The Torch Magazine, The Journal and Magazine of the
International Association of Torch Clubs
For 92 Years
A Peer-Reviewed
Quality Controlled
Publication
ISSN Print 0040-9440
ISSN Online 2330-9261
Volume 91, Issue 2
|
Benjamin
Graham: The Father of
Value Investing and His
Unconventional Life
by
Kandra Hahn
Benjamin Graham is revered among
investors as the father of the style
of investing known as "value
investing" and as the author of The
Intelligent Investor.
Written in 1949 and still in print, it
is routinely included in lists of the
top five or ten books every investor
should read.
Yet, though he developed a system of research, calculation and calm rationality in investment, Benjamin Graham's personal life was, in contrast, one of chaos, unconventionality and pain. Beginnings
Benjamin Graham was born Benjamin
Grossbaum in London in 1894 to a
strict Orthodox Jewish family. His
father, Isaac, and his uncles,
successful importers of china and
bric-a-brac, emigrated to New York
City to expand the business when
Benjamin was an infant. Because they
spoke English and had money, they
passed easily through Ellis Island and
lived quite well on Park Avenue.
But in 1903, Benjamin's father died of cancer. The family soon discovered that he had been the brains in the business, as it began to fail. Benjamin's mother and her three sons were forced to relocate and go to work. At nine years of age, Benjamin sold papers and, because he was smart and a very good student, became a tutor to other students. In 1907, his mother used the last of the family's resources to buy stock on margin—borrowing money to buy additional stock—just two months before a stock market calamity known as the Panic of 1907. The family lost everything. Fortunately, Benjamin was recognized as one of the best students in New York City. He graduated high school at 16, winning a Pulitzer Scholarship that allowed him to go to Columbia University. There he graduated from the four-year program in two and a half years, second in his class, having worked virtually full-time. At Columbia he developed and indulged a particular affection for classical languages. On graduation he was offered jobs teaching in mathematics, English, and philosophy, all disciplines in which he had excelled. Though he would have liked to stay in academia, his family experiences drove him to seek work in business, where he could earn more money. The year 1914 was a crucial one for Benjamin Grossbaum. First, the entire family, responding to anti-German and probably anti-Semitic sentiment, changed its name to Graham. Then, by chance, he was in the Columbia Dean's Office at just the right time to be offered a job at the Wall Street firm of Newburger, Henderson, and Loeb as Junior Bond Salesman. He accepted. Reviewing some of the methods of investment decision-making Graham found when he arrived on Wall Street will help us grasp the impact of his later innovations:
None of these had ever
done Graham's family any good. In fact
Graham came to differentiate between
users of such methods as "speculators"
and those who used his methods as
"investors."
Graham's
Innovations
Graham, untrained or unspoiled by
traditional Wall Street thinking,
applied his mathematical turn of mind
to the data he was keen to research
and began to develop ideas that came
to be the fundamentals of value
investing:
In The Intelligent
Investor, Graham wrote that, if
he had to "distill the secret of sound
investment into three words," they
would be "Margin of Safety" (Graham
512). This was his name for a method
he devised for protecting invested
principal while securing a
satisfactory return. He felt there was
more to investing than finding the
undervalued security; there was
knowing when to buy, how long to hold,
and when to sell. The calculated
margin of safety provided these
points.
Graham disdained the hallowed belief that the prices of securities fully reflected all available information at any point in time. This comforting notion still rises and falls in investing popularity. Recently it has been known as the Efficient Market Theory. Value investors reject it as an operating principle for security selection. Graham's "Parable of Mr. Market" (Graham 204-05) drove home his point on efficient pricing and has had an astonishingly powerful effect on people's understanding of the market. Graham wrote that Mr. Market is a guy who is always hanging around, willing to buy from you or sell to you any stock or bond. But he is a moody fellow. Some days he is wildly optimistic about his securities, and they are overpriced. But the next day he may be depressed, and he will price things too low. Successes and
Setbacks
By
1917 Graham's fortunes seemed to be
looking good as Wall Street celebrated
the United States' entry into World
War I—the market loves a good,
profitable war. That year he was
able to marry Hazel Mazur, an
attractive woman he had "stolen" some
years earlier from his brother Leon.
Soon a son, Isaac Newton Graham, was born to them. The boy was known as Newt and was, by all accounts, a great child, the apple of Ben's eye. Two daughters followed. Ben worked hard, began to lecture on his new methods and wrote about them in Wall Street publications. He made junior partner in the firm. In 1926 Graham formed the "Benjamin Graham Joint Account," a sort of private mutual fund with important investors who trusted his abilities. He used his methods but, like many investors of the day, he borrowed money to buy on margin. The stock market was taking off; it quadrupled in trading volume in the next few years. Graham began teaching Security Analytics at Columbia in the evenings after the market closed. In a still legendary move, Graham became the darling of shareholders when he forced the disbursement of $3.6 million in idle retained earnings of Northern Pipeline to shareholders. He is still remembered as a model activist shareholder for this heroic act. Everything was going so well. Then personal tragedy struck. Young Newt contracted mastoiditis, an infection behind his ear that would be cured easily now with antibiotics. But lacking such treatment in 1927, the infection spread to his central nervous system, and he died a painful death of spinal meningitis at age seven. Devastated, Ben and Hazel did something that today might be considered macabre: they immediately had another child, a boy, whom they named Newton and referred to as Newton II. He was, from the beginning, an obviously troubled child. About this time, Graham later confessed in his memoirs, he began a period of sexual promiscuity that continued for many years. Suddenly it was 1929 and the stock market crashed, taking the most dramatic dive in American history. The Graham Joint Account's troubles were magnified by margin buying and Graham, once and for all, swore off borrowing to invest. It is not a hallmark of value investing. Still, Graham's methods bettered the market—but painfully. From 1929 to 1932, the Dow Jones Industrial Average lost 74% of its value while The Graham Joint Account lost only 70%. In such a time, that is a big victory. By 1934, Graham had recouped all losses from the Great Crash and repaid everything lost—to those investors who stayed with him. This underscores an important tenet of value investing that marks it as not for everyone: value investors must wait things out. It is a long-haul strategy. Some investors simply cannot gut a crash out; value-style investing is probably not for them. If the sickening downward slide of the market sends an investor irresistibly to the phone to sell, then that investor should definitely let his or her financial advisor know. For the value investor, a falling market is a time to hold and, if possible, to buy. On the domestic front, Ben and Hazel had their last child and Ben discovered that Hazel had been unfaithful when he found a misplaced love letter. They divorced quite nastily in 1937 when their children were ages 17 to 3, including the troubled Newt II, aged 9. Wasting no time, Ben remarried in haste the next year. His second wife, Carol Wade, was a Canadian actress, 18 years his junior, whom he met when he was still married and on a cruise. They divorced a year after they married. Ben took a breather and spent the next few years mostly with his mother and brothers as his career flourished. Then, in 1944 he took his third wife, his secretary, Estelle Messing, known as Estey. Graham's Later
Career and the Oracle of Omaha
In
1949, Graham's most famous work, The
Intelligent Investor, was
published. It has since sold over one
million copies, many because it has
been championed by famed value
investor Warren Buffett. In 1949, the
19-year-old Buffett had just graduated
from the University of Nebraska with
an undergraduate degree in economics.
He moved to New York City and enrolled
in Columbia for the sole purpose of
studying with Benjamin Graham.
The two men were very different, as Joe Carlen, author of The Einstein of Money: The Life and Timeless Wisdom of Benjamin Graham, observes. At 18, Graham had never read a book on investing and had dropped out of Economics at Columbia for lack of interest. But Buffett told Carlen in an interview: I mean, I read every book in the Omaha Public Library on investment by the time I was eleven and I reread most of them, and, you know, my Dad was in Congress so I had access to the Library of Congress. So my Dad got me all the books—they were all interesting to me. […] But then, when I read The Intelligent Investor, it just made clear sense to me […] and I've been following it ever since. My life would have been entirely different had I not encountered that book. Who knows where it would have gone exactly? However, I can absolutely assure you that it would have been entirely different . . . Probably would have taken a couple of zeros off my net worth! (Carlen 224-25)Buffett graduated Columbia in 1951 and, according to Graham associate Irving Kahn, another famous value investor, in an interview with Carlen, "wanted a job with Ben but Ben wouldn't give him a job, and he said that it wasn't because of a lack of experience but that he tended to favor boys that were Jewish because they were so often discriminated against. But later, he changed his mind about that and gave a job to Warren anyway" (Carlen 231). Graham relented in 1954, after Buffett had returned to Omaha, begun to work there, married, and had his first child. Then Buffett brought his young family back to New York City. There his first son was born and was named Howard Graham Buffett. Meanwhile, Graham was trying to spend time with his son, Newton II, who finally had found a place in the peacetime Army. At the age of 26, Newt found himself, like many other American members of the armed services at that time, stationed in Europe. Suddenly, word came to the United States that Newt had killed himself. Graham went alone to France to settle his son's affairs and met his son's lover, who had been quite a bit older than Newt: Marie-Louise Amingues, who was in her forties. Graham who was now about sixty, quite liked her, and struck up a friendship with her by correspondence. By 1955 Graham's brothers had moved to California, and they loved it. Ben enjoyed his work, which included being summoned to Washington, DC, by Senator William Fulbright and his Committee on Wall Street Practices to serve as an expert witness. Graham, now known as "the Dean of Wall Street," had worked a long time at something that, after all, was not his first choice. In 1956 Graham decided to retire and close down his fund, just two years after hiring Warren Buffett. This led Buffett to form The Buffett Partnership and turn all of his attention to the creation of his fortune and that of many others. Graham moved to Los Angeles and felt it was time to enjoy the things he truly valued. Among those things was that woman in Europe. Their friendship had leapt off the pages of their letters and into a real relationship and ultimately a life partnership. Graham's wife Estey liked their life in California. She formed friendships there, according to acquaintances interviewed by Joe Carlen, even if Ben did not. According to people who were at parties at the Grahams' home, "frequent guests at the Grahams' dinner table included famous writers such as Will Durant (The Story of Civilization), Irving Stone (The Agony and the Ecstasy)" (Carlen 267) and notables from UCLA and elsewhere, but— Ben apparently couldn't find much to talk about with them. All of a sudden there would be twelve or fourteen people and Ben had disappeared. Estey would go looking for him, and he would be in his office working on some mathematical puzzle or something abstract. (Carlen 270)In the early 1960's, Graham suggested to Estey that he live six months of every year with her, and six months with Marie-Louise—whom he now called Malou. Estey countered with a request for a divorce and a large financial settlement. In 1965 Estey got a $1 million settlement, but she never got a divorce; they never lived together again. Graham bought Malou a house in Aix-en-Provence, France, where they spent half the year, and a condo in San Diego, where they lived the other half, to be near Ben's family. Graham's daughter Marjorie, who remembered his first divorce and the way his devotion to career affected his family, told Carlen, Graham's "last years were his happiest. He became warmer . . . the family really did gather around him . . . But not just as a duty. We looked forward to it" (Carlen 303). A
Surprising Conclusion
Certainly biographer Joe Carlen refers
to Graham as "the Einstein of Money"
because Graham was a genius with
investments. But Carlen had more in
mind and it may be more surprising
than Graham's irregular life. He
writes, "In the latter part of Albert
Einstein's career, the eccentric
physicist was willing to abandon and
even discredit his own theories when
they no longer made sense to him"
(Carlen 310). Similarly, late in
his life, Graham, the man who wrote
and lectured extensively on detailed
company-specific calculations for
security selection said he favored
what he called an "apparently
too-simple investment program," for
example, buying securities selling for
67% or less of their book value,
"regardless of the industry and with
very little attention to the
individual company" (Carlen 311).
The year Graham died, he said in an interview, "For the past few years I've been testing the results of selecting undervalued stocks according to a few simple criteria. My research shows that a portfolio put together using such an approach would have gained twice as much as the Dow Jones Industrial Average over the long run" (qtd in Carlen 311). This is a shocking statement from a man who taught courses at Columbia and wrote a 276-page book that has now ballooned, after four editions, to 623 pages with commentary deemed helpful, even necessary, to understand it. Death came to Benjamin Graham, the father of investment analysis on September 21, 1976, in Aix-en-Provence, France. Though he had a profound impact on those who march under the banner of intelligent investing, he seemed, at the end, to care relatively little for it. One can imagine that, in his final years, all things being equal, he might have liked translating Greek passages into Latin and Latin into Greek, as much as anything else. Works
Cited and Consulted
Cameron, Doug and Nicole Friedman. "Berkshire Makes Airline Plays." Wall Street Journal, November 15, 2016. Carlen, Joe. The Einstein of Money: The Life and Timeless Financial Wisdom of Benjamin Graham. Prometheus Books, 2012. "Did Buffett's Mentor Lead An Unorthodox Life?" August 2, 2012. http://www.warrenbuffett.com/did-buffetts- mentor-lead-an-unorthodox-life/. Downie, Ryan. July 21, 2016. "3 Differences Between Benjamin Graham and Warren Buffett" http://www.investopedia.com/articles/insights/ 060716/3-differences-between-benjamin-graham-and-warren-buffett.asp. Graham, Benjamin. The Intelligent Investor, Revised Edition, updated with new commentary by Jason Zweig. Harper Business, 2003. Housel, Morgan. February 17, 2016. "The Evolution of Good Investing Ideas: How to adapt to a world that always changes." https://twitter.com/morganhousel/status/700063702691745792. ---. August 30, 2016. "Investing Is a Fascinating Business: There's nothing else like it." twitter.com/morganhousel/status/770707537113079808. Lanchester, John. "Cover Letter: When Investors Write to C.E.O.s, and Vice Versa." Books, The New Yorker, September 5, 2016. Loth, Richard. n.d. "The Greatest Investors: Benjamin Graham" http://www/investopedia.com/university/ greatest/benjamingraham.asp. Myers, Daniel. n.d. "The 3 Most Timeless Investment Principles" http://www.investopedia.com/articles/ basics/07/grahamprinciples.asp. Newfeld, Dorothy. July 19, 2016. "Ben Graham's Advice on Reading Financial Statements." http://www.investopedia.com/articles/ investing/030916.beb-grahams-advice-reading-financial-statements.asp. Russolillo, Steven. "Beware the Postvote Fake-Out." Ahead of the Tape, Wall Street Journal, November 6, 2016. Traflet, Janice. Book review of 'The Einstein of Money.' Essays in Economic & Business History, Volume XXXIII, 2015. http://www.ebhsoc.org/journal/index.php/ journal/article/download/308/282. Zweig, Jason. "Clearly Afraid? Read This." The Intelligent Investor, Wall Street Journal, November 10, 2016. ---. "Do You Have the Stamina to Be Wealthy?" The Intelligent Investor, Wall Street Journal, November 12, 2016. Author's Biography
Kandra Hahn's bachelor's degree in
English is from Nebraska Wesleyan and
her master's in business
administration is from the University
of Nebraska. Elected Clerk of the
District Court and County Clerk of
Lancaster County in Lincoln, Nebraska,
she also served as Director of the
Nebraska Energy Office in Governor Bob
Kerrey's cabinet during 35 years in
public service. She has worked as a
newspaper reporter, at the Gallup
Organization, and as a consultant to
government and non-profit
organizations, retiring in 2012.
Ms. Hahn assisted an MBA classmate in starting his own financial advisory firm and then served on the Board of Kaplan Investments of Omaha for 30 years. She enjoyed researching this Torch paper, which brings together her interests in writing and finance to tell the story of value investing. She is also a poet, her most recent work appearing in the journal Plainsongs. "Benjamin Graham: The Father of Value Investing and His Unconventional Life" was presented to the Tom Carroll Torch Club of Lincoln, Nebraska on November 21, 2016. ©2018
by the International Association of
Torch Clubs |