Few individuals have left as significant a mark on the world of investing as Benjamin Graham. Omaha natives might recognize him as being a mentor to Warren Buffett, who was taught by and later worked for Graham. Other individual and professional investors may know him as the “Dean of Wall Street” and the father of value investing. Nearly fifty years after his passing, Graham’s lessons continue to be invaluable.  

A tribute to Benjamin Graham from Warren Buffett
Graham graduated from Columbia University at age 20 in 1914. As he wrapped up his senior year, he was offered a faculty position in three separate departments, including English, Philosophy, and Mathematics. Imagine being so gifted that an Ivy League University asked you to become a professor before even receiving a degree. Most normal people are happy to even graduate. Ultimately, he chose to begin a career on Wall Street, though he would eventually return to teach a course at Columbia’s Business School and later at UCLA.

Graham literally wrote the book on what would later become known as ‘value investing.' Security Analysis, co-authored by David Dodd in 1934, established the framework for analyzing individual stocks (i.e., Stock picking). Later, in 1949, Graham authored The Intelligent Investor, which Warren Buffett has called “by far the best book on investing ever written.” The book was updated four times between 1949 and 1972, and the 1972 version would later be rereleased in 2003 with annotation by the Wall Street Journal’s Jason Zweig.

In 1936, Graham co-founded the Graham-Newman Corp, an investment vehicle that is roughly equivalent to a closed-end fund today. Over the roughly twenty-one years that he managed the fund, the annual return was 14.7% net of fees, compared to 12.2%(1) on the S&P 500. Outperforming the market by such a sizable margin for decades makes for a hall-of-fame career, and he eventually retired from professional money management in the late 1950s.

To recap, Graham invented an entire investment discipline, taught it to a generation of youth at some of the nation’s most prestigious universities, and amassed a superb performance record successfully implementing his approach. If there was ever a flag-bearer to champion the art of active stock-picking, this would have to be the guy, right!?

Perhaps not…

Shortly before his passing in 1976, Graham did an interview for the Financial Analysts Journal(2). Below is an excerpt from the interview:

Q: In selecting the common stock portfolio, do you advise careful study of and selectivity among individual issues?

A: In general, no. I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook “Graham and Dodd” was first published, but the situation has changed since then. In the old days, any well-trained security analyst could do a good professional job of selecting undervalued issues through detailed studies, but in light of the enormous amount of research now being carried out, I doubt whether, in most cases, such extensive efforts will generate sufficiently superior selections to justify their cost.

Graham is effectively saying that even by the mid-1970s, the competition was already too fierce for investors to consistently outperform the market through stock picking. Keep in mind that the “enormous amount of research” that he referenced was being conducted prior to the emergence of the Personal Computer (PC) industry, which exploded in 1977 with the launch of a few models, including the Apple II.

The debate on whether investors should employ an active stock-picking strategy in their portfolios continues to rage decades later. At this point, however, there is a mountain of evidence from both academics and practitioners that supports the idea that stock picking is not a successful strategy.
One of my favorite examples comes from S&P Dow Jones (SPDJ). Their semi-annual S&P Index Versus Active (SPIVA) Scorecard demonstrates the failure of active mutual fund managers to keep up with an appropriate market index.

Last week, SPDJ published an updated report evaluating performance through the first half of this year. The table below provides a summary of the updated findings. It separates the active mutual funds into categories based on their investment mandate, with the performance comparison based on a variety of time horizons. The percentages illustrated represent the portion of active funds that failed to keep up with their relevant benchmark. As you can see in the column highlighted yellow, the vast majority of funds failed to beat the market over the long term.

The average failure rate across all the categories for the 20-year period was a horrendous 94%. Unfortunately for investors, there was no way to know in advance which of the funds would wind up in the small subset of winners. There is also no guarantee that any of the funds can remain a winner over the next 20 years.

Although later in life, Graham gave up on the notion that it was still possible to outperform the market by analyzing accounting statements and picking individual stocks, that doesn’t mean he gave up on value investing in general.

More from that Financial Analysts Journal interview(2):

Q: What general approach to portfolio formation do you advocate?

A: Essentially, a highly simplified one that applies a single criterion, or perhaps two criteria, to the price to assure that full value is present and that relies for its results on the performance of the portfolio as a whole-i.e., on the group results, rather than on the expectations for individual issues.    

Translation: Buy a diversified portfolio that tilts toward low-priced stocks. These final lessons from Graham remain as relevant today as they were 50 years ago.

Jasonzweig.com/lessons-and-ideas-from-benjamin-graham-2/

Week in Review

• The yield on the 10-year Treasury closed at 4.54% yesterday (9/25), a level not seen since 2007. While the yield curve remains inverted, the interest rate spread between the 10-year Treasury Note and the 2-year Treasury Note is the smallest it’s been since May, with the yield on the 10-year note being .60% below the 2-year as of the 9/25 close. 
• The FOMC released its updated economic forecasts in its Summary of Economic Projections last Wednesday, which includes the dot plot that shows projections of the Federal Funds Rate by FOMC members. The projection has one more hike penciled in for 2023. Rate cut projections for 2024 fell to -0.50% from -1.00% in the prior estimate. The September 2023 projections show that FOMC members are expecting rates to remain higher for longer than previously thought. Other notable data released in the SEP include projections for 2023 GDP of 2.1%, which is more than double the 1% estimate in June. 
• Weekly jobless claims in the US, which is seen as a proxy for layoffs, fell by 20,000 to 201,000 for the week ending September 16th, the lowest level in eight months. While the labor market remains tight, there is potential for claims to increase as the United Auto Workers strike continues without resolve. 

Hot Reads

Markets

• Bank of Japan Leaves Rates Unchanged On Concerns of ‘Extremely High Uncertainties’ (CNBC)
• Sales of Newly Built Homes Reverse Course, Drop Nearly 9% in August (CNBC)
• How Much Savings Do Americans Have Left, Anyway (WSJ)

Investing

• 24 Things I Believe About Investing (Ben Carlson)
• How Safe is Gold (Morningstar)
• Is This Really a Bull Market (Michael Batnick)                     

Other

• Why America Has a Long-Term Labor Crisis, in Six Charts (WSJ)
• Ryder Cup 2023: US Captain Zach Johnson’s Potentially Winning Philosophy (Golf Digest)
• NASA’s First Asteroid Sample Has Landed, Now Secure in Clean Room (NASA)

Markets at a Glance

Source: Morningstar Direct.

Source: Morningstar Direct.

Source: Treasury.gov

Source: Treasury.gov

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Economic Calendar

Source: MarketWatch

IMPORTANT DISCLOSURE INFORMATION