Benjamin Graham on Value Investing


By Miles Clyne

Benjamin Graham is considered by many as a founding father of value investing. If you read Security Analysis, which he and David Dodd first published in 1934, you learn that many of Graham’s insights were not just about security analysis. He clearly put a lot of effort into investor psychology and how it impacted both the markets and the investors outcome. His work went on to influence today’s behavioral economists.

The following are some thoughts from Mr. Graham on the psychology of investing, I’ve added my notes as a reminder to myself of why investing can in the short-term and sometimes longer-term be so unpredictable, regardless of the care and attention an investor takes.

Investment theory should recognize that the merits of an issue (i.e. stock) reflect themselves in the market price not by automatic response or mathematical relationship but through the minds and decisions of buyers and sellers.”  Note: As an investor, you can be right in what you buy should go up, but if more sellers disagree for whatever reason, you will be wrong, at least in the short-term.

“…the market is a voting machine; whereon countless individuals register choices which are the product partly of reason and partly of emotion.”  Note: Therefore, investing is often referred to as both art and science.

“The main obstacles to the success of the analyst’s work are threefold; (a) the inadequacy or incorrectness of the data, (b) the uncertainties of the future, and (c) the irrational behavior of the market.”  Note: of the three obstacles listed, the analyst only has a degree of control over one of them.

 “The prices of common stocks are not carefully thought out computations, but the resultants of a welter of human reactions. The stock market is a voting machine rather than a weighing machine. It responds to factual data not directly, but only as they affect the decisions of buyers and sellers.” Note: Stay with the disciplines that consistently outperform the markets, this is especially true when they are not out performing.

 “At times some specific development greatly strengthens the position of a (company), but the (stock) price is slow to reflect this improvement, and thus a bargain situation is created.” Note: a primary reason to stay true to your discipline.

“Undervaluation’s caused by neglect or prejudice may persist for an inconveniently long time, and the same applies to inflated prices caused by over enthusiasm or artificial stimulants.” Note: review and understand your discipline if you are losing faith. You can switch disciplines but know why you are doing it. If it emotionally driven, likely you are making a mistake.

There are few things that are relevant today as they were 80 years ago. Sound advice hopefully never goes out of style.  Value is often found in the depths of despair in the markets. After a long period of relatively steady growth such as the US stock market is having, it is easy to start thinking investing is easy. If you think you have it figured out. Write yourself a letter explaining your reasoning, then see how it works out for you. Changes should be about learning to adapt and improve, not about chasing yesterday’s winner.