Graham and Keynes: Challenge What You Know to Grow

These legendary figures challenged convention and thought outside the box

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Rupert Hargreaves
Feb 23, 2021
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Benjamin Graham is widely considered to be the Godfather of value investing. He taught

Warren Buffett (Trades, Portfolio), among others, the principle of paying less for a business than it is worth. The Oracle of Omaha has since gone on to teach tens of thousands of individuals similar principles through his letters, lectures and annual shareholder meetings.

Fundamental analysis

Graham revolutionized the idea of fundamental investing. When he began to teach students about the principles of investing in the early 1900s, fundamental analysis was a relatively unheard of and unfollowed discipline. Rather than trying to work out the intrinsic value of businesses, investors essentially speculated on stock prices. Financial information was relatively tricky to get ahold of back then.

In one particularly well-known example, when Graham was trying to work out how much a pipeline company was worth, he had to travel to Washington to get ahold of a copy of the firm's financial statements. Today, anyone in the world can find this information on a publicly traded company with just a few clicks on the internet.

However, this didn't mean investor returns were low. By all accounts, dividend yields were significantly higher than they are today, and information arbitrage was extremely profitable. Rather than focusing on fundamental valuations, investors looked to such factors as these to provide an indicator of a stock's worth.

Economics and investing

Graham wasn't the only successful investor to realize the power of fundamental analysis in the first few decades of the last century. John Maynard Keynes also developed a similar strategy in the 1930s.

Buffett said the following at Berkshire Hathaway's (

BRK.A, Financial) (BRK.B, Financial) 1994 annual shareholder meeting:

"Keynes and Graham, from vastly different starting points, came to the same conclusion at about the same time in the '30s, as to the soundest way to invest over time. They differed some on their ideas on diversification. Keynes believed in diversifying far less than did Graham. But Keynes started off with the wrong theory, I would say, in the '20s and essentially tried to predict business cycles in markets, and then shifted to fundamental analysis of businesses in the '30s, and did extremely well."

Keynes is probably better known for his work in economics rather than as an investor. He introduced the revolutionary idea that governments should act during periods of reduced economic demand to stimulate economic activity. His work followed the depression of the 1930s when the existing economic theory was unable to provide a solution to help stimulate the economy.

He was also an investor, though. According to Buffett, he worked with Graham to develop his own investment strategy. He abandoned "speculation" in favor of "investment" and "careful selection of a few investments... having regard to their cheapness and potential intrinsic value over a period of years ahead."

Lower turnover, higher returns

For 25 years, from 1921 to 1946, Keynes managed the endowment of his alma mater, Kings College, Cambridge. Interestingly, according to records, in the first half of this period, the investor and economist turned over 50% of the portfolio every year.

However, in the second half, presumably after he had spoken with Graham and changed his investment strategy, turnover dropped to around 15%. Between 1921 and 1946, the portfolio returned 16% per annum, significantly outperforming the broader British equity market.

Keynes was a great investor, but more importantly, he was also open to learning and challenging existing ideas. By challenging existing economic principles, he was able to help rewrite the rulebook for economists and set the pace for economic development for the next few decades.

What's more, by challenging existing investing principles and seeking out individuals like Graham, Keynes changed and improved his investment style for the better. To put it another way, no matter how much experience and education one has, it's never too late for investors to learn more.

Disclosure: The author owns no share mentioned.

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Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors. Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.