Security Analysis : Sixth Edition, Foreword by Warren Buffett: Additional Aspects of Security Analysis. Discrepencies Between Price and Value

abuses at the hands of investment bankers, while the folks at Goldman Sachs and Morgan Stanley may shed a few tears of nostalgia when they read about the good old days of 20% underwriting spreads on the likes of American Bantam Car Corporation Convertible Preference Stock. But the last page of the chapter really stands out for its enduring relevance. Graham and Dodd wrote,
    The relaxation of investment bankers’ standards in the late 1920s, and their use of ingenious means to enlarge their compensation, had unwholesome repercussions in the field of corporate management. Operating officials felt themselves entitled not only to handsome salaries but also to a substantial participation in the profits of the enterprise. . . . But it may not be denied that devious and questionable means were frequently employed to secure these large bonuses to the management without full disclosure of their extent to the stockholders. . . . With publicitygiven to this compensation, we believe that the self-interest of stockholders may be relied on fairly well to prevent it from passing all reasonable limits. (p. 642)
    So many of the recent excesses—from the Internet bubble to the leveraged buyout craze to the subprime mortgage fiasco—bear more than a passing resemblance to the shenanigans Graham and Dodd described years ago. And while the pair probably would not have been surprised at some of the excessive compensation at the corporate level, they likely would have been shocked that these excesses reached into the management of the New York Stock Exchange itself. Today’s investors would do well to view Wall Street with at least the same degree of reproach and skepticism our authors exhibited in their writings.
    Jumping ahead, Chapter 50 , “Discrepancies between Price and Value,” and Chapter 51 , “Discrepancies between Price and Value (Continued),” are among the gems of Part VII , and anyone interested in investing should read them. They provide the reader with a useful list of dos and don’ts, places to look for value, and traps to avoid, illustrated by examples from the 1930s. Many of us have a tendency to romanticize the past, and when investors engage in such fond reminiscence, they often speak wistfully of Graham’s era. Oh, for a return to the days when stocks sold at seven times earnings and less than working capital! And I must admit that when I read the Group A list in Chapter 50 , I, too, felt a twinge of envy. How easy it must have been to be an investor in the late 1930s!
    But wait a minute, I thought. I’ve encountered numerous opportunities in my own lifetime that would have made Graham green with envy. The truth is that, from time to time, financial markets present opportunities to buy assets that have remarkable risk-reward characteristics. It can be described only as the best of all worlds when an investor has the chance to make a decent amount of money in the worst case and oodlesin the best case. My personal list begins with the Management Assistance Liquidating Trust—perhaps my first true value investment—and includes Public Service of New Hampshire 18% second mortgage bonds trading at par; Executive Life Muni GICs trading at 25 cents on the dollar in the wake of a trial court judge’s decision later declared on appeal to have “no basis in law or reason”; and Gentiva common stock, a spin-off resulting from a merger that was trading at about a third of its working capital.
    Around the same time Ira was enlightening me about the options market, my friend Chris Stavrou introduced me to Management Assistance Liquidating Trust when he faxed me the 10-Q, adorned with his handwritten notes. As he walked me through, I could see exactly what he saw: a stock trading at $2 that was worth $4. What’s more, the company was now obligated to pay out to shareholders all the proceeds from the sale of its assets. Knowing that this was a certain double, I promptly sold all my other holdings and put 100% of my assets (all $10,000 worth) into this one stock. My only regret is that I didn’t buy any for my company because I was afraid my boss, who was on vacation at the time, would disapprove of the investment.
    One of the most recent and spectacular sets of opportunities occurred in mid-2002, amid the epic meltdown in the corporate bond market. Bargains were there for the taking—left, right, and center. Corporate bond market investors that year had stories galore. Mine was the AES 10.25% Senior Subordinated