1950

The 1950 Graham-Newman annual report, the partnership's report for the year ended January 31, 1950, sets out the returns the partnership earned across its three working categories and is the document in which the partnership's working method is most clearly documented. The report breaks the partnership's total return into the contributions from undervalued common stocks, from special situations, and from arbitrage positions. The breakdown is the report's analytical contribution: it allows the partnership's shareholders to see which of the three categories carried the year's return, and it allows the partnership's auditors to verify that each category's contribution reconciles to the underlying positions the partnership held through the year. The 1950 report is, in this sense, the document that most clearly distinguishes the partnership's three working categories from one another in the published record, and it is the document on which subsequent generations of value partnerships have drawn for the working method of categorical return attribution. The report's discussion of the undervalued-common-stock category is its most instructive passage. Graham-Newman records that the partnership's undervalued holdings were bought at prices the partnership estimated to be below the working-capital value of the underlying businesses, and that the partnership's return on the category came from the market's re-rating of the holdings toward their working-capital values as the cycle progressed. The point the report makes is that the return on the undervalued category was not a forecast of the market's direction; it was a return on the structural undervaluation the partnership had identified at the time of purchase. The market's subsequent re-rating was the mechanism by which the structural undervaluation closed, and the partnership's return was the analytical fruit of the identification. The report's instruction is that the undervalued category's return is the analytical wage for the partnership's identification of working-capital discounts at the time of purchase. The report's discussion of the arbitrage and special-situations categories is the report's other instructive passage. Graham-Newman records that the arbitrage positions were held for defined closings such as the completion of tender offers and the settlement of recapitalizations, and that the special-situations positions were held for defined catalysts such as mergers, reorganizations, and liquidations. The report's instruction is that the returns on the arbitrage and special-situations categories were not dependent on the market's direction; they were dependent on the closing of the catalyst. The partnership's return on these categories was, in this sense, the analytical wage for the partnership's identification of catalysts at the time of purchase, and the partnership's discipline in holding the positions through to the catalyst's closing. The 1950 report is, in this sense, the document in which Graham-Newman's working method is most clearly mapped to the returns the partnership earned in each category.