36
Ben Graham: Ideas as Mementos

Since Ben Graham was surely the most original and enduring thinker and writer about serious investing. It seems altogether fitting to end this section with a review article covering some of his many contributions. It concludes with an insight from Warren Buffett.

Ben Graham developed the idea of our profession just as surely as Sir Robert Peel created the idea of an effective London policeman, and just as certainly as the London constables are still called Bobbies in respect for Sir Robert's conceptualization of their mission and qualifications, those of us who serve in the profession as financial analysts are living out Ben's idea of what we might be able to do. We are, at least we aspire to be, adherents to the mission he originated.

My own acquaintance with Ben was all too brief: In his late seventies, he joined in a series of seminars I was leading for Donaldson, Lufkin & Jenrette, to which were invited, in groups of 20–25, the leading investment managers of the day. By common consent, Ben was the best informed, the most inquisitive, the most delighted with ideas and differences of view in the group. And, of course, he charmed us all by his grace, wit, and appreciation.

Sometimes, the incidental imperfection serves to illuminate the excellence of the man. For me, there is still special pleasure in the impossibility of sorting out one trivial misunderstanding. Ben was very pleased with Jacob Bronowski's television series on The Ascent of Man, watched every program, and was reading the book of the program's transcripts.

Ben was delighted with Bronowski's research and ideas: They were the twin dimensions of Ben's work. But Ben was even more enchanted by Bronowski's extraordinary ability, as Ben saw it, to “get every word in every sentence in every performance exactly right—exactly the way it was in the book!” It never occurred to Ben that the book was made after the television program, and that it was the book that was accurately repeating Bronowski. Twice I tried to help Ben “get the cart before the horse,” to no avail. Then I realized he liked it the way he had it and would rather get on with the serious discussion of investment ideas.

Here, then, are a few excerpts from a dozen articles Ben wrote for The Financial Analysts Journal over 30 years.

The Campaign for Professionalism

Ben was an early advocate of what we now call Chartered Financial Analysts and the extensive examination and educational program conducted through the CFA Institute. His campaign for this professionalism was evident in a 1945 FAJ article where he posed the rhetorical question: “Should security analysts have a professional rating?” For a mind so quick, to isolate the central argument, the analysis was not difficult.

First, “The crux of the question is whether security analysis as a calling has enough of the professional attributes to justify the requirement that its practitioners present to the public evidence of fitness for their work.”

Second, “The right of every individual to practice his chosen trade is subject to the higher right of society to impose standards of fitness where these are advisable.”

Third, “It would seem to follow, almost as an axiom, that security analysts would welcome a rating of quasi-professional character and will work hard to develop this rating into a universally accepted warranty of good character and sound competence.”

The elegance of Ben's thinking was complemented by a plain way with words and dress. He wore dark suits of a durable fabric that would last and last, and he described his work as “stock market operations.” In a similar vein, his term for the recognized professional was simply Qualified Security Analyst.

In the course of a 1946 article, written as “Cogitator,” Ben admonished his colleagues, saying that a professional analyst was “right” in recommending purchase of a security only when the stock appreciated in price for the reasons identified by the analyst. You should be right for the right reason—the one you identified when making your recommendation:

Evident in this brief excerpt is Ben's respect for the other investors working in the market. In later years, after many more smart people had come into the market, he would doubt the ability of any large institutional investor to outperform the market and the competition.

Organized Knowledge

Ben enjoyed throughout his life that open-minded thirst for understanding and information that we admire in the term “childlike.” At nearly 80, he was working out a new formulation and testing it against actual market results.

In 1946, at the time of the announcement of a new Awards Committee on Corporate Disclosure, Ben had addressed the need for organized knowledge in a profession:

Intrinsic Value

Ben was clearly identified in his investing with “intrinsic value” and not with “growth stocks.” The reason for his preference was the confidence he could have in his own work when the analysis focused on present assets and liabilities rather than depending upon estimates of the future. Ben would have been comfortable, of course with Baron Rothschild's summary of a lifetime's learning: “Buy assets; sell earnings.”

Here is Ben's logic from a 1957 article:

Later in the same piece:

The Psychology of the Stock Market

In 1958, Ben was Visiting Professor of Finance at UCLA, and gave a long talk on what he perceived to be speculation in common stock:

Ben developed his thesis, to the pleasure of his audience, with a bit of personal history:

Later on, another personal experience:

Always seeking lessons to be drawn from experiences, Ben summarized this lesson:

On Price-Earnings Ratios

Observing how markets change and reverse apparent certainties, Ben gently admonished:

His conclusion draws upon his beloved classics: