Judging by the track records of analysts, money managers, OPMIs, bloggers, etc., the endeavor to select issues with above average expectancy is not on the whole a satisfactory activity. It is successful at times and it is unsuccessful at other times, but on balance it does not pay. The work of many intelligent minds engaged in this field becomes self-neutralizing and self-defeating given equal access to information.

Ben Graham’s superior performance is due at bottom to his preference for obscure situations and techniques. I have excerpted relevant sections of his memoir:

“But later it would be my advice that the firm would follow, rather than the other way around. Ironically, it was the same Missouri, Kansas and Texas common stock which lent itself to an unusual financial operation which I persuaded my firm to pursue, an operation exemplifying the kind of calculation that I was to become good at. The Kitty railroad was now in bankruptcy (a fact which bore out A. N.’s criticism of my earlier, neophyte’s flyer). A reorganization plan had been promulgated, which gave the common stockholders only the right to buy shares of stock in the new, reorganized company. The stock was regarded as practically worthless, and was selling at about 50 cents per share. I pointed out to the partners that it would take at least a year for the plan to be consummated. In the meantime the old Kitty stock would constitute a cheap call on the same number of new shares. In other words, if the new stock advanced only $1 from its current indicated price, the old stock would also rise $1 in value—which would mean a profit of 200 percent on an investment in the old stock. In fact, one could easily make 3 or 4 points during any strong period in the railroad market, while the maximum loss could only be a half-point. The N.H.&L. partners were opposed to anything resembling speculation for the firm (although they were happy enough to see their customers indulge and even over-indulge in it). But in this case, my logic prevailed over their scruples. We bought 5,000 shares. During the next year we made a profit of around six times that amount.

“The real beginning of my career as a distinctive type of Wall Street operator dates back to 1915, with the dissolution plan of the Guggenheim Exploration Company. This concern held large interest in several important copper mines—namely, Nevada, Chino, Ray Consolidated, and Utah—all of which were actively traded on the New York Stock Exchange. When Guggenheim proposed to dissolve and to distribute its various holdings pro rata to its shareholders, I calculated that the current market value of the various pieces together would be appreciably higher than the price of Guggenheim shares. Thus, there was a practically assured arbitrage profit by buying shares of Guggenheim and simultaneously selling shares of Chino, Nevada, Ray, and Utah. The possible risks lay (1) in failure of stockholders to approve the dissolution, (2) litigation or other trouble occasioning a protracted delay, (3) difficulty in maintaining a short position in the shares sold until they were actually distributed to Guggenheim stockholders.

“None of these risks appeared substantial to me. I recommended the operation to the firm, who arbitraged a fair number of shares. I also recommended it to others in the office. I recall that Harold Rouse proposed that I handle the entire operation for him in return for a 20 percent share of the profits. In that way I effected my first arbitrage, an operation which was to prove one of my special fields of study and action. The dissolution plan went through without a hitch; the profit was realized exactly as calculated; and everyone was happy, not least myself.

“My standard procedure was to buy convertible bonds around par and to sell calls against them on the related common stock; or else—in a more elaborate variant—sell the common stock short and sell puts against our short position. The amount received in these puts and calls was substantial and in effect guaranteed us a satisfactory profit on the whole deal, regardless of whether the stock advanced, declined, or stood still. I spare the reader a technical explanation of the complicated business, but it was as successful as it was ingenious. We had one such elaborate operation going in Pierce Oil bonds in 1919, selling puts against our short position.

“Actually, I came through the dangerous period of 1919 to 1921 extremely well. Having learned much from my shattering experience with the Tassin account in 1917, I did not let the angry flood engulf me. My operations were nearly all arbitrage and hedging, affording limited but satisfactory profits and protecting me against serious loss. A typical operation: one of the speculative favorites of the time was Consolidated Textile, a recent conglomeration of rather second-rate cotton mills. I had bought some of their convertible 7 percent bonds, considering them sufficiently safe, and later, as the common stock advanced, I sold the corresponding amount of shares at prices which assured me a good gain, whatever happened thereafter. Dan Loeb was an enthusiastic bull on the stock and carried many thousands of shares in his customers’ accounts. I remember suggesting to him that he replace the stock with the 7 percent bonds, pointing out that he would have virtually the same chance of profit, would run much smaller risks of loss, and would have a better income return into the bargain. To this Dan replied that his customers didn’t want to bother with convertible bonds, that they liked to see their stock appearing constantly ‘on the tape’ and that it wasn’t necessary to pay the extra point or so for the added safety of the bonds because a big further rise in the stock was absolutely certain. In a year’s time the stock had fallen from 70 to 20, while the 7 percent bonds were actually refinanced and paid off at a premium above par.

“The Graham Corporation operated for two and a half years, to the end of 1925, and was then dissolved. It was a successful venture and returned a high percentage on the capital. I limited investments to my standard arbitrage and hedging operations, plus securities I thought very cheap on value. The first thing I did was to buy some shares of Du Pont and to sell seven times as many shares of General Motors short against it. At that time, Du Pont common was selling for no more than the value of its holdings of GM, so that the market was really placing no value on its whole chemical business and assets. So Du Pont was greatly undervalued by comparison with the market price of General Motors; in due course a goodly spread appeared in our favor, and I undid the operation at the projected profit.

“My operations consisted largely of buying common stocks that were selling well below their true value as determined by dependable analysis. The most reliable indication of a substantial undervaluation occurs precisely in the Northern Pipeline kind of situation—where there were large realizable assets employed at a small profit and withheld from the stockholders. It was my policy first to acquire a substantial interest in such companies and then to endeavor by one means or another to bring about the appropriate change in the company’s capitalization or operating policies. Almost invariably management resisted my endeavors, utilizing the same argument as the Bushnells. The favorite weapon in their arsenal was the claim that the business was a very special one, that I knew very little about it, and they were much better qualified than I to judge what policies were required.

“When, in all innocence, I made my first effort as a stockholder in 1926 to persuade management to do something other than what it was doing, old Wall Street hands regarded me as a crackbrained Don Quixote tilting at a giant windmill. No experienced person would waste his time trying to change any corporate policy from the outside, especially not in the stronghold of Standard Oil. ‘If you don’t like the management or what it’s doing, sell your stock’—that had long been the beginning and end of Wall Street’s wisdom in this domain, and it is still the predominant doctrine. More than that, an outsider who tried to change anything was deemed either crazy or suspect. Many years before, a crafty character named Clarence Venner had made a lot of money and an unenviable reputation by bringing many suits against management for alleged financial misdeeds of various kinds, some entirely technical. So now, if you just asked politely for something to be done, you were rebuffed, more or less courteously. If you then persisted and indicated an intention to institute a legal action or to ask for stockholders’ proxies, your motives were immediately impugned, with broad intimations that the company was being victimized by a ‘holdup artist, another Venner.’”