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Jack Bogle Doesn't Think Ben Graham Was a Very Good Hedge Fund Manager

June 15, 2013 | About:

Jack Bogle is a long-time advocate of the mindless and low-stress investment approach involved with using an index fund.

Bogle took issue with a recent article extolling the benefits of the downside attraction offered by investing in hedge funds and wrote this which looked at Ben Graham's hedge fund results during the market crash of the late '20s and early '30s.

Not much downside protection...


I fear that The Wall Street Journal's opinion piece by hedge-fund specialist Bob Rice ("The Hedge-Fund Investment Puzzle," June 1) conceals more than it reveals.

Yes, as he writes, "it is plain common sense" to seek "downside protection, strategies that tend to zig when markets zag, and broader opportunities for profit." But while the idea of market timing is indeed simple, many hedge fund managers have tried, but precious few have succeeded.

Citing Benjamin Graham as the first "hedged fund" operator is an especially unfortunate example. "The trick," Mr. Rice writes, was Graham's "clever way to make money . . . whether it [the market] continued to rise, or started to fall."

How did the hedged strategy work out in the bull market of the Roaring Twenties and thereafter? Thanks to Joe Carlen's recent book, "The Einstein of Money," we know the answer. Mr. Carlen carefully documents the returns earned in the "Benjamin Graham Joint Account" (the predecessor to Graham-Newman Corporation).

From 1929 through 1932 inclusive, the Graham account turned in a loss of 70%, compared to a loss of 64% for the S&P 500 Index. (Dividends are included in both cases.) "The strategy unraveled quickly," Mr. Carlen writes. "There was no longer any reliable advantage to be gained from that kind of hedging."

Despite Mr. Rice's high confidence in hedge funds (based on unspecified data), forewarned is forearmed!

John C. Bogle

Valley Forge, Pa.

Mr. Bogle is the founder of the Vanguard Group.

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Canadian Value

Rating: 2.4/5 (7 votes)


Perots - 4 years ago    Report SPAM
The impetus for Graham's change in investment philosophy came from the great losses in the Depression years.His greatness came out of the ashes of those years.Bogle would have to look at returns after the above noted era to be fair.
Tonyg34 - 4 years ago    Report SPAM
He's simply pointing out that hedge fund strategies aren't some magical panacea.
AlbertaSunwapta - 4 years ago    Report SPAM
Yesterday's investment options aren't today's investment options. Graham worked in the world he lived in.

Also, from the text I can read here I'd say the title here misconstrues Bogles comments in a very unprofessional way.
Batalha - 4 years ago    Report SPAM
You do know that Graham laid out the principals of Value Investing after getting burned in the depression, right?
AlbertaSunwapta - 4 years ago    Report SPAM
So what were Graham's hedging techniques and how exactly did they fail over the three years 1929 -1932? I believe short regulations were changed suddenly. Did that play a role? Expiries, redemptions and forced sales maybe? Likely mismatched/improper hedges? Lack of useful instruments?
John Huber
John Huber - 4 years ago    Report SPAM
At one point, Graham was very fond of a strategy he called "unrelated hedges". This was essentially a pairs trading strategy that bought a relatively undervalued stock and sold a relatively overvalued stock in the same industry. He later determined that this was a flawed strategy (expensive stocks get more expensive and can cause significant losses for a short seller).

As other comments above have pointed out, the '29-32 period was the catalyst that changed his entire investing philosophy. Graham got more focused on downside protection, margins of safety, he used less margin (really only used it for certain hedges or arbitrage situations, where previously he had used margin more extensively.

So the Depression years brought about some serious changes and new ideas and eventually gave us Security Analysis, The Intelligent Investor, and the concept of the Margin of Safety (not to mention Buffett, Schloss, and all the other Superinvestors).

It is interesting to think about value investing in the context of another Great Depression. Virtually nothing would be completely insulated from a 89% decline in the Dow. But looking at Graham's record from 1936-1956 will show that he averaged about 20% per year (before his profit split) vs a market that averaged about 12%. And this period also included some significant (50%) kind of market declines.

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