Financial History 134 (Summer 2020) | Page 14

One of the students in the fall of 1927 was David L. Dodd, then an assistant professor in the School of Business at Columbia. He was to become my co-adjutor in teaching, the co-author of our “Bible of Wall Street,” Security Analysis, an associate in important financial ventures, and an unfailingly loyal friend. PhD Dissertation (1930) During the late 1920s, Dodd continued to teach and study at Columbia, in collaboration with Ben Graham. In 1930, he was awarded his PhD degree. His dissertation, entitled “Stock Watering: The Judicial Valuation of Property for Stock-Issue Purposes,” was published as a 330-page book by Columbia University Press. He defined stock watering “as the issuance of nominally fully paid stock in an amount exceeding the value of the assets against which the stock has been issued.” His dissertation seeks to “answer the question as to what the courts mean by ‘value’ when they interpret the laws which require that stock must be issued for property or services at a fair valuation.” The issue was complicated by the existence of both historical par value and newly popular non-par value shares issued by different companies. Dodd’s conclusion for non-par value shares was to propose a series of minimum requirements for companies issuing stock. These included an independent audit, a balance sheet valuation, an annual balance sheet, annual profit and loss statements and a prospectus. Upon completion of his dissertation and publication of his book, Dodd was promoted to assistant professor. Security Analysis (1934) Ben Graham reflects in his memoirs that in the “trying times of 1930–32, I kept busy with many activities… I continued to give my course at Columbia, though to much smaller classes, and in 1932 I set definitely to work on the textbook that I had first projected in the lush times of 1927.” He continues: I asked Dave Dodd to collaborate with me on the book. We agreed that I would be the senior author and write the entire text in my style. He would aid with suggestions and criticisms, would check the numerous facts and references, and work up the tables. We prepared a table of contents and a sample first chapter, and submitted them to McGraw-Hill & Company through Hugh Kelly, a bright young employee who had been one of our students. (He later became McGraw’s vice president.) McGraw submitted our material to their reader, a Harvard professor of finance. As an exception to the rule, we were shown his report, which was very favorable—his only doubt being whether we would have the stamina to carry the ambitious work to a conclusion. McGraw-Hill was so impressed with his recommendation that they offered us a straight 15% royalty, instead of the sliding scale that usually started at 10%. Dodd and I agreed to divide the royalties threefifths to me and two-fifths to him. The contract was signed at the end of 1932, but it was to take a year and a half before the first edition of Security Analysis made its appearance. Roger F. Murray, Ben Graham and David Dodd’s successor at Columbia, has a slightly different recollection of their relationship. In an interview with Peter Tanous, in his book Investment Gurus, Murray looked back to the period of 1956–61, when he and Dodd were both professors at Columbia Business School. He describes the textbook as an “interesting joint product,” admitting that “Ben Graham was not addicted to writing a serious text. He was full of ideas, loved to chat, loved to think out loud. David Dodd sat in on Ben’s classes and took copious notes. Then Dave would go dig out and verify the examples that Ben had used. That’s how the first edition of Security Analysis came about in 1934.” Graham and Dodd: A True Partnership In addition to describing their working dynamic to Tanous, in the same interview Murray remembers Graham and Dodd’s complementary personalities: [Ben Graham was] just exactly the way he was pictured—a man who read for background, a fine classical scholar, a man with an idea a minute. He had a wonderfully agile mind. Dave Dodd was a wonderful gentleman. He was one of the finest people I have ever met anywhere. He could listen to Ben all day long, but retained a healthy skepticism, and when Ben would launch into one of his ideas, which came along about every thirty seconds, Dave would quietly just sit down and say, that’s an interesting idea, Ben. However, do you believe that the facts really support that strong a conclusion? Then, he’d get to work on the serious analysis. As demonstrated in the recollections by both Graham and Murray, Graham and Dodd were true partners. This partnership was evident not only in their academic collaboration, but also in their business ventures: Graham-Newman Corporation and GEICO. Their relationship extended until Graham’s passing in 1976. Graham-Newman Corporation (1936–1957) The Graham-Newman Corporation was an investment company originally founded in 1926 as the Benjamin Graham Joint Account, with a capital base of $400,000. Jerry Newman, an acquaintance who graduated from Columbia College and Law School, joined him as a partner in the first year. Graham recalls that Newman was invaluable. “He was much better than I at the details of a commercial operation. He was shrewd and effective at negotiating deals of all sorts and was completely honest and dependable—qualities essential for lasting success in Wall Street. However, he was not a theoretician nor especially inventive in the field of finance.” Three years later, the capital had increased to $2,500,000 mostly from profits. In 1936, its legal form was changed from a “quasi-partnership” to a corporation, the Graham-Newman Corporation, in order to comply with IRS tax regulations. Dodd became a director of the corporation in 1944, a post he held until the liquidation of the fund in 1957. By 1946, after 10 years of operation, the net asset value of the fund increased to $4,172,000. This represented a 17.6% net annual return after fees and expenses, as compared to 10.1% for the S&P Index. In 1951, Dodd and his wife held 90 shares of stock in the corporation. Each share was worth $1,232 for a total of $110,880. Graham and his wife owned 252 shares for a total of $310,464. In addition, Graham and 12 FINANCIAL HISTORY | Summer 2020 | www.MoAF.org