|
Getting your Trinity Audio player ready...
|
Again continuing on Benjamin Graham, this weekend I was privileged to have read a book by this title “Benjamin Graham, Building a Profession”. It is a collection of rare writings by and interviews with one of financial history’s most brilliant visionaries. The book presents Graham’s evolution of ideas on security analysis spanning five decades.
Particularly striking are the changes in thinking that occurred in Graham over time from the pre-1929 to the Great Depression era when security analysis as a profession was not even defined, and then later from the World War II to the post 1950’s to the late 1960’s and 70’s when stock market levels and the approach to security analysis had changed quite dramatically. While this set of writings are not in the nature of an investing bible, like ‘Security Analysis’ and ‘The Intelligent Investor’, there still are numerous nuggets and views specially provided to his own industry. They also reflect Graham’s lifelong effort to bring science into his own fraternity, his numerous attempts to bring integrity into the methods of Wall Street and the sheer difficulty of doing so due to the nature of the beast, and his honest effort to help ordinary individual investors. Here are a few excerpts from the writings:
1. On the Accountability of Security Analysts: We have no scoring system for security analysts, and hence no batting averages. Yet it would be anomalous indeed if we were to devote our lives to making concrete recommendations to clients without being able to prove, either to them or to ourselves, whether we were right in any given case. (1946)
2. On similarities between Medicine and Security Analysis: Both medicine and security analysis partake of the mixed nature of an art and a science; in both the outcome is strongly influenced by unknown and unpredictable factors; in both we may find “the concealment of ignorance, probably more or less unconsciously, with a show of knowledge.” (1946)
3. On the performance of security analysis: The greatest weakness of our profession is our failure to provide really comprehensive records of the results of investments initiated or carried on by us under various principles and techniques. We have asked for unlimited statistics from others covering the results of their operations, but we have been more than backward in compiling fair and adequate statistics relating the results of our own work. (1952)
4. On the change in valuation thinking from relying on past records to future expectations: A large part of the discrepancies between carefully calculated formula values based on the past and the market prices can be traced to the growth factor, not because the formulas underplay its importance, but rather because the market often has concepts of future earnings changes which cannot be derived from the companies’ past performance. (1957)
5. On the use of complex mathematical models in analysis: The combination of precise formulae with highly imprecise assumptions can be used to establish, or rather to justify, practically any value one wishes. Measuring imprecise variables with highly precise tools is not better than using crude tools. In fact, it may well be worse because over precise formulas tend to trigger overconfidence in those who wield them – creating the illusion of certainty in areas where no certainty is ever possible. (1958)
6. On the accumulation of equity using systematic plans like dollar cost averaging: The computations made of theoretical dollar averaging experience in the past embolden us to predict that such a policy will pay off ultimately, regardless of when it is begun, provided that it is adhered to conscientiously and courageously under all intervening conditions. This is by no means a minor proviso. It presupposes that the dollar-cost averager will be a different sort of person from the rest of us, that he will not be subject to the alternations of exhilaration and deep gloom that have accompanied the gyrations of the stock market for generations past. This, I greatly doubt. No technique or tool can ever impose complete external discipline on an investor who lacks internal discipline. (1962)
7. On market forecasts and their future: My views on the validity of stock market forecasting have been unfavorable for about half a century. Let me make a guarded prediction here. It is more than just possible that the investigations of Wall Street’s practices in the future will include a really comprehensive study of the claims and accomplishments of the leading approaches to market forecasting. The opposite possibility is merely that all such prognostications will be required to bear in large type the legend: “For entertainment purposes only. Do not take seriously.” (1963)