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Stepan Lavrouk
Stepan Lavrouk
Articles (382) 

A Conversation With Benjamin Graham

The dean of value investing did not have a very high opinion of Wall Street

December 13, 2019

Most, if not all, value investors are familiar with the works of Benjamin Graham - considered to be the father of the discipline. Many famous value investors, like Warren Buffett (Trades, Portfolio), credit Graham as the person who put them on the road to success. Graham’s most well-known texts are "Security Analysis" and "The Intelligent Investor," both of which I would encourage all aspiring value investors to read. Recently, I came across an interview from 1976 with the man himself. Graham, who at that point was 81 years old, spoke at length about the history of value investing, and how he perceived the industry had changed over his lifetime.

What random walk hypothesis?

The random walk hypothesis states that the fluctuations in stock prices are random and therefore cannot be predicted. It is an extension of the efficient market theory, which states that stock prices always reflect all available information, and that it is impossible to gain any edge in the market. Unsurprisingly, as the person who formulated the principles of value investing, Graham did not put too much stock (pun intended) in the random walk hypothesis. Of the academics who formulated the hypothesis, he said:

“Well, I am sure they are all very hardworking and serious. It’s hard for me to find a good connection between what they do and practical investment results...The idea of saying that the fact that the information is so widely spread that the resulting prices are logical prices - that is all wrong. I don’t see how you can say that the prices made in Wall Street are the right prices in any intelligent definition of what right prices would be.”

As is evident from this passage, Graham had a pretty dim view of Wall Street analysts and capital allocators. He believed that the main mass of financial professionals learn nothing and forget everything. This was his pithy way of expressing what value investors know to be true: that even highly-paid professionals have a tendency to get too greedy and too fearful, to say nothing of amateur investors, who are typically the ones who get left holding the bag when the market makes a new top and who sell their stocks when it has bottomed.

What is needed for success?

Interestingly, in his later years, it seemed like Graham had lost interest in the specific details of how to discover undervalued companies. If you read "Security Analysis," a lot of its prescriptions can seem somewhat dated. Perhaps by 1976, the market had changed so much that Graham no longer felt like his old strategies worked. For instance, it is hard to find companies that are selling at significant discounts to book value these days. He did, however, believe that the general principles of value investing were more important than the specifics.

Graham believed there were two requirements for success in investing: thinking correctly and thinking independently. It’s no use having a correct opinion that everyone else holds. Similarly, there’s no point in being heterodox if your independent thoughts are wrong. Balancing these two requirements is a tricky thing, but necessary if you are to succeed as an investor.

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About the author:

Stepan Lavrouk
Stepan Lavrouk is a financial writer with a background in equity research and macro trading. Specific investing interests include energy, fundamental geoeconomic analysis and biotechnology. He holds a bachelor of science degree from Trinity College Dublin.

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