This is about activist investing, where big shareholders push companies to change. Jeff Gramm thinks the market is expensive now, so opportunities are fewer. His top pick is Star Gas (SGU), his largest holding for 7-8 years, which bought back 25% of shares and yields 5%. He also owns 30% of Tandy Leather and sits on its board, bought when it was worth $30-40 million with $8 million profit. He warns buybacks should be opportunistic, not just to boost earnings per share.
Jeff Gramm (portfolio manager at Bandera Partners and author of Dear Chairman) discusses with Patrick O'Shaughnessy the history and current state of shareholder activism, as well as his own investment approach of taking large positions and frequently joining boards. Core thesis: Shareholder activism
Jeff Gramm (Partner at Bandera Partners, author of Dear Chairman) discusses with Patrick O'Shaughnessy the historical evolution and current state of shareholder activism, as well as his own investment approach of taking large positions and often joining boards. Core thesis: Shareholder activism has evolved from Ben Graham's professional courtesy against Northern Pipeline in the 1920s to Dan Loeb's scathing criticism of CEO Eric Seven (calling him "one of the most dangerous and incompetent executives in America"), reflecting a dramatic shift in activist style over 80 years. However, Gramm argues that "greed" was not unique to the 1980s; what truly changed was access to capital — Michael Milken's junk bonds allowed "nobodies" to obtain massive funding to attack large corporations.
Gramm points out that the evolution of activist strategies fundamentally reflects changes in shareholder structure. In the 1920s, most small companies had concentrated large shareholders (e.g., the Rockefeller Foundation held 30% of Northern Pipeline), so Ben Graham had to "politely" win support. By the 1950s, as the older generation of capitalists passed away, equity ownership shifted from concentrated to dispersed — Peter Drucker called America "the first truly socialist country" because corporate ownership was so widespread. This gave rise to the "proxy fight" movement, where shareholders began publicly vying for voting rights.
"In the 1950s, proxy fights were front-page news, while Graham's Northern Pipeline incident didn't even appear in the Wall Street Journal." — Jeff Gramm
The key turning point in the 1980s was not the "birth of greed" but Michael Milken's junk bonds providing activists with unprecedented capital. Gramm cites Carl Icahn's battle against Philips as an example: Icahn had no support from major banks but relied on Milken's "cohort" for financing, allowing him to attack one of the top 20 companies in the U.S. This stood in stark contrast to the 1950s, when "small players" could not access capital.
After the 1980s, the junk bond era ended, and activism shifted to a "persuasion game." Gramm explains that institutional investors (Vanguard, BlackRock, etc.) now hold most voting rights, so activists must convince these institutions that their views are correct. Dan Loeb's style of public shaming letters (e.g., telling Eric Seven "you bring shame to Cornell University students") was a fleeting phenomenon because "the rules of the game have changed — as an activist, you need to persuade institutional shareholders that you are more right than management."
Gramm highlights an interesting paradox: passive investors (like Vanguard) do not actively pick stocks but have powerful governance teams to vote. "Vanguard has 22 professionals studying governance issues, and their long-term interest is that the S&P 500 is well-managed and the market has integrity." However, Gramm warns: "When Vanguard owns 10% of the market, how will that voting power be used? Power is intoxicating — that's a lesson from history."
Gramm is skeptical of the criticism that "maximizing shareholder value leads to short-termism." He argues that short-termism is a human problem — boards, managers, and CEOs can all be short-sighted, not just shareholders. He cites Amazon as an example: Bezos reinvests all free cash flow into long-term growth while serving customers, shareholders, and society. "I haven't seen compelling evidence that public company shareholders are so short-sighted that they destroy the economy."
Gramm specifically questions using stock price to evaluate CEO performance: "Markets are inefficient in the short term, and evaluating CEOs based on stock performance during their tenure is highly problematic." He views stock options as a "highly problematic" incentive tool — they are highly leveraged and tied to an irrational market. "You see people in a company getting huge payouts due to stock price fluctuations that may have nothing to do with their actual performance."
Gramm believes that activist opportunities depend not only on governance quality but more importantly on valuation. "Governance opportunities have always existed, but valuations are higher now — we are at the tail end or middle of a historic bull market. For activists, the threshold factor is undervalued companies, and we aren't seeing that many right now."
Star Gas is Gramm's largest position (approximately 21%) and the central subject of the Dan Loeb vs. Eric Seven conflict in his book. Gramm describes the phenomenon of "investor fatigue": after all the drama (bankruptcy restructuring, Loeb's public letters, management changes) subsides, the stock is ignored. "People say, 'Oh, SGU, I've heard of it,' but they often stop paying attention."
Key investment logic:
Falsification condition: Gramm has held the stock for 7-8 years and still considers it "extremely undervalued." He expected low interest rates and a 5% dividend yield to drive valuation reversion, but "two abnormally cold winters made them a lot of money, yet the valuation didn't improve as expected."
Gramm holds approximately 30% of Tandy Leather and serves on its board. The company is a retailer of leathercraft supplies with a "fanatical customer base" — it can open stores in low-rent areas, and customers will seek them out.
Investment timing: In 2008-2009, Wellington Group (a large micro-cap fund) held 16% of the shares and was eager to sell. Gramm bought in at a valuation of roughly $30-40 million — the company had no debt, excess cash, and operating profit of about $8 million at the time. "This is a classic micro-cap story: valuation is influenced by large shareholder behavior and liquidity."
Gramm believes buybacks are "one of the least understood issues in corporate governance." He recalls a meeting with Popeyes' CFO: "He told me, 'You want to do buybacks at the beginning of the year to maximize the impact on diluted share count' — that's the last thing investors want to hear, because it has nothing to do with long-term intrinsic value."
Gramm distinguishes between "good buybacks" and "bad buybacks":
"Most boards don't know how to assess company value. They hire investment banks for reports, but that's just a means to an end. So even if they understand how buybacks work (most don't), they don't understand valuation well enough to execute them correctly."
Gramm believes micro-caps are the "natural territory" of active managers: "Liquidity issues, information asymmetry (you're often at an information disadvantage relative to the sell side), and characteristics similar to distressed investing — these factors make quantitative or index strategies difficult to apply here."
However, he is not pessimistic about large caps either: "Markets are prone to serious judgment errors, and I think there is room for concentrated large-cap investors." His concern is that large quantitative funds with access to real-time consumer data (e.g., satellite imagery, credit card data) could create information imbalances — "they know more about real-time conditions than the companies themselves."
Gramm views the S&P 500 index fund as his only competitor: "Our investors choose us over the S&P 500 index fund. It's not just about better returns; we also need to consider tax efficiency and administrative burdens (K-1 forms, etc.)." His investors are primarily young, sophisticated high-net-worth individuals who provided critical support during 2008-2009 — "I know many fund managers with equally good performance who had to shut down because they lost their seed investors."
| Position | Analyst Stance | Key Data |
|---|---|---|
| Star Gas (SGU) | Bullish (largest position, held 7-8 years) | Position ~21%; repurchased ~25% of shares; dividend yield 5% |
| Tandy Leather | Bullish (holds 30% of shares, serves on board) | Bought at valuation ~$30-40 million; operating profit grew from $8M to $12M |
| Popeyes | Neutral (sold) | Previously pushed management for opportunistic buybacks |
| General Motors | Sold | One of the main sell actions over the past three years |
| Northern Pipeline | Historical case (Ben Graham) | Stock price $65, held $90 in "gilt-edged securities" |
| Philips Petroleum | Historical case (Carl Icahn) | Top 20 U.S. company, market cap ~$10 billion |
1. "Changes in activist style reflect changes in shareholder structure, not changes in morality." (Jeff Gramm) — Concentrated ownership in the 1920s required politeness; junk bonds in the 1980s allowed "nobodies" to attack large companies; today, institutional investors act as "arbiters," turning activism into a persuasion game.
2. "Investor fatigue is a common phenomenon in special situation investing." (Jeff Gramm) — After Star Gas went through bankruptcy restructuring, Dan Loeb's public letters, and management changes, the market ignored it despite fundamentally improved fundamentals. Gramm has held it for 7-8 years and still considers it "extremely undervalued."
3. "Most boards don't know how to assess company value, so they cannot execute buybacks correctly." (Jeff Gramm) — Good buybacks are opportunistic, large-scale, and executed at a discount; bad buybacks are autopilot moves to influence EPS. He recalls Popeyes' CFO saying, "Do buybacks at the beginning of the year to maximize the impact on diluted share count" — the worst possible approach.
4. "Stock options are highly problematic — they are highly leveraged and tied to an irrational market." (Jeff Gramm) — CEOs can receive huge payouts due to market fluctuations unrelated to their actual performance. Gramm believes effective boards should evaluate CEOs beyond short-term stock prices.
5. "Passive investors (like Vanguard) don't actively pick stocks but have powerful governance teams to vote — when Vanguard owns 10% of the market, how will that voting power be used?" (Jeff Gramm) — Power is intoxicating, a lesson from history. The governance role of passive investors is an "unsettling" unknown.
6. "Short-termism is a human problem, not a shareholder problem." (Jeff Gramm) — Boards, managers, and CEOs can all be short-sighted. Amazon is a counterexample: Bezos reinvests all free cash flow into long-term growth while serving customers, shareholders, and society.
7. "Arthur Levitt got me into Columbia Business School — the admissions director later told me, 'Without him, we wouldn't have admitted you.'" (Jeff Gramm) — This made him grateful but also reflective: "They should admit more people like me — I had ability, just no business background."
8. "The Snowball is more valuable for young investors than The Intelligent Investor or Security Analysis." (Jeff Gramm) — It shows how many factors (timing, hardship, effort, luck) must align for a successful fund manager, and how success looks inevitable only in hindsight.