Chapter 107 - Benjamin Graham: The Memoirs of the Dean of Wall Street
Today’s Chapter is based on the book “Benjamin Graham: The Memoirs of the Dean of Wall Street” by Benjamin Graham.
Benjamin Graham is widely known as the Father of Value Investing. He authored seminal works including “Security Analysis” in 1934 and “The Intelligent Investor” in 1949. Graham’s teachings significantly influenced many successful investors, notably Warren Buffett, who regards him as a pivotal figure in his own investment philosophy.
Here’s what I learned:
The Pursuit of Knowledge
“In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time – none, zero.”
— Charlie Munger
Benjamin Graham's life was marked by an insatiable appetite for knowledge. From a young age, he demonstrated a deep love for learning, often prioritizing intellectual pursuits over the practicalities of everyday life. As he once said, “I remember the things I learn, rather than the things I live.” Moreover, Graham's curiosity was not confined to one field; he explored literature, mathematics, history, and philosophy with equal enthusiasm. His prodigious reading habits were central to his development.
During Graham’s youth, he had plenty of time to read and mentioned that the amount he read seemed prodigious. He explained that, "Each two weeks I would take four or five books out of the library, and in addition, I consumed a number of proscribed but relatively innocent books that passed from hand to hand." Graham quickly realized that by reading more than his friends, his knowledge was compounding at a higher rate.
"Later on in my life, I was amazed to discover how much greater an impact reading had on me than on my friends. The common attitude was that reading was done merely to pass examinations, or for temporary amusement, and then promptly forgotten."
— Benjamin Graham
One interesting anecdote from Benjamin Graham was the fact that he made friends with the characters he met from his readings. As he explains, "The real friends and intimates of my life have been Hadrian and Severus and countless other characters of history—even Gustavus Adolphus and Oxenstierns of Sweden—together with those writers whose work and personalities had a special meaning for my developing youth."
This reminds me of Charlie Munger’s concept of making friends with the eminent dead. One of Charlie Munger’s life principle is the idea that the way of learning something is to learn from what others have already mastered. In this way, you can learn from the mistakes and experience of those that came before you. As Isaac Newton once said, “If I have seen further it is by standing on the shoulders of Giants.”
“I think you learn economics better if you make Adam Smith your friend. That sounds funny, making friends among the “eminent dead,” but if you go through life making friends with the eminent dead who had the right ideas, I think it will work better for you in life and work better in education. It’s way better than just giving the basic concepts.”
— Charlie Munger
Funnily enough, both Charlie Munger and Benjamin Graham had the same hero: a certain Benjamin Franklin. As Graham explained, “But while Ulysses has ever been my fantasy idol, there is another fleshand-blood character after whom I have consciously modeled my life. By coincidence we have the same first name. The man is Benjamin Franklin. He had all the characteristics to which I aspire-high intelligence, application, inventiveness, humor, kindness, and tolerance of others' faults.”
As we have learned previously, Benjamin Franklin established in his writings thirteen virtues that are absolutely necessary to lead the perfect life, which no doubt inspired both Munger and Graham:
Temperance: Eat not to dullness; drink not to elevation.
Silence: Speak not but what may benefit others or yourself; avoid trifling conversation.
Order: Let all your things have their places; let each part of your business have its time.
Resolution: Resolve to perform what you ought; perform without fail what you resolve.
Frugality: Make no expense but to do good to others or yourself; i.e., waste nothing.
Industry: Lose no time; be always employed in something useful; cut off all unnecessary actions.
Sincerity: Use no hurtful deceit; think innocently and justly, and, if you speak, speak accordingly.
Justice: Wrong none by doing injuries, or omitting the benefits that are your duty.
Moderation: Avoid extremes; forbear resenting injuries so much as you think they deserve.
Cleanliness: Tolerate no uncleanliness in body, clothes, or habitation.
Tranquillity: Be not disturbed at trifles, or at accidents common or unavoidable.
Chastity: Rarely use venery but for health or offspring, never to dullness, weakness, or the injury of your own or another's peace or reputation.
Humility: Imitate Jesus and Socrates.
“My intention being to acquire the habitude of all these virtues, I judg’d it would be well not to distract my attention by attempting the whole at once, but to fix it on one of them at a time; and, when I should be master of that, then to proceed to another, and so on, till I should have gone thro’ the thirteen; and, as the previous acquisition of some might facilitate the acquisition of certain others, I arrang’d them with that view, as they stand above.”
— Benjamin Franklin
Father of Value Investing
“All intelligent investing is value investing — acquiring more that you are paying for. You must value the business in order to value the stock.”
— Charlie Munger
Graham's approach to investing is perhaps his most enduring legacy. He pioneered the concept of value investing, advocating for a disciplined and analytical approach to the stock market. His insights reveal a foundational principle: investing should be grounded in thorough analysis and a clear understanding of the intrinsic value of assets.
As a matter of fact, Graham's career on Wall Street coincided with a period of rapid change and unprecedented speculation. He witnessed firsthand the irrational exuberance of the roaring twenties and the devastating consequences of the 1929 crash. These experiences solidified his conviction that market prices often deviate significantly from the intrinsic value of a security. As he once said, “If you speculate, you'll lose your money. Always remember that.”
As such, Benjamin Graham encouraged a more systematic approach to investing comparatively to his peers. His contrarian approach focused on identifying undervalued companies and exploiting market inefficiencies. He meticulously analyzed financial statements, seeking companies with strong fundamentals trading at a discount of their book value. He once said, “My operations consisted largely of buying common stocks that were selling well below their true value as determined by dependable analysis.”
"I concluded that money could be made both conservatively and plentifully by buying common stock which analysis showed to be selling too low and selling against the other common stocks which a similar analysis indicated to be overpriced."
— Benjamin Graham
However, despite being quite successful as a value investor himself, Graham believes that investing is quite complex for the common individual. As he once said, "I have little confidence even in the ability of analysts, let alone untrained investors, to select common stocks that will give better than average results... Consequently, I feel that the standard portfolio policy should be to duplicate, more or less, the Dow Jones Industrial Average." This is eerily similar to Warren Buffett’s point of view. Buffett once said, "In my view, for most people, the best thing to do is to own the S&P 500 index fund.”
As we have learned previously, Benjamin Graham is one of the biggest influences on Warren Buffett’s investment philosophy. As a matter of fact, according to Buffett, he took three main principles from Ben Graham’s investment philosophy:
A stock is the right to own a little piece of a business. A stock is worth a certain fraction of what you would be willing to pay for the whole business.
Use a margin of safety . Investing is built on estimates and uncertainty. A wide margin of safety ensures that the effects of good decisions are not wiped out by errors. The way to advance, above all, is by not retreating.
Mr. Market is your servant, not your master . Graham postulated a moody character called Mr. Market, who offers to buy and sell stocks every day, often at prices that don’t make sense. Mr. Market’s moods should not influence your view of price. However, from time to time he does offer the chance to buy low and sell high.
Firstly, Buffett recognises that stocks should be seen as a piece of business rather than a bunch of numbers on a screen. While the majority of people are speculators who are trading stocks as if they were chips in a casino, value investors such as Buffett try to identify the total value of the chips.
Secondly, Benjamin Graham mentions that value investors must have a margin of safety when investing, meaning that they must leave plenty of room for error. Buffett illustrates this concept of margin of safety with the following saying: “Buy one dollar for fifty cents.”
“You also have to have the knowledge to enable you to make a very general estimate about the value of the underlying businesses. But you do not cut it close. That is what Ben Graham meant by having a margin of safety.You don’t try and buy businesses worth $83 million for $80 million. You leave yourself an enormous margin.”
— Warren Buffett
Finally, on the concept of “Mr. Market”, I’ll allow Buffett to explain it in his own words. In his 1987 Berkshire Hathaway letter to shareholders, he wrote the following:
“Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.
Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market’s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions, he will name a very low price, since he is terrified that you will unload your interest on him.
Mr. Market has another endearing characteristic: He doesn’t mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you.
But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren’t certain that you understand and can value your business far better than Mr. Market, you don’t belong in the game. As they say in poker, “If you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy.”
Ben’s Mr. Market allegory may seem out-of-date in today’s investment world, in which most professionals and academicians talk of efficient markets, dynamic hedging and betas. Their interest in such matters is understandable, since techniques shrouded in mystery clearly have value to the purveyor of investment advice. After all, what witch doctor has ever achieved fame and fortune by simply advising “Take two aspirins”?
The value of market esoterica to the consumer of investment advice is a different story. In my opinion, investment success will not be produced by arcane formulae, computer programs or signals flashed by the price behavior of stocks and markets. Rather an investor will succeed by coupling good business judgment with an ability to insulate his thoughts and behavior from the super-contagious emotions that swirl about the marketplace. In my own efforts to stay insulated, I have found it highly useful to keep Ben’s Mr. Market concept firmly in mind.
Following Ben’s teachings, Charlie and I let our marketable equities tell us by their operating results – not by their daily, or even yearly, price quotations – whether our investments are successful. The market may ignore business success for a while, but eventually will confirm it. As Ben said: “In the short run, the market is a voting machine but in the long run it is a weighing machine.” The speed at which a business’s success is recognized, furthermore, is not that important as long as the company’s intrinsic value is increasing at a satisfactory rate. In fact, delayed recognition can be an advantage: It may give us the chance to buy more of a good thing at a bargain price.”
— Warren Buffett
Beyond the Book
Read "The Best Way to Find More Time to Read" by Farnam Street
Read "Seneca on Letting the Eminent Dead Guide You" by Farnam Street
Read "Ben Franklin: The Thirteen Necessary Virtues" by Farnam Street
Read "The Timeless Parable of Mr. Market" by Farnam Street
If you enjoy reading my newsletter, please consider becoming a paid subscriber. You’ll be able to keep this newsletter going! Here’s what you get when you upgrade:
Voting on polls: you’ll get to vote on who I should write about next.
Requesting biographies: you can request a biography for me to read and write about next.
Supporting my next book purchase: all payments received will be used to purchase a new biography.