1956

The 1956 closing letter is the document in which Graham-Newman announced that the partnership would be wound up and its remaining positions distributed to its shareholders. The letter is, in part, a record of the partnership's analytical method over the partnership's life, and in part a reflection on the conditions under which the method had become harder to apply. Graham and Newman record that the partnership's undervalued common-stock category had become harder to find candidates for, because the bull market of the early 1950s had narrowed the universe of structural discounts to a degree the partnership regarded as durable. The closing letter's analytical contribution is to make explicit the partnership's view that the analytical edge the partnership had exploited since 1936 had, by 1956, narrowed to a degree that justified winding the partnership up and returning the remaining capital to the partners who had supplied it. The letter's discussion of the partnership's analytical edge is its most instructive passage. Graham and Newman record that the partnership's working method had been built around the identification of securities whose market prices were below the working-capital value of the underlying businesses, and that the bull market had lifted most of the structural discounts above the working-capital floor at which the analytical edge had been identified. The letter's instruction is that the partnership's analytical method is a feature of a particular market condition, and that the method's edge narrows as the market condition changes. The letter is candid that the partnership does not regard the method as obsolete; the partnership regards the method as appropriate to the market condition the partnership was founded to exploit, and as inappropriate to the market condition the partnership finds itself in by 1956. The closing of the partnership is the candid acknowledgment that the method has outlived the condition that made it pay. The closing letter's other instructive passage is the partnership's discussion of the distribution of its remaining positions. Graham and Newman record that the partnership's remaining undervalued holdings, the special-situations positions, and the arbitrage positions would be distributed to the partnership's shareholders in specie, and that the shareholders would then hold the positions directly rather than through the partnership's vehicle. The letter's instruction is that the partnership's analytical method was always a feature of the partnership's working organization, and that the method's continued application after the partnership's closing would be the shareholders' responsibility rather than the partnership's. The 1956 closing letter is, in this sense, the document in which Graham-Newman's working method is most clearly shown to be the analytical discipline of the partners who applied it, and the closing of the partnership is the partners' candid acknowledgment that the analytical discipline had outlived the market condition that had made it pay.