We all know that Benjamin Graham built the structure and framework of what we know as value investing today. He wrote Security Analysis, among other great books, and taught personally many of the most famous value investors. In this interview from 1955, he lays out several important points that go from basic concepts to more advanced descriptions and suggestions for investors. As usual, his work is timeless and his suggestions can be applied today just as in the past.
Here are some of the most relevant comments from the interview:
“Common stocks have the advantage, in the first instance, of representing sound, growing investments in the American economy, with a higher return than you would get on bonds, and secondly, because they do carry some measure of protection against inflation – against further inflation of the kind we’ve lived through as a result of the last two wars.”
I connect this lesson to what his disciple, Buffett mentions on inflation: “The best thing to combat the threat of inflation is to have a lot of earnings power of your own. If you’re the only surgeon in town, you’ll be OK, because you can simply raise your prices to keep up with inflation and people will pay it. Charlie and I think it’s best to own fine businesses that can price in inflationary terms and don’t require big capital investments. See’s Candies can handle an inflationary world and maintain value.”
On volatility and education: “Let’s take a widow who has all her money in common stocks, or nearly all, and is doing pretty well with it for a while. Then the market has one of its old lashings, it collapses, and she finds her principal value greatly reduced. She is likely to get so panicky that she might sell out at the bottom, or near the bottom, and have a harrowing experience as a result of that. A businessman or a man with a career earning a good deal of money may do the same thing, but he’s not as likely to do it, particularly if he has educated himself to know and be familiar with the normal vicissitudes of the stock market.”
On investing as a profession: “Investing would be good for a person who has considerable native intelligence and ability and who has a real interest in financial matters and is willing to devote the amount of time and energy to it. Everybody has enough time for it. It’s really the determination that counts. I mean, investing a few thousand dollars is not a full-time job. But it is a job that you can’t do casually, by tips and so forth.”
I really enjoyed this part, because it discussed a brilliant point: the fact that we all have time to learn how to allocate capital, however, it is really the determination that sets apart average and superior results. That determination will lead to taking a different approach than the crowd, which is an investment by itself.
On getting instruction and educations for investing: “Well, the average man won’t do it. But I wouldn’t be willing to admit that he can’t do it. A person who is really determined to prepare himself to be an intelligent investor can do it. For example, he can take a correspondence course. You learn the job just the way you learn to play the piano. The next best thing is to decide that he cannot expect to get optimum investment results without this optimum preparation, and consequently he has to accept a more representative or average investment program.”
This connects with Munger’s comments on learning accounting as the business language and then getting proficient with it. Not only that, but incorporate the great ideas from all the branches of knowledge, the famous latticework of mental models. There are also other course, among them the CFA program which can teach the basics of finance in an auto-study form.
Here the topics become more specific and deep. I highlight the fact that Ben Graham always remained objective and prudent, avoiding getting emotional acting in a rational way.
On growth stocks:“Even when you have a good deal of knowledge, it is hard to tell how good your knowledge is, because growth stocks lead to the future, and you don’t really ever have any knowledge of the future. You may have a more expert guess than the other man, but it’s still a guess. And many mistakes have been made in buying growth stocks on the theory that the future will duplicate the past.”
“A man can earn some money by taking a sensible attitude toward investment, but I don’t see how a man can earn money by being an untrained speculator. He just doesn’t put enough into it to justify his hopes of getting something out of it.”
On how to identify issues in the market: “The simplest test that I’ve had is the value of the company as a private business. If you can look at a company and say that at this price for the stock the whole enterprise is selling at a figure which is clearly less than it would be worth to me if it were my business, if I owned it – you can divide the figure by 10 or 100 to make them comparable to the kind of business you are familiar with in private practice- is that test shows that the price is quite low, then it’s generally a reasonably good guide to your evaluation of the stock itself. In some cases, the very fact that the company is selling considerably under the working capital alone, with no value given to all the fixed assets, is a prima facie indication that the price is too low.”
