CET Central Securities Corp

CENTRAL SECURITIES CORPORATION

NINETY-FOURTH ANNUAL REPORT

2022

SIGNS OF THE TIMES

“Five big technology stocks accounted for about a quarter of the U.S. stock market’s total declines last year, a bruising selloff reminiscent of the dot-com bust two decades ago” (Gunjan Banerji, The Wall Street Journal, January 2, 2023)

“Mortgage rates recorded their largest increase in any calendar year in 2022, a consequence of the Federal Reserve’s aggressive moves to calm inflation. The higher rates can add hundreds of dollars or more to a monthly mortgage payment, putting homeownership further out of reach for many in a market where prices remain elevated.” (Gina Heeb, The Wall Street Journal, December 29, 2022)

“America’s debt is now six times what it was at the start of the 21st century. It is the largest it has been, compared with the size of the U.S. economy, since World War II, and it’s projected to grow an average of about $1.3 trillion a year for the next decade.” (Jim Tankersley, The New York Times, January 22, 2023)

“Universities are being urged to safeguard against the use of artificial intelligence to write essays after the emergence of a sophisticated chatbot that can imitate academic work, leading to a debate over better ways to evaluate students in the future. ChatGPT, a program created by Microsoft-backed company Open AI that can form arguments and write convincing swaths of text, has led to widespread concern that students will use the software to cheat on written assignments.

“Academics, higher education consultants and cognitive scientists across the world have suggested universities develop new modes of assessment in response to the threat to academic integrity posed by AI. ChatGPT is a large language model trained on millions of data points, including large chunks of text and books. It produces convincing and coherent replies to questions by predicting the next plausible word in a sequence of words, but often its answers are inaccurate and require fact-checking.” (Christina Criddle and Bethany Staton, Financial Times, December 18, 2022)

“An MIT study examined a data set of 126,000 tweets in all categories of information – from science to terrorism to finance – and sorted them based on factual accuracy. The time taken for falsehoods to reach 1,500 people, they found, was six times shorter than it was for the truth. Meanwhile, 7 in 10 U.S. adult Twitter users say they get news on the site, and 80% of all tweets come from 10% of its users.” (Scott Galloway, Adrift, (page 126), September 2022)

“A study of how retail investors use cryptocurrency exchange apps suggests about three-quarters have lost money on Bitcoin, according to the Bank of International Settlements. Data spanning 95 countries from 2015 to 2022 indicates that the vast majority of app downloads occurred when Bitcoin’s price was above $20,000, the working paper from the Basel, Switzerland-based BIS says. The analysis says if we assume each new user bought $100 of Bitcoin in the month they installed the app and each month thereafter, 81% would have lost money.” (Sunil Jagtiani, Bloomberg, November 16, 2022)

“…a bubble needs three elements to inflate, just as a fire needs three elements - fuel, heat and oxygen – to keep burning. For a financial bubble, it’s marketability, speculation and cheap money.” (Tim Harford, Financial Times, January 26, 2023)

“Eight of the 10 largest private U.S. employers track the productivity metrics of individual workers, many in real time, according to an examination by The New York Times. Now digital productivity monitoring is also spreading among white-collar jobs and roles that require graduate degrees. Many employees, whether working remotely or in person, are subject to trackers, scores, ‘idle’ buttons, or just quiet, constantly accumulating records. Pauses can lead to penalties, from lost pay to lost jobs.” (Jodi Kantor and Arya Sundaram, The New York Times, August 14, 2022)

“The United States still has a stranglehold on the silicon chips that gave Silicon Valley its name, though its position has weakened dangerously. China now spends more money each year importing chips than it spends on oil. These semiconductors are plugged into all manner of devices, from smartphones to refrigerators, that China consumes at home or exports worldwide. Armchair strategists theorize about China’s ‘Malacca Dilemma’—a reference to the main shipping channel between the Pacific and Indian Oceans—and the country’s ability to access supplies of oil and other commodities amid a crisis. Beijing, however, is more worried about a blockade measured in bytes rather than barrels. China is devoting its best minds and billions of dollars to developing its own semiconductor technology in a bid to free itself from America’s chip choke. If Beijing succeeds, it will remake the global economy and reset the balance of military power.” (Chris Miller, Chip War (page XVIII), October 2022)

“Pandemic-related shortages combined with efforts to reduce carbon emissions are leading corporate executives to reconsider far-flung suppliers in low-cost jurisdictions. Growing tension between China and the west is also changing the calculus – German direct investment in China tailed off during Covid and has not rebounded. As companies decide which plants to modernize and when it makes sense to start over somewhere else, energy costs will clearly play a role. And here, the US has a crucial advantage over Europe: natural gas supplies are local, reliable and consistently cheaper, although the price gap has fluctuated wildly.” (Brooke Masters, Financial Times, November 2, 2022)

“The Inflation Reduction Act, signed into law by President Biden in August, was designed to promote battery-powered vehicles while providing incentives for companies to make them in North America. It is also designed to exclude rivals like China and Russia from the supply chain. But the details of how to apply those principles were left to the Treasury, which has had only four months to work through scores of brain-numbing technical details not fully addressed in the legislation. For example, to qualify for credits, at least 40 percent of the minerals in a vehicle’s battery, measured by their value, must come from the United States or a trade ally. The quota rises in steps to 80 percent in 2027. But it is devilishly difficult to track the origin of raw materials. And the law didn’t specify which countries should be considered trade allies.” (Jack Ewing, The New York Times, December 29, 2022)

“Many of the most prominent office developers in the U.S. are shifting gears, looking to buy or build real estate that isn’t office. Boston Properties Inc. is planning to develop 2,000 residential units up and down the East Coast. The firm, which owns more U.S. office space than any other publicly traded company, also is developing millions of square feet of lab and life-science space.…  The efforts come as the Covid-19 pandemic and rise of remote work have reordered American habits around the workplace, dimming the importance of office towers that populate city business districts. Shares of publicly traded office owners have broadly declined as investors and analysts worry that the companies’ growth prospects have been hurt by the likelihood of a long-term decline in office demand.” (Peter Grant, The Wall Street Journal, January 10, 2023)

CENTRAL SECURITIES CORPORATION

(Organized on October 1, 1929 as an investment company, registered as such with the
Securities and Exchange Commission under the provisions of the Investment Company Act of 1940)

Comparative operating results are as follows:

*Per-share data are based on the average number of Common shares outstanding during the year.

The Corporation declared two distributions to holders of Common Stock in 2022, $.20 per share paid on June 24 in cash and $2.25 per share paid on December 22 in cash or in additional shares of Common Stock at the stockholder’s option. For Federal income tax purposes, of the total $2.45 paid, $.55 represents ordinary income and $1.90 represents long-term capital gains. A separate tax notice has been mailed to stockholders. With respect to state and local taxes, the character of distributions may vary. Stockholders should consult with their tax advisors on this matter.

In the distribution paid in December, the holders of 46% of the outstanding shares of Common Stock elected stock, and they received 797,817 Common shares at a price of $35.36 per share.

During 2022, the Corporation purchased 79,449 shares of its Common Stock at an average price of $34.36 per share. The Corporation may from time to time purchase its Common Stock in such amounts and at such prices as the Board of Directors deems advisable in the best interests of stockholders. Purchases may be made in the open market or in private transactions directly with stockholders.

Central’s net asset value, adjusted for the reinvestment of distributions to shareholders declined by 11.5% during 2022. Over the same period, Central’s shares returned -19.9%. For comparative purposes, the S&P 500 Index declined by 18.1% while the Russell 2000, a broad index composed of smaller companies, declined by 20.5%.

Long-term returns on an annualized basis are shown below.

The fiscal and monetary stimulus response to the pandemic, combined with strong consumer demand and widespread supply shortages, led to an overheated economy in 2022. Unemployment neared its pre-pandemic multi-decade low, while inflation rose to the highest level seen in 40 years.

The Federal Reserve responded by reversing its policy of near-zero interest rates and active bond purchases. The Fed raised interest rates seven times during the year and constricted liquidity by slowly reducing its $9 trillion bond portfolio, resulting in deflationary pressure on asset prices and broad stock market declines. Residential mortgage rates nearly doubled.

Signs of a softening in inflation and some areas of consumer demand emerged as the year progressed, despite continued labor market strength. The index of leading economic indicators turned negative in July, while used car prices, home prices and housing transactions began to fall in the second half of the year. Leading companies including Alphabet, Amazon, Goldman Sachs, and Microsoft announced layoffs in early 2023.

Pandemic-related supply-chain snarls and Russia’s invasion of Ukraine revived long-dormant concerns about geopolitical risks and economic dependencies, challenging the post-Cold War political and economic status quo and raising the possibility of structurally higher long-term inflation and interest rates.

In the face of this shifting economic landscape Central maintained its approach of investing for the long-term. Our portfolio turnover remained in the single digits. We initiated no new positions in 2022. We completed the sale of our long-term holding in industrial laser manufacturer Coherent, Inc., which was acquired by II-VI Incorporated. We added to our position in II-VI, which subsequently renamed itself Coherent Corp., leaving us with a smaller overall position in the combined company. We also added to our existing position in MercadoLibre. We exited positions in Bank of New York Mellon, Cogent Communications, Heritage-Crystal Clean, MKS Instruments, and Star Group. We modestly reduced our positions in Hess and Motorola Solutions. We ended the year with 28 holdings, down from 34 at year-end 2021.

The most significant positive contributors to Central’s 2022 results on an absolute basis, in order of importance, were Hess, Progressive, and Merck. Our relative performance was helped by our overweight positions in financials and energy and our underweighting in consumer discretionary and technology companies. The largest detractors on an absolute basis, in order of importance, were Alphabet, Plymouth Rock, Meta Platforms, and Amazon.

Central’s largest and most important investment remains Plymouth Rock, a privately held company in which we invested in 1982. The Plymouth Rock Group of Companies together write and manage $1.7 billion in personal and commercial auto, homeowners and umbrella insurance in Massachusetts, New Hampshire, Connecticut, New York, New Jersey and Pennsylvania. We currently own 23% of the shares outstanding.

In 2022 Plymouth Rock focused on addressing the industry-wide challenges of rate adequacy and loss cost severity in its home and auto businesses. A more complete discussion of Plymouth Rock’s year will be contained in its 2022 annual report which we expect will be available in April. The most current annual report may be found at www.plymouthrock.com/about/financial-information/annual-reports.

Central is an independent, internally managed closed-end investment company. Our primary objective is long-term growth of capital through the ownership of equity stakes in select companies operating in diverse industries. We aspire to invest with a time horizon of at least five years. Honest and capable management working in the long-term interest of all stockholders is of the utmost importance in our appraisal of investments. Finally, we attempt to purchase investments at a reasonable, if not a bargain price. Our approach requires intimate knowledge of the business and management of the companies we own. We believe Central’s ability to take a long-term view is advantageous to our stockholders.

A statement of Central’s investment objective, principal investment policies and the principal risks associated with an investment in Central’s common stock is provided beginning on page 25 of this report. We also include Management’s Discussion of Performance, beginning on page 9.

Stockholder’s inquiries are welcome.

John C. Hill         Wilmot H. Kidd         Andrew J. O’Neill

630 Fifth Avenue
New York, New York 10111
February 1, 2023

we expect that the company’s book value will decrease from the prior year due to the performance of its equity investments. We believe that the company avoided significant operating losses from adverse weather events. Plymouth Rock paid one dividend to Central that added to our return in 2022.

Other significant detractors on an absolute basis were Alphabet, Meta Platforms and Amazon.com. All three were impacted by a slowdown in growth resulting from consumer shifts back to in-person activities and a normalization of online behavior after the pandemic. Alphabet, the parent company of Google, provides web-based search, advertising, mobile software and other internet services. Alphabet shares declined 39% for Central in 2022. Meta Platforms, the parent company of Facebook and Instagram, engages in the development of social media applications. It builds technology that helps people connect, find communities, and grow businesses. Meta shares declined 64% in 2022. Amazon.com provides online retail shopping services and supports the technology of other companies through its Web Services business. Amazon shares declined 50%.

Among the Corporation’s other large investments, Charles Schwab and AON each generated positive returns helped by the rise in inflation and interest rates; Analog Devices and Motorola Solutions were down modestly but less than the broader stock market.

(a)Non-dividend paying.

(b)Affiliate as defined in the Investment Company Act of 1940 and restricted. See Note 5 and Note 6.

(c)Valued based on Level 3 inputs. See Note 2.

(d)Formerly II-VI Incorporated.

(e)Valued based on Level 2 inputs. See Note 2.

See accompanying notes to financial statements.

NOTES TO FINANCIAL STATEMENTS — Continued

regulations which may differ from generally accepted accounting principles. Financial statements are adjusted for permanent book-tax differences; for the year ended December 31, 2022 such adjustments were approximately $456,000 primarily due to non-deductible employee compensation.

4. Investment Transactions—The aggregate cost of securities purchased and the aggregate proceeds of securities sold during the year ended December 31, 2022, excluding short-term investments, were $4,184,112 and $100,654,762, respectively.

As of December 31, 2022, the tax cost of investments was $463,213,806. Net unrealized appreciation was $668,155,780 consisting of gross unrealized appreciation and gross unrealized depreciation of $703,834,664 and $35,678,884, respectively.

5. Affiliated Companies—Plymouth Rock is an affiliated company as defined in the Investment Company Act of 1940 due to the Corporation’s ownership of 5% or more of the company’s outstanding voting securities. During the year ended December 31, 2022, unrealized appreciation from the Corporation’s investment in Plymouth Rock decreased by $34,108,800 and the Corporation received dividends of $9,344,958 from Plymouth Rock. The Chairman of the Corporation is a director of Plymouth Rock. The Chief Executive Officer and President of the Corporation is a director of certain subsidiaries of Plymouth Rock.