50.320 company CEO two is like you have to like to 0:17:50.440 --> 0:17:54.080 keep your shareholders informed about, you know, how you operate. 0:17:54.119 --> 0:17:57.080 You can't guarantee good results, but you can at least say, 0:17:57.359 --> 0:17:59.560 here's our process, here's what we're doing, and we want 0:17:59.600 --> 0:18:02.440 you to un uderstand and look, I mean, in value investing, 0:18:02.480 --> 0:18:04.400 like you're never going to have a great year every year, 0:18:04.680 --> 0:18:08.400 that's right, because because by definition, you're buying those stubs, 0:18:08.400 --> 0:18:11.560 those unloved things. And just because something's cheap doesn't mean 0:18:11.600 --> 0:18:13.840 it can't get cheaper. It will get cheaper. So you 0:18:13.880 --> 0:18:17.040 wrote yourself a dear chairman letter tell us about that. Yeah, 0:18:17.080 --> 0:18:20.040 my first one. It was um in the early two 0:18:20.080 --> 0:18:22.679 thousand's at my very first job, you know, which was 0:18:23.200 --> 0:18:25.280 like the early years of the hedge fund business, and 0:18:25.359 --> 0:18:27.119 so it was like a little bit of a crazier 0:18:27.600 --> 0:18:30.400 you know, more like the wild West, you know. So 0:18:31.000 --> 0:18:35.840 so the evolution of that is that today, post two thousand, 0:18:35.840 --> 0:18:38.800 there's ten thousand hedge funds, but for a long time 0:18:38.840 --> 0:18:41.159 there was only a handful of funds. There was some 0:18:41.200 --> 0:18:45.440 pretty well known guys, and that exploded around post dot 0:18:45.480 --> 0:18:47.720 com period. I think it's also it's just a more 0:18:47.920 --> 0:18:51.600 mature and process oriented business. I think that when I 0:18:51.640 --> 0:18:54.560 began in it, I was just out of business school. 0:18:54.640 --> 0:18:56.400 I didn't know what I was doing, and I got 0:18:56.440 --> 0:18:58.400 and I mean I wrote a thirt d letter well 0:18:58.440 --> 0:19:00.639 to like a like a pretty big of the company, 0:19:00.920 --> 0:19:04.919 the Denny's Corporation, the Moon's over Miami people, And I 0:19:04.960 --> 0:19:07.399 just think that like that back then it was just like, 0:19:07.480 --> 0:19:09.480 you know, it was a little bit of a of 0:19:09.520 --> 0:19:11.920 a of a crazier time in the business. But they 0:19:12.000 --> 0:19:16.000 had had some problems and they had tried to kind 0:19:16.000 --> 0:19:19.280 of expand their like their lunch and dinner business and 0:19:19.280 --> 0:19:23.080 and had neglected to advertise their breakfast business. It hurt 0:19:23.119 --> 0:19:25.720 their results. And there, I mean I think of Denny's 0:19:25.720 --> 0:19:28.480 and I think of breakfast. Yeah, So how did that 0:19:28.600 --> 0:19:31.240 Did you influence that chain? Are you? Are you the 0:19:31.280 --> 0:19:34.640 reason why we have Denny's Breakfast all day? I think 0:19:34.720 --> 0:19:38.040 I played a role in them. Were not doing a 0:19:38.119 --> 0:19:40.840 restructuring in in the early two thousand's, you know, so 0:19:40.880 --> 0:19:44.119 we basically it was a cheap stock because it was 0:19:44.200 --> 0:19:47.879 highly overleveraged. And like you, I mean, like you rarely 0:19:47.880 --> 0:19:51.560 see this as often, but it was a situation where 0:19:51.720 --> 0:19:57.159 on an enterprise basis, the company was extremely undervalued, you know, 0:19:57.280 --> 0:20:00.160 where if you could deliver it like then you could 0:20:00.160 --> 0:20:03.159 be realized. Yeah, you know that stuff tends to be 0:20:03.160 --> 0:20:05.440 a lot more priced in these days, I would imagine. 0:20:05.960 --> 0:20:09.400 So when you come across a situation these days where 0:20:09.880 --> 0:20:12.760 there is an undervalued company, the market is miss pricing it, 0:20:13.119 --> 0:20:15.840 and you want management to do something, how do you 0:20:15.840 --> 0:20:19.120 go about writing that, dear chairman? Like yeah, I mean 0:20:20.160 --> 0:20:22.879 in in a funny way, even though I wrote a 0:20:22.880 --> 0:20:26.320 book about it. Um, the age of the deer chairman 0:20:26.440 --> 0:20:28.840 letter is kind of passing. Like you go meet with 0:20:28.880 --> 0:20:31.399 the management, and you and and you meet with the board, 0:20:31.480 --> 0:20:33.320 and you have a conversation with him, and you meet 0:20:33.320 --> 0:20:36.960 with the other shareholders. You know, back then, like you're 0:20:37.000 --> 0:20:40.240 more trying to persuade the shareholder base. And so at 0:20:40.280 --> 0:20:44.280 that time, like the Denny's board was considering doing a 0:20:44.320 --> 0:20:48.080 restructuring to equitize their debt, and you know, so we 0:20:48.119 --> 0:20:51.000 had to Yeah, you know so we had to commence 0:20:51.000 --> 0:20:53.639 the board. No, like, you're doing fine. If you need 0:20:53.680 --> 0:20:55.840 to raise a capital, like, you should do it well 0:20:55.880 --> 0:20:59.320 from the stockholders. And by doing that in a like 0:20:59.359 --> 0:21:03.320 in a public a fashion, like it also got the 0:21:03.400 --> 0:21:06.760 stockholders behind the idea. That makes a lot of sense. 0:21:07.280 --> 0:21:10.200 So let's talk about some of the quotes from the book. 0:21:10.200 --> 0:21:13.800 And I really like this. In normal market conditions, if 0:21:13.840 --> 0:21:17.159 I find a good company a cheap valuation, it tends 0:21:17.200 --> 0:21:20.840 to have governance problems. Is that still true today? I 0:21:20.880 --> 0:21:23.760 think that's true. And I mean that was a statement 0:21:23.800 --> 0:21:25.680 that I made in the introduction of the book, where 0:21:25.720 --> 0:21:28.639 like I'm kind of explaining who I am and explaining 0:21:28.680 --> 0:21:30.879 the voice of the book. And you know, I'm a 0:21:30.920 --> 0:21:34.399 value investor. I look for cheap stocks, and especially in 0:21:34.440 --> 0:21:37.679 the market like today's, it's hard to find a cheap stock, 0:21:37.760 --> 0:21:40.600 and if you do find one, it's often because there's 0:21:40.840 --> 0:21:43.920 an issue with how they're run. It's cheap for a reason. Yeah, 0:21:44.560 --> 0:21:47.240 that makes sense. And what's the difference in management at 0:21:47.240 --> 0:21:50.679 a large company versus a small company when it comes 0:21:50.680 --> 0:21:54.280 to these governance issues. I mean, I guess, like from 0:21:54.320 --> 0:21:58.359 you know, from my experience, am I generally believed that, like, 0:21:58.440 --> 0:22:01.959 the larger companies tend to have higher quality boards, and 0:22:02.040 --> 0:22:05.480 they tend to be just like to have higher caliber 0:22:06.040 --> 0:22:09.480 CEOs and boards of directors. And you know, that is 0:22:09.520 --> 0:22:13.119 both intuitive and counterintuitive because like in some ways that 0:22:13.240 --> 0:22:15.520 you would think, well, at these you know, well, Nitchie, 0:22:15.560 --> 0:22:19.080