WILFRID CRAIGIE, Senior Investment Analyst
To mangle the Monty Python and the Romans: What did Benjamin Graham ever do for us?
Graham – whose seminal works include 1934 Security Analysis (with David Dodd), and the much more accessible 1949 Intelligent Investor – died fifty years ago this month. He is widely considered the father of Value investing and security analysis.
His enduring legacy is hard to overstate. His students are the most visible part of this; not least of all Warren Buffett, who studied under him at Columbia Business School and later worked with him, but also the other so-called Superinvestors of Graham-and-Doddsville, whose achievements Graham laid out in a 1984 essay that Buffett delivered.
Before Graham, stock picking was closer to speculation. Wall Street ran largely on tips, momentum, and narrative. Graham gave investors a systematic framework: study a company’s financials, assess its intrinsic value, and buy only when the price offers a significant margin of safety below that value. That idea – margin of safety – became the cornerstone of a whole school of investing and endures today.
The core insight was deceptively simple (but not easy!): price and value are not the same thing. Markets frequently misprice securities, driven by fear and greed rather than fundamentals. The investor’s job is not to predict where prices are going, but to identify the gap between what something is worth and what it costs – and to act upon it patiently.
Mr. Market
His allegory of Mr. Market is in many ways his greatest legacy and contribution. He asked readers to imagine the market as a moody business partner who shows up every day offering to buy your share of a business or sell you his – at a price determined entirely by his manic-depressive emotional state, rather than any rational assessment of value.
Some days he is euphoric and names an absurdly high price; other days he is despairing and offers his stake for almost nothing. The intelligent investor’s job is to exploit Mr. Market’s irrationality, not be infected by it. You are never obligated to transact; you can simply wait until the price makes sense. In the short term the market is a voting machine but in the long-run it is a weighing machine – and patient long-term investors can exploit these mispricing’s.
For this author (as an embarrassingly obsessed teenager!) this framing – the market as servant rather than master – clicked as an “a-ha” moment. It is one of the mostpsychologically useful ideas in investing and has guided generations of investors – both amateur and preeminent – through periods of market volatility.
The margin of safety
Graham’s margin of safety principle holds that you should pay considerably less than what a business is worth, so that even if your analysis is wrong, you are cushioned against serious loss. He often focused upon so-called “net-nets” – that is companies trading below net current asset values – with this grounding of physical asset value. This shifts the emphasis away from predicting the future – inherently uncertain – toward assessing current value relative to price – less tall order but one still fraught with difficulty.
A changing world:
The world today is very different from that in which Graham wrote and operated. Algo trading, passive, leveraged ETFs – the market structure is unrecognisable. At the same time so are the companies and their fundamentals; although we are now seeing a revenge of the physical, the last half century has been dominated by intangible not physical assets, and companies that can deliver increasing returns to scale, sustaining high growth in ways previously unimaginable.
Even his great and most famous disciple – Mr Buffett – evolved his approach, heavily influenced by his business partner Charlie Munger. The 1972 acquisition of See’s Candy now appears a seminal moment in Buffett’s career, as brands and other intangible qualities became increasingly important.
And there is an ever-present pressure to contrast – and compete – Value investing with its sister discipline – so-called Growth investing. This discourse has intensified since the 1990s when Eugene Fama and Kenneth French developed their eponymous Three Factor Model.
The historic outperformance of Growth in the more than decade that followed the financial crisis saw Value written off by many as an outdated relic.
To the detractors of value investing this long winter limits and curtails Graham’s relevance. However, we believe such dismissal misses the point and is overly reductionist.
Enduring relevance:
As we see it the relevance of Graham today is not to try and follow his approach in copycat form nearly a century later.
Rather we believe the value lies in the enduring nature of his big ideas and the mental and philosophical framework this provides.
Whilst many things have changed, human nature is such that markets are still prone to the very same bout of pessimism and optimism that Mr Market embodies and Graham observed.
This inefficiency is best exploited at the stock level and buying businesses at deep discounts to their intrinsic value – with a significant margin of safety – remains as relevant today as it did in Graham’s day. We believe this is true for fundamental investors of all hues – growth or value.
As with many things, Charlie Munger put it most succinctly: “all intelligent investing is value investing”. We are all Grahamites now. That is his legacy.
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General Terms
Deliberate misuse of any element of this website including, without limitation, hacking, introduction of viruses or similar code, disruption or excessive use or any use in contravention of applicable law, is expressly prohibited and we reserve the right to terminate your access to the website, and at our discretion, pass information to the legal authorities.
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