Jeff Gramm – Activist Investing - [Invest Like the Best, EP.01]

Episode Summary

Executive Summary: Patrick O’Shaughnessy interviews Jeff Graham about the evolution of shareholder activism and how Graham’s own investing reflects it. They trace activism from Ben Graham’s hidden-value campaign, through proxy fights and corporate raiders, to today’s institution-driven persuasion battles. The conversation also covers buybacks, governance, and Graham’s own concentrated, board-involved investing style.

Main Topics: Origins of shareholder activism: Ben Graham pioneered activism by uncovering hidden value at Northern Pipeline and pressuring large holders. From diffuse ownership to institutions: Ownership shifted from concentrated insiders to individuals, then back to institutions and mutual funds. Proxy fights and populist shareholder rights: 1950s proxy contests turned activism into a public, shareholder-rights movement. 1980s raiders and junk-bond financing: Milken-funded raiders like Icahn used leverage to attack large companies and force value realization. Modern activism as persuasion: With ownership concentrated in Vanguard-like institutions, activists now win by convincing major holders. Buybacks and capital allocation: Graham views smart, opportunistic buybacks as powerful; mechanical or clueless buybacks destroy value. Graham’s own investing approach: His portfolio is concentrated, illiquid, and often involved, favoring mispriced small and special situations.

Key Arguments: Activism changed with shareholder structure, not just rhetoric or tactics. Ben Graham’s Northern Pipeline campaign was an early hidden-value activism case. 1950s proxy fights made shareholder rights a public, populist issue. 1980s raiders were enabled by Michael Milken’s direct financing. Today activism is mostly persuasion aimed at large institutional voters. Good boards matter more than stock price alone because markets are imperfect. Opportunistic, high-conviction buybacks can create value; autopilot ones often don’t. Microcaps and special situations remain fertile ground because liquidity and information are imperfect.

Data Points: Northern Pipeline share price: $65 - Patrick cites the stock price when discussing Ben Graham’s campaign. Northern Pipeline embedded securities: $90 - Graham found $90 of gilt-edged securities sitting inside the company. Rockefeller Foundation ownership: 30% - A concentrated holder Graham needed to persuade in the Northern Pipeline fight. Number of public pipeline companies: eight - Companies formed after Standard Oil was broken apart and reported to the ICC. Bandera’s largest position in Stargas: about a quarter of the overall portfolio - Patrick asks about the scale of the holding; Graham clarifies it is the largest position. Stargas position weight: 21% - Graham states the 13F showed roughly this weight, excluding cash and unlisted holdings. Tandy Leather ownership: about 30% - Graham says Bandera owns roughly 30% and he serves on the board. Tandy Leather operating income: 8 million - At purchase, the company was doing about this much operating income. Tandy Leather operating income later: 12 million - Graham says it reached about this level in a later year. Stargas dividend yield: 5% - He notes the company pays the lowest dividend it feels it can sustain. Stargas bond/share buybacks: about 25% of the shares - Graham says the company repurchased this share amount opportunistically. CEO tenure in Fortune 500: something like six years - Patrick uses this to frame short-term pressure on management. Bandera portfolio size: 10 to 15 positions - Graham describes a concentrated portfolio with idiosyncratic outcomes. Bandera investor base change: a large percentage - He says a large percentage of current assets come from high-net-worth high-frequency traders. Career timeline: 1994 or 95 to 2001 - Graham says his band was active across these years before business school.

Pivotal Quotes: "the market is not efficient" — Jeff Graham: His core investing belief and lens on activism and governance. "if a board is beholden to too many bosses, it's easy for them to be beholden to nobody" — Jeff Graham: His argument for shareholder-focused governance. "value investors are journalists at heart who feel compelled to gather their own facts and do their own analysis" — Patrick O'Shaughnessy: Used to frame Graham’s research-driven, non-closet-indexing style.

Implications: As ownership concentrates further in passive giants and data advantages widen, activism and value investing will hinge increasingly on judgment, patience, and governance discipline.