Jeff Gramm - Activist Investing

Principles & Lessons:

• Activism evolves with ownership structure—its form reflects who the shareholders are. Gramm emphasizes that the history of shareholder activism is shaped primarily by changes in ownership dispersion. In the 1920s, “most of the smaller public companies had big concentrated owners,” and activism was indirect and civil, as in Ben Graham’s letter to Northern Pipeline. By the 1950s, “this big diffusion in stock ownership” gave rise to populist proxy battles where “you’re appealing to individual shareholders.” Today, concentrated institutional ownership again reshapes activism into a game of behind-the-scenes persuasion. This illustrates a deeper principle: governance outcomes are structurally contingent on who owns the equity, not merely on the behavior of activists or management.
• Persuasion, not confrontation, is now the core skill of effective activism. While 1980s activism was fueled by external capital and leveraged buyouts, and early 2000s activism saw a phase of “shame-driven” public letters (e.g., Loeb’s to Irik Sevin), Gramm notes that modern activism centers on convincing a small set of institutional shareholders. “The game of shareholder activism is a lot more a game of persuasion now,” because “in any given public company... there tend to be a handful of institutions that have a lot of the votes.” Success today depends less on aggression and more on understanding the incentives, biases, and priorities of those few major holders.
• Bad governance alone is not an investable thesis—valuation is the binding constraint. Gramm makes a key distinction that’s often missed in activism: identifying misgovernance is not sufficient. “If you're an activist and your only target is bad governance, then I think that's a dangerous situation to be in.” Governance failures are pervasive, but not always actionable without an associated valuation gap. Opportunity requires mispricing and an identifiable path to value realization. The insight is that even correct analysis of qualitative issues—like board dysfunction—may be structurally inert without quantitative misvaluation.
• Investor fatigue and perception inertia can sustain mispricings long after catalysts play out. Gramm’s position in Star Gas (SGU), held for over seven years, reflects this principle. Despite a new management team, improved capital allocation, and strong fundamentals, “underlying it all... it's still not respected as it should be.” He attributes this partly to the market’s memory of past blow-ups and the high-profile Loeb controversy: “People, they tend to under follow these things that have been in the public eye.” This suggests that reputation and historical narrative shape the present valuation in ways that are epistemically decoupled from fundamentals—a form of mispricing that may persist in the absence of short-term catalysts.
• Capital allocation skill is asymmetrically important—it’s more useful to identify bad allocators to avoid than to depend on finding great ones. Gramm notes that while excellent allocators are rare and difficult to predict, “I'm more looking for bad allocation as a thing to avoid.” Misallocation of capital—via overpaying for acquisitions, poorly timed buybacks, or under-leveraging—can cause structural value destruction. Importantly, he argues that many boards “don’t understand valuation enough to do buybacks in the right way,” which results in capital allocation being a governance function requiring judgment, not just capital budgeting.
• Buybacks are value-creating only when coupled with valuation insight and opportunism—routine buybacks often reflect misunderstanding or signaling games. Gramm differentiates between passive or EPS-driven repurchases and “buybacks with a brain behind them.” The former, often done early in the fiscal year “to reduce diluted share count,” may reflect performance optics rather than intrinsic value thinking. The latter are lumpy, opportunistic, and reflect management’s conviction in undervaluation. This distinction undermines the simplistic framing of buybacks as universally good or bad—it’s the informational and behavioral context that determines their value impact.
• Illiquidity, investor fatigue, and shareholder transitions create structural inefficiencies in small-cap markets—but exploiting them requires durability and patience. In the Tandy Leather case, Gramm emphasizes how “valuation gets heavily influenced by the activities of the large shareholders and liquidity.” A retiring CEO or an institution exiting a microcap may create temporary price pressure unrelated to business fundamentals. But exploiting these dynamics requires a long-term capital base: “When you go active on a company, you lose your liquidity.” Thus, inefficiencies exist, but their capture depends on the investor’s ability to absorb duration risk and reputational friction.
• Indexing may win on selection, but passive investors still hold significant influence through governance—and this role is underappreciated and understudied. Gramm highlights a growing inversion: while index funds don’t select stocks actively, “they have a pretty robust team to study governance issues and to vote shares.” Vanguard and similar players are now the de facto stewards of governance for much of the market, despite having little financial incentive to engage deeply. Gramm worries this creates “a weird dynamic when you have this entity with 22 paid professionals who have this huge impact,” raising questions about persuasion, accountability, and concentration of soft power in index fund stewardship.

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