Benjamin Graham

Benjamin Graham in 1950

Benjamin Graham (May 9, 1894 – September 21, 1976) was an influential economist and professional investor. Graham is considered the first proponent of Value Investing. Well known disciples (students and teaching assistants) of Graham include Warren Buffett, William J. Ruane, Irving Kahn, Walter Schloss, and Charles Brandes. Buffett, who credits Graham as grounding him with a sound intellectual investment framework, described him as the second most influential person in his life after his own father. In fact, Graham had such an overwhelming influence on his students that two of them, Buffett and Kahn, named their sons, Howard Graham Buffett and Thomas Graham Kahn, after him.

Quotes

• You are neither right nor wrong because people agree with you.
  • As quoted by Warren Buffett, in an interview in Forbes magazine (1 November 1974)

Storage and Stability (1937)

• The idea of storage as a solution of economic problems at least has the support of common sense.It is diametrically opposed to the topsy-turvy Alice-in-Wonderland reasoning that has marked so much of our depression thinking and policy.
  • Preface, p. vii

• Instead of passing blithely over into that Promised Land, flowing almost literally with milk and honey, it may be our destiny to wander a full 40 years or more in the wilderness of doubt and divided sentiments.
  • Part I, Chapter I, The Changing Role of Surplus Stocks, p. 4

• Even the most conservative must realize that the recent transformation of surplus from an individual to a national disaster implies a scathing indictment of our capitalist system as it has now developed.
  • Part I, Chapter I, The Changing Role of Surplus Stocks, p. 17

• Whether we like it or not, government intervention in the face of surplus is here to stay.
  • Part I, Chapter II, Government and Surplus Stocks, p. 26

The State can always afford to finance what its citizens can soundly produce.

• It is a fact worth pondering that four centuries ago the evil of "an abundance or surplus" arose from its being kept off the market, while today the evil of surplus lies in its being thrown upon the market.
  • Part I, Chapter II, Government and Surplus Stocks, p. 28

• The State can always afford to finance what its citizens can soundly produce.
  • Part I, Chapter III, The Problem of Conserving Surplus, p. 43 (italics as per text)

• The Reservoir system will function not only as an equalizer of business conditions, but also as a national store to meet further emergencies, such as war and drought, and-most important of all-as the concrete means of developing a steadily higher living standard for all.
  • Part II, Chapter IV, A Plan For Conserving Surplus, p. 50

• Why should the cotton growers suffer if there is shortage of wheat?
  • Part II, Chapter V, Reservoir System and Commodities, p. 72

• Price statistics show clearly that instability in raw-material prices is a prime cause of instability of other prices.
  • Part II, Chapter VI, The Question of Price Stability, p. 85

• The existence of such a war chest might go far to strengthen our prestige and frighten off any would be assailant.
  • Part II, Chapter VIII, Ultimate Uses of the Stored Units, p. 97

• Both a priori reasoning and experience teach us that as as these funds grow larger the geometrical rate of growth by compound interest ultimately defeats itself.
  • Part II, Chapter VIII,Ultimate Uses of the Stored Units, p. 103

• The money cost of the reservoir plan literally fades into insignificance when it is compared with the financial burden which the great depression imposed on the nation.
  • Part II, Chapter IX, The Cost of the Reservoir Plan, p. 114

• The utility, or intrinsic value of gold as a commodity is now considerably less than in the past; its monetary status has become extraordinarily ambiguous; and its future is highly uncertain.
  • Part III, Chapter X, The Status of Gold and Silver, p. 127

• THERE is widespread agreement among economists that abuse of credit constitutes one of the chief unwholesome elements in business booms and is mainly responsible for the ensuing crash and depression.
  • Part III, Chapter XIII, The Reservoir Plan and Credit Control, p. 153

• The volume of credit depends upon three factors: the desire to borrow, the ability to lend and the desire to lend.
  • Part III, Chapter XIII, The Reservoir Plan and Credit Control, p. 154

• There is something paradoxical in the fact that by establishing an export market we subject our entire domestic production to the vagaries of that market.
  • Part IV, Chapter XIV, Farm Problems and Remedies, p. 172

• It must be fundamentally wrong to reduce production of food and fiber while one-third of our population is still ill fed and ill clothed.
  • Part IV, Chapter XVI, Reservoir Plan Versus Crop Control, p. 195

• The Reservoir plan is an engineering mechanism applied to the field of economics, and in its essence it has nothing to do with democracy or any other political philosophy.
  • Part V, Chapter XIX, The Reservoir Plan and Tradition, p. 232

• The people of the United States will not tolerate another deep depression that arises not from any lack of natural resources, productive capacity or man and brain power, but solely from imperfections in the functioning of the system of finance capitalism.
  • Part V, Chapter XIX, The Reservoir Plan and Tradition, p. 234 (See also; Karl Marx, Capital)

World Commodities and World Currencies (1944)

• The world has not learned the technique of balanced expansion without the resultant commercial and financial congestion.
  • Chapter I, The Problem of Raw Materials, p. 5

• Cartels have spread and will spread as long as the world lacks an effective mechanism by which balanced expansion may be achieved without a resulting disruption of prices.
  • Chapter II, The Issue of Cartels, p. 21

• The modern world is not geared properly to the storage of goods.
  • Chapter III, The Paradox of the Stockpile, p. 23

• The story of Joseph in Egypt and of the seven fat and the seven lean years has passed into the homely wisdom of the ages; but our economic thinking seems to have lost contact with so simple and basic approach to prudent management of a nations welfare.
  • Chapter V, Stabilization of Raw Materials, p. 56

• Many progressive economists insist that gold is now in essentially the same position as silver and that the arguments the simon-pure gold advocates use against the white metal can be directed with equal effect against their own fetish.
  • Chapter IX, Commodities, Gold, Credit as Money, p. 100 (See also Karl Marx, Capital Volume I, p. 89)

• It is a misfortune of the times that all of us must needs be amateur economists-including, and perhaps especially, the professionals.
  • Chapter X, Commodity Unit Stabilization, p. 109

• We have introduced the monetary factor not by necessity but by choice. Its advantages are obvious. Self-financed commodity units are not only interest free, but free also from dependence upon credit conditions. They are a step-desirable, it seems to us-in the direction of a goods economy as distinct from a money economy; but this step is taken without violence by merely identifying basic goods with money. It guarantees unfailing purchasing power where it is most needed-among the countless producers of raw commodities.
  • Chapter X, Commodity Unit Stabilization, p. 114

The Intelligent Investor: The Classic Text on Value Investing (1949)

• Though business conditions may change, corporations and securities may change, and financial institutions and regulations may change, human nature remains the same. Thus the important and difficult part of sound investment, which hinges upon the investor's own temperament and attitude, is not much affected by the passing years.
  • Introduction, p. xxiv

• The history of the past fifty years, and longer, indicates that a diversified holding of representative common stocks will prove more profitable over a stretch of years than a bond portfolio, with one important provisio—that the shares must be purchased at reasonable market levels, that is, levels that are reasonable in the light of fairly well-defined standards derived from past experience.
  • Chapter I, What the Intelligent Investor Can Accomplish, p. 7

• Stocks can be dynamite.
  • Chapter I, What the Intelligent Investor Can Accomplish, p. 8

• The genuine investor in common stocks does not need a great equipment of brain and knowledge, but he does need some unusual qualities of character
  • Chapter I, What the Intelligent Investor Can Accomplish, p. 8

• It is no difficult trick to bring a great deal of energy, study, and native ability into Wall Street and to end up with losses instead of profits. These virtues, if channeled in the wrong directions, become indistinguishable from handicaps.
  • Chapter I, What the Intelligent Investor Can Accomplish, p. 11

• All the real money in investment will have to be made—as most of it has been in the past— not out of buying and selling but out of owning and holding securities, receiving interests and dividends therein, and benefiting from their long-term increases in value. Hence stockholder's major energies and wisdom as investors should be directed toward assuring themselves of the best operating results from their corporations. This in turn means assuring themselves of fully honest and competent managements.
  • Chapter I, What the Intelligent Investor Can Accomplish, p. 17

• Nothing in finance is more fatuous and harmful, in our opinion, than the firmly established attitude of common stock investors regarding questions of corporate management. That attitude is summed up in the phrase: "If you don't like the management, sell your stock." [...] The public owners seem to have abdicated all claim to control over the paid superintendents of their property
  • Chapter I, What the Intelligent Investor Can Accomplish, p. 18

• Intelligent investment is more a matter of mental approach than it is of technique. A sound mental approach toward stock fluctuations is the touchstone of all successful investment under present-day conditions.
  • Chapter II, The Investor and Stock-Market Fluctuations, p. 21

• In most cases the favorable price performance will be accompanied by a well-defined improvement in the average earnings, in the dividend, and in the balance-sheet position. Thus in the long run the market test and the ordinary business test of a successful equity commitment tend to be largely identical.
  • Chapter II, The Investor and Stock-Market Fluctuations, p. 25

• A price decline is of no real importance to the bona fide investor unless it is either very substantial—say, more than a third from cost—or unless it reflects a known deterioration of consequence in the company's position. In a well-defined bear market many sound common stocks sell temporarily at extraordinary low prices. It is possible that the investor may then have a paper loss of fully 50 per cent on some of his holdings, without any convincing indication that the underlying values have been permanently affected.
  • Chapter II, The Investor and Stock-Market Fluctuations, p. 25

• Why could the typical investor expect any better success in trying to buy at low levels and sell at high levels than in trying to forecast what the market is going to do? Because if he does the former he acts only after the market has moved down into buying levels or up into selling levels. His role is not that of a prophet but of a businessman seizing clearly evident investment opportunities. He is not trying to be smarter than his fellow investors but simply trying to be less irrational than the mass of speculators who insist on buying after the market advances and selling after it goes down. If the market persists in behaving foolishly, all he seems to need is ordinary common sense in order to exploit its foolishness.
  • Chapter II, The Investor and Stock-Market Fluctuations, p. 31

• It is worth pointing out that assuredly not more than one person out of a hundred who stayed in the market after after 1925 emerged from it with a net profit and that the speculative losses taken were appalling.
  • Chapter II, The Investor and Stock-Market Fluctuations, p. 34

• Whenever the investor sold out in an upswing as soon as the top level of the previous well-recognized bull market was reached, he had a chance in the next bear market to buy back at one third (or better) below his selling price.
  • Chapter II, The Investor and Stock-Market Fluctuations, p. 35

• The graph does show one tremendous rise and collapse which stands out starkly from all the other fluctuations. This is commonly called the "new era" stock market of 1927-33. The striking feature of this phenomenon was that the new era existed solely in the minds of market speculators. The whole episode, in retrospect, now seems to have been one of those rare manifestations of mass financial madness which we used to study in our history books under the titles of "the South Sea Bubble", "the Mississippi Bubble" and so on.
  • Chapter II, The Investor and Stock-Market Fluctuations, p. 36

• The purchase of a bargain issue presupposes that the market's current appraisal is wrong, or at least that the buyer's idea of value is more likely to be right than the market's. In this process the investor sets his judgement against that of the market. To some this may seem arrogant or foolhardy.
  • Chapter II, The Investor and Stock-Market Fluctuations, p. 38

• If General Motors is worth $60 a share to an investor it must be because the full common-stock ownership of this gigantic enterprise as a whole is worth 43 million (shares) times $60, or no less than $2,600 million.
  • Chapter II, The Investor and Stock-Market Fluctuations, p. 39

• The true investor scarcely ever has to sell his shares, and at all other times he is free di 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 in his holdings 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 then be spared the mental anguish caused him by other persons' mistakes of judgement.
  • Chapter II, The Investor and Stock-Market Fluctuations, p. 40

• The investor has the benefit of the stock market's daily and changing appraisal of his holdings, for whatever that appraisal may be worth, and, second, that the investor is able to increase or decrease his investment at the market's daily figure—if he chooses. Thus the existence of a quoted market gives the investor certain options which he does not have if his security is unquoted. But it does not impose the current quotation on an investor who prefers to take his idea of value from some other source.
  • Chapter II, The Investor and Stock-Market Fluctuations, p. 41

• 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.
  • Chapter II, The Investor and Stock-Market Fluctuations, p. 42

• The investor's primary interest lies in acquiring and holding suitable securities at suitable prices.
  • Chapter II, The Investor and Stock-Market Fluctuations, p. 43

• The investor would not be far wrong if this motto read more simply: "Never buy a stock immediately after a substantial rise or sell one immediately after a substantial drop".
  • Chapter II, The Investor and Stock-Market Fluctuations, p. 43

• Good managements produce a good average market price, and bad managements produce bad market prices.
  • Chapter II, The Investor and Stock-Market Fluctuations, p. 44

• If we assume that there are normal or standard income results to be obtained from investing money in securities, then the role of the adviser can be more readily established. He will use his superior training and experience to protect his clients against mistakes and to make sure that they obtain the results to which their money is entitled.
  • Chapter III, The Investor and His Advisers, p. 45

• Nearly everyone interested in common stocks wants to be told by someone else what he thinks the market is going to do. The demand being there, it must be supplied.
  • Chapter III, The Investor and His Advisers, p. 48

• The value of the security analyst to the investor depends largely on the investor's own attitude. If the investor asks the analyst the right questions, he is likely to get the right—or at least valuable— answers.
  • Chapter III, The Investor and His Advisers, p. 51

• Readers of this book, however intelligent and knowing, could scarcely expect to do a better job of portfolio selection than the top analysts of the country. But if it is true that a fairly large segment of the stock market is often discriminated against or entirely neglected in the standard analytical selections, then the intelligent investor may be in a position to profit from the resultant undervaluations.
  • p. 204.

• Good management are rarely overcompensated to an extent that makes any significant difference with respect to the stockholder's position. Poor management are always overcompensated, because they are worth less than nothing to the owners.
  • Chapter XIV, Stockholders and Managements, p. 209

The Intelligent Investor (1973) (Fourth Revised Edition)

• Unusually rapid growth cannot keep up forever; when a company has already registered a brilliant expansion, its very increase in size makes a repetition of its achievement more difficult.
  • Chapter 7, Portfolio Policy: The Positive Side, p. 75

Investment is most intelligent when it is most businesslike.

• Wall Street has a few prudent principles; the trouble is that they are always forgotten when they are most needed.
  • Chapter 16, Convertible Issues and Warrants, p. 225

• Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions.
  • Chapter 20, "Margin of Safety": The Central Concept, p. 280

• Investment is most intelligent when it is most businesslike.
  • Chapter 20, "Margin of Safety": The Central Concept, p. 286

• Do not let anyone else run your business.
  • Chapter 20, "Margin of Safety": The Central Concept, p. 286

• To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.
  • Chapter 20, "Margin of Safety": The Central Concept, p. 287

Disputed

• In the short-run, the market is a voting machine - reflecting a voter-registration test that requires only money, not intelligence or emotional stability - but in the long-run, the market is a weighing machine.
• [Shorter variant:] In the short run, the market is a voting machine but in the long run, it is a weighing machine.
  • Quoted and attributed to Graham in Warren Buffett's 1993 letter to investors.[1]

The statement is not found in any of Graham's publications or lecture transcripts, and when asked, Buffett could not provide a reference.[2]

Quotes about Benjamin Graham

• A story that was passed down from Ben Graham illustrates the lemminglike behavior of the crowd: "Let me tell you the story of the oil prospector who met St. Peter at the Pearly Gates. When told his occupation, St. Peter said, “Oh, I’m really sorry. You seem to meet all the tests to get into heaven. But we’ve got a terrible problem. See that pen over there? That’s where we keep the oil prospectors waiting to get into heaven. And it’s filled—we haven’t got room for even one more.” The oil prospector thought for a minute and said, “Would you mind if I just said four words to those folks?” “I can’t see any harm in that,” said St. Pete. So the old-timer cupped his hands and yelled out, “Oil discovered in hell!” Immediately, the oil prospectors wrenched the lock off the door of the pen and out they flew, flapping their wings as hard as they could for the lower regions. “You know, that’s a pretty good trick,” St. Pete said. “Move in. The place is yours. You’ve got plenty of room.” The old fellow scratched his head and said, “No. If you don’t mind, I think I’ll go along with the rest of ’em. There may be some truth to that rumor after all."
  • Warren Buffett in his Berkshire Hathaway 1985 Annual Report

• In his first edition of Security Analysis, back in 1933, Graham expressed disdain for Wall Street's near-obsession with earnings in determining the value of a public company. For Graham, book value was a better guide. ...Bill Graham was right. ...We took the largest 1,500 companies... for the 25-year period ended Dec. 31, 1994. ...We calculated returns for the 20% of stocks with the lowest and highest price-to-book ratios. ...[I]t was no contest. ...If you had invested $10,000 in the lowest... it would have returned $364,000... This more than doubled the return of the market as a whole... an equally weighted market index provided... $163,000. ...[S]tocks that sold at the handsomest premiums to book value... ended up with a miserable $92,000, about 55% of the market's return and only one-fourth ...the lowest price-to-book group. ...[E]motion favors the premium priced stocks. They are fashionable. They are hot. ...Emotion overrides logic time after time.
  • David Dreman, "Ben Graham was right—again" (May 6, 1988) Forbes, p. 145.

• Ben Graham was a truly formidable mind, and he also had a clarity in writing. And, we've talked over and over again about the power of a few simple ideas thoroughly assimilated. ... that happened with Graham's ideas, which came to me indirectly through Warren — but also some directly from Graham. ... And, by the way, Buffett was the best student Graham had in 30 years of teaching at Columbia. ... Buffett became way better than Graham. That is a natural outcome. ... Newton said that, "If I've seen a little further than other men, it's by standing on the shoulders of giants." ... Warren may have stood on Ben's shoulders, but he ended up seeing farther. And, no doubt, somebody will come along in due course and do a lot better than we have.
  • Charlie Munger, (March 9, 2019)"1997 FULL Berkshire Hathaway Annual Meeting Warren Buffett Charlie Munger". IDP, YouTube. (quote at 4:44:43 of 5:19:21)

"The Superinvestors of Graham-and-Doddsville" (Fall, 1984)

Warren Buffett, Hermes, Columbia Business School magazine, source.

• Tom [Knapp] was a chemistry major at Princeton before the war; when he came back... he was a beach bum. And then one day he read that Dave Dodd was giving a night course in investments at Columbia. Tom took it on a non-credit basis, and he got so interested... that he enrolled at Columbia Business School where he got the MBA... He took Dodd's course again, and took Ben Graham's course. ...35 years later ...I found him on the beach ...he owns the beach!

• You... have to have the knowledge 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.

• [T]he secret has been out for 50 years, ever since Ben Graham and Dave Dodd wrote Security Analysis, yet I have seen no trend toward value investing in... 35 years... There seems to be some perverse human characteristic that likes to make easy things difficult.

• There will continue to be wide discrepancies between price and value in the marketplace, and those who read their Graham and Dodd will continue to prosper.

"After the Crash: The Opportunities According to Benjamin Graham" (1988)

Michael Aczel, The Investment Analyst

• There are perhaps four points where Graham departs radically from conventional practice: ...The "value" ...is not a short-term price forecast ...The "value" is a medium-term sustainable value for the firm as on on-going operation. ...The future is estimated conservatively, using realistic estimates of earnings, and prudent multipliers ...[O]nly ...purchase when price is substantially below value, thus using a considerable "margin of safety". The security should be sold when price begins to exceed value by a given proportion. ...[P]articularly at times when the market is low, a sufficiently large number of under-priced securities will exist ...This insight is perhaps his most unusual one. ...[U]nderpriced shares almost disappear when the market is historically high, and reappear when it falls.

• Graham strongly felt that market prices could be considerably out of line with values. The reason for this discrepancy he took to be psychological. ...[T]he overall level of the market could go to extremes in either direction, as optimism or pessimism holds sway. ...[F]avored stocks would sell at unduly high prices, while unpopular stocks would sell at unduly low prices.

• Graham's approach is cogent, well argued and has a substantial following among successful investors. There is some modern evidence to support him. It may well be worthwhile to sharpen his methods along modern lines and to test them thoroughly.

External links

• The Rediscovered Benjamin Graham – Selected Writings of the Wall Street Legend, by Janet Lowe