Benjamin Graham on Concentration

The 1948 report discloses that the partnership held a meaningful concentration in a small number of securities. The audited balance sheet shows that the largest positions, including GEICO, made up a substantial portion of net asset value. The concentration is a function of Graham-Newman's analytical discipline: the partnership bought only when the analytical case was strong, and the result was that a small number of positions carried the partnership's returns. Graham-Newman's working view, recorded across the letters, was that concentration was acceptable when each position had a margin of safety and when the analyst's conviction was grounded in financial-statement analysis rather than narrative. The partnership did not diversify for its own sake; it diversified to the extent that the analytical screen produced a list of qualifying positions, and concentrated when the screen produced a short list. The 1948 report is also notable for the disclosure of the GEICO position. Graham-Newman had purchased its stake in 1948, and the audited balance sheet records the holding at cost. The report's auditors confirmed the partnership's valuation of the position, but the report did not yet reflect the later SEC-mandated distribution of the GEICO stake. The 1948 report is therefore a snapshot of the partnership at the moment the GEICO position entered the portfolio, before the regulatory process that would turn the holding into one of the most successful investments in the partnership's history.