Today, Benjamin Graham is widely considered to be the Godfather of value investing.
While he was instrumental in developing value investing into the framework we know today, Graham had a much more significant impact on the world of fundamental analysis. His first book, "Security Analysis," produced with partner David Dodd was one of the first books ever published on the topic.
Over the next few decades, Graham refined and developed his process, focusing mainly on value investing. In the decades since, generations of Wall Street analysts and investors have built upon the framework he initially developed in the 1920s.
Graham also developed his own framework throughout his life. His experience helped form Warren Buffett (Trades, Portfolio) and a new generation of other investors' view of the stock market.
Learning from Graham's work
What's impressive about so much of Graham's work is that it remains relevant to this day. I'm not necessarily talking about the framework he used to find value stocks. Instead, I'm referring to the behavioral investing principles that he developed.
The most famous of these is Graham's Mr. Market allegory. First introduced in Graham's 1949 book, "The Intelligent Investor," Mr. Market was Graham's way of describing the irrational nature of the stock market. Mr. Market was a hypothetical investor driven by panic, euphoria and apathy (on any given day) and approached his investing with emotions rather than rational financial analysis. Buffett has repeatedly advised investors to memorize the principle of not being like Mr. Market if they want to succeed in the stock market.
Graham also disagreed with the mentality on Wall Street. He believed that the Street was there only to serve its own financial interests, and did not provide any conceivable benefit for the average investor. Therefore, the average investor couldn't rely on Wall Street. They have to do their own work to achieve a desirable outcome.
Graham on Wall Street analysts
Graham was so suspicious of Wall Street analysts that in 1946 he published a guide for investors to rate analyst recommendations.
"If a security analyst should recommend the purchase of the United States Steel at 80 as 'a good buy' what criteria of corresponding definiteness can we apply to test his wisdom?" the article asked. The author went on to debate this question in the article. He arrived at several conclusions.
For a start, to test the "rightness" of any recommendation, a timeframe must be provided. Analysts must also provide an indication as to the type of recommendation made and the analytical reasoning behind it. With this information provided, Graham went on to opine that investors can put together a "batting average" of certain analysts and determine whether or not their advice is worth following. He wrote:
"Assuming we can test the analyst's performance on individual recommendations, we can develop a crude batting average for his work, based solely on the percentage of times he is right out of the total number of recommendations made."
In my opinion, Wall Street analysts get a lot of negative attention, but much of this is undeserved. Professional analysts have access to much more in-depth and more comprehensive data sets than the average investor. However, they can also be influenced by market factors and the need to remain relevant.
With that being the case, investors should keep Graham's advice in mind. Advice from Wall Street should not be written off entirely, but investors should review the analysis, consider what and why the analyst is recommending and consider their track record. This will allow for a balanced evaluation of the analyst and their work.
Disclosure: The author owns no share mentioned.
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