Benjamin Graham looms large in the history and practice of securities analysis. While "Security Analysis" was undoubtedly his magnum opus, Graham left another important legacy: his students.
Of course, every value investor knows Graham’s most famous protege, Warren Buffett (Trades, Portfolio), has employed his teacher’s principles to become one of history’s most successful investors at the helm of Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial). But many other successful investors developed their skills under Graham’s tutelage and, over the years, several have shared their most memorable moments with the father of value investing.
Marshall Weinberg: Invest in the aspect of eternity
While Marshall Weinberg accumulated a fortune during a long career with investment firm Herzfeld & Stern, today he is best known for his philanthropic and charitable endeavors. Studying at Columbia during the early 1950s, Weinberg left the business school as a lifelong admirer of Graham:
"One sentence changed my life...Ben Graham opened the course by saying: 'If you want to make money in Wall Street you must have the proper psychological attitude. No one expresses it better than Spinoza the philosopher.' When he said that, I nearly jumped out of my course. What? I suddenly looked up, and he said, and I remember exactly what he said: 'Spinoza said you must look at things in the aspect of eternity.' And that's what suddenly hooked me on Ben Graham."
This recollection offers an excellent example of how Graham approached the activity of investing. While known mostly for his empirical bent, Graham was intimately acquainted with investor psychology. Understanding short-term psychology is important even for a long-term-minded value investor like Graham. Without understanding what is happening in the market and why, planning for the long term becomes an onerous burden. But it is equally difficult to plan a long-term investment strategy without an appreciation of time as a concept. Only by filtering short-term perceptions through “the aspect of eternity” can we develop effective long-term plans.
Irving Kahn: Cash is king
Irving Kahn found great success over a long career working in capital markets. As founder and longtime chair of Kahn Brothers Group Inc., a broker-dealer and investment advisory firm, the guru put Graham’s principles into action over the course of more than 70 years. Reflecting on the lessons he learned at the feet of the master, Kahn highlighted Graham’s affinity for cash:
"He believed in cash. He did not like companies that had a lot of bonds."
Ultimately, cash is the lifeblood of any enterprise. It is the end-goal of profitable companies and the fuel that powers the growth of upstarts. While bonds might be somewhat liquid, cash is the only sure way to keep the lights on. Moreover, Graham understood that companies serve their shareholders best by deploying capital toward growth, rather than holding unexciting debt paper. The bonds will offer a yield, but any investor can buy the same or similar bonds. Companies that sit on big bond books or unused cash piles are not doing their jobs. Such managers should be pushed to either invest in expansion or give the money back.
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Walter Schloss: The guts to be a contrarian
Walter Schloss began his illustrious investment career as a runner for trading firms and brokerages. Heading to Wall Street at age 18, Schloss did not gain a formal university education. He first encountered Graham in the 1930s, while the latter was teaching investment courses at the New York Stock Exchange Institute. Eventually, he turned from pupil to protege, heading to work for Graham’s investment partnership. While he ultimately left to start his own firm, Schloss never forgot what he learned from Graham:
“Basically we like to buy stocks which we feel are undervalued, and then we have to have the guts to buy more when they go down...And that’s really the history of Ben Graham.”
Grit is obviously an important personality trait among value investors. Searching for bargains is inherently contrarian, and many investors find it hard to constantly be fighting against the tide of public opinion. Graham clearly understood this psychological requirement and embraced it. Schloss’s son, Edwin, was also exposed to Graham, both directly and through his writing. The younger Schloss evidently feels much the same as his father did:
"[Graham] talked about risk based on the fact that he wanted to buy something at less than $0.50 on the dollar. He just wanted to buy something that was undervalued. He was very aware that he was going against the tide. He was buying companies that were trouble, he was willing to buy something that nobody else wanted."
Verdict
Graham was an unusual individual. While very academic, he was also a successful investment practitioner. His writings and teachings likely owe some of their enduring appeal to the fact they were tested in the field. Clearly, his students strove to carry on his legacy, putting his principles into practice across all market conditions and in wide-ranging geographies.
All value investors owe a debt to Graham. The best way to repay it is to practice what he preached.
Disclosure: No positions.
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