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Relevance of Graham 79 Years Later
Posted by: Charles Mizrahi (IP Logged)
Date: June 18, 2013 10:40AM
Most books about investing usually have very short shelf lives. In many cases, they hit the bookshelves right at the peak of customer enthusiasm and then quickly lose their relevance. It certainly is a challenge to write something new, and even harder to write something about investing principles in one generation that will be just as relevant in the next.
Just about a decade ago, the stock market was raging to all-time highs. Investors were told that we were now in a new paradigm. Companies with no earnings and very few assets had market valuations in the billions of dollars. By the end of 1999, the Nasdaq was up over 86%. Here are a few hot sellers that were flying off the shelves toward the end of 1999:
Instead of the “Roaring 2000s” or “Dow 36,000,” the stock market plunged into the steepest bear market in 30 years. The Dow Jones lost 36% and the Nasdaq fell 77% from their highs before finding a bottom in October 2002. And Y2K proved to be a bust; planes didn’t fall from the sky, computers didn’t freeze up and electronic equipment didn’t go haywire when the clock struck midnight on Dec. 31, 1999.
How many successful investors do you know who keep these books on their desks, quote from them often, and refer to them when the financial world is in flux? I’m sure you’d have a hard time finding one. These books remain relevant for a few months at best, and then remain tucked in bookcases, never again to see the light of day.
In September 2008, the sixth edition of “Security Analysis by” Benjamin Graham and David Dodd was released. The book has been continuously in print since it was first published in 1934. Benjamin Graham’s most famous student, billionaire investor Warren Buffett, wrote the foreword to the current edition. He wrote, “[T]hey [Graham and Dodd] laid out a road map for investing that I have now been following for 57 years. There’s been no reason to look for another.”
Still relevant after 79 years and six editions.
How is it possible that in the present day of high-frequency trading by computers, instant access to information, and trillions of dollars trading in the world market on a daily basis, a book on investing written during the height of the Great Depression could stay relevant for 79 years? The question was recently asked of Professor Bruce Greenwald of Columbia University School of Business. Professor Greenwald teaches the same course that Benjamin Graham taught over seven decades ago at Columbia.
Why It Still Makes Sense
Greenwald said that Graham continues to be relevant because studies continue to prove him right. Buying stocks that are overlooked by most investors or are in boring businesses tend to sell at cheap prices. Greenwald referred to them as “cheap and ugly.” Studies have shown that over different time periods, cheap and ugly stocks outperformed the stock market by 3% to 5% on an annual basis.
Benjamin Graham was proven right — buying “cheap and ugly” stocks continues to outperform.
Without knowing it, Graham understood that investors would avoid these types of stocks, preferring to buy the latest fad of the day, regardless of price, rather than what had the most value.
A new field of study called behavioral finance, which attempts to figure out the emotional side of investing, has developed over the past several years. In other words, when it comes to money, why do people act the way they do? Greenwald identified three reasons why buying cheap and ugly stocks works.
1. People love to buy lottery tickets. Investors look at buying a stock as like buying a lottery ticket, hoping to make a killing, while knowing that they will probably lose. When enough of this type of thinking converges on the same sector or stock, price becomes detached from reality, and companies that are worthless have market caps in the billions.
Most investor look at owning stocks like buying a lottery ticket.
2. We avoid what is unpleasant. Most investors are predisposed to buy stocks only when they are moving higher, instead of going against the grain and buying them when they are trading at multiyear lows.
3. Too sure of themselves.Studies have shown that people are much more sure of themselves than they really ought to be. The future is uncertain and there are many unknowns that can change the outcome, yet investors plug projections into spreadsheets and treat them as fact.
Benjamin Graham continues to be relevant 79 years after he wrote his principles on investing. Both statistical and behavioral sciences have proven him right. Buying stocks that are out of favor when they trade for a discount is a logical and rational approach that has passed the test of time.
A Few Ideas
Here are a few ideas. These companies have financially sound balance sheets and are currently selling at attractive valuations:
Stocks Discussed: SPY, DJI, QQQ,
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