Book Synopsis: Benjamin Graham, Building a Profession

benjamin-graham-building-a-professionAgain 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)

Guru Speak: Some More Excerpts from Benjamin Graham’s Writings

Continuing on the topic of investing wisdom from Benjamin Graham, here are a few more excerpts from the Master’s writings.

1. On Portfolio Policy: We are thus led to put forward for most of our readers what may appear to be an oversimplified 50-50 formula. Under this plan, the guiding rule is to maintain as nearly as practicable an equal division between bond and stock holdings. When changes in market level have raised the common-stock component to, say 55%, the balance would be restored by a sale of one-eleventh of the stock portfolio and the transfer of the proceeds to bonds. Conversely, a fall in the common-stock proportion to 45% would call for the use of one-eleventh of the bond fund to buy additional equities.

2. On The Defensive Investor and Common Stocks: No one has yet discovered any other formula for investing which can be used with so much confidence of ultimate success, regardless of what may happen to security prices, as Dollar Cost Averaging. (Quoted by Graham from another study)

3. On Portfolio Policy: Investment policy depends in the first place on a choice by the investor of either the defensive (passive) or enterprising (aggressive) role. There is no room in this philosophy for a middle ground, or a series of gradation, between the passive and aggressive status. Many, perhaps most, investors seek to place themselves in such an intermediate category; in our opinion that is a compromise that is more likely to produce disappointment than achievement.

4. On Market Fluctuations: In any case, the investor may as well resign himself in advance to the probability rather than the mere possibility that most of his holdings will advance, say 50% of more from their low point and decline the equivalent one-third or more from their high point at various periods in the next five years. A serious investor is not likely to believe that the day-to-day or even month to month fluctuations of the stock market make him richer or poorer.

5. On Market Fluctuations: It is for reasons of human nature, even more than by calculation of financial gain or loss, that we favor some kind of mechanical method for varying the proportion of bonds to stocks in the investor’s portfolio. The chief advantage, perhaps, is that such a formula will give him something to do.

6. On Market Fluctuations: A true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would be spared the mental anguish caused to him by other persons’ mistakes of judgment.

7. On Investment Advisers: If the reason people invest is to make money, then in seeking advice they are asking others to tell them how to make money. That idea has some element of naiveté.

8. On the Central Concept of Investment: In the old legend the wise men finally boiled down the history of mortal affairs into the single phrase, “This too will pass.” Confronted with a like challenge to distill the secret of sound investment into three words, we venture the motto, Margin of Safety.

Guru Speak: Timeless Wisdom from Benjamin Graham

bengrahamBenjamin Graham, widely known as the Father of Value Investing, was a professor and an investment manager. Known as the founding father of the profession of security analysis, Graham wrote two of the most valuable books in the area of investing: “The Intelligent Investor” and “Security Analysis”. Credited by Buffett as the key influence on his investing approach, Graham is also famous for his timeless gems of investing wisdom that have stood the test of time.

1. Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble… to give way to hope, fear and greed.

2. Wall Street people learn nothing and forget everything.

3. The individual investor should act consistently as an investor and not as a speculator. This means… that he should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that satisfies him that he is getting more than his money’s worth for his purchase.

4. I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities.

5. To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.

6. Even the intelligent investor is likely to need considerable willpower to keep from following the crowd.

7. It is absurd to think that the general public can ever make money out of market forecasts.

8. If you are shopping for common stocks, choose them the way you would buy groceries, not the way you would buy perfume.

9. Individuals who cannot master their emotions are ill-suited to profit from the investment process.

10. The underlying principles of sound investment should not alter from decade to decade, but the application of these principles must be adapted to significant changes in the financial mechanisms and climate.

11. Obvious prospects for physical growth in a business do not translate into obvious profits for investors.

12. The investor’s chief problem – and even his worst enemy – is likely to be himself.

13. Finance has a fascination for many bright young people with limited means. They would like to be both intelligent and enterprising in the placement of their savings, even though investment income is much less important to them than their salaries. This attitude is all to the good. There is a great advantage for the young capitalist to begin his financial education and experience early. If he is going to operate as an aggressive investor he is certain to make some mistakes and to take some losses. Youth can stand these disappointments and profit by them. We urge the beginner in security buying not to waste his efforts and his money in trying to beat the market. Let him study security values and initially test out his judgment on price versus value with the smallest possible sums.3

14. Most businesses change in character and quality over the years, sometimes for the better, perhaps more often for the worse. The investor need not watch his companies’ performance like a hawk; but he should give it a good, hard look from time to time.

15. Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.

16. The most realistic distinction between the investor and the speculator is found in their attitude toward stock-market movements. The speculator’s primary interest lies in anticipating and profiting from market fluctuations. The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices. Market movements are important to him in a practical sense, because they alternately create low price levels at which he would be wise to buy and high price levels at which he certainly should refrain from buying and probably would be wise to sell.

17. It is far from certain that the typical investor should regularly hold off buying until low market levels appear, because this may involve a long wait, very likely the loss of income, and the possible missing of investment opportunities. On the whole it may be better for the investor to do his stock buying whenever he has money to put in stocks, except when the general market level is much higher than can be justified by well-established standards of value. If he wants to be shrewd he can look for the ever-present bargain opportunities in individual securities.

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