Benjamin Graham on Staying Small
This 1976 interview with a long-retired Benjamin Graham has been floating around the internet lately. It’s a neat read, but I thought Graham’s comment about why his firm hadn’t grown larger was particularly interesting:
“We could have built up an enormous business had we wanted to, but we limited ourselves to a maximum of $15 million of capital–only a drop in the bucket these days. The question of whether we could earn the maximum percentage per year was what interested us. It was not the question of total sums, but the annual rates of return that we were able to accomplish.”
I’d never never seen this quote before and never realized the extent to which Graham-Newman limited their AUM. This reminds me of something a young Warren Buffett once told Businessweek:
“If I was running $1 million today, or $10 million for that matter, I’d be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It’s a huge structural advantage not to have a lot of money. I think I could make you 50 percent a year on $1 million. No, I know I could. I guarantee that.”
While the dollar amounts have changed dramatically over the years, the idea that relatively small AUM can help drive out-performance remains very important.