Posted by jasonzweig on Aug 3, 2004 i 

Image credit: HarperBusiness

By Jason Zweig |  August 3, 2004

Who was Benjamin Graham, and why is he worth listening to?

Graham was one of the greatest investors of all time. As a money manager and a finance professor at Columbia Business School, Graham was a teacher, mentor and hero to such investing giants as Sir John Templeton, William Ruane of the Sequoia Fund, and Charlie Munger and Warren Buffett of Berkshire Hathaway. Buffett has said: “Ben had more influence on me than any person except my father…. Graham was the smartest man I ever knew.”

Graham’s text Security Analysis, originally published in 1934, was the first book to apply rigorous logic and objective standards to the study of stock and bond values.  And The Intelligent Investor — originally published in 1949, revised four times during Graham’s lifetime and by me, in the greatest honor of my career, in 2003 — was the first book that ever explained, for retail investors, the intellectual framework and emotional discipline that are essential for financial success.

What accounts for Graham’s influence and innovation?  Put simply, by any measure he was one of the most brilliant men of the 20^th century.  Graham’s genius manifested itself on at least five fronts:

• as an intellectual
• as a financier
• as a psychologist
• as an historian
• as a writer

As an intellectual, Graham graduated second in his class at Columbia College and, before the end of his senior year, was offered faculty positions in three different departments: English, Greek and Latin, and mathematics. (He was all of 20 years old.) Later, Graham came up with several of the key ideas behind the Bretton Woods agreement that modernized the global financial system. He also patented an improved slide rule, wrote a Broadway play, and taught himself Spanish so he could translate a major Uruguayan novel, Mario Benedetti’s The Truce, into English. (By the end of his life, Graham knew at least seven languages.)

But Graham was not just smart: he was wise.  His book-learning and quantitative brilliance were always tempered by prudence and common sense.

As a financier, Graham amassed one of the best track records in the history of investing, outperforming the Standard & Poor’s 500-stock index by at least 2.5 percentage points annually for a period of more than 20 years. Graham survived the Great Crash of 1929 and, for the rest of his career, issued timely warnings about overvalued markets (including the severe collapse in 1973-1974). He also helped restructure GEICO Corp. and was a fearless advocate for better corporate governance, going so far as to take on the Rockefeller family by shaking up their sheltered interest in the Northern Pipe Line Co.

As a psychologist, Graham cast a bright spotlight on human behavior, revealing subtleties and contradictions that, in some ways, foreshadowed the findings of Nobel Laureate Daniel Kahneman. Throughout his writings, Graham is not concerned with how people ought to act; instead, he focuses on how they actually behave in the real world. All his recommendations are based not just on what people should do, but on what they can do.

Graham knew that self-control and self-knowledge are the keys to successful investing.  In his words, “The investor’s chief problem — and even his worst enemy — is likely to be himself.”  If you read nothing but Chapters 1, 8, and 20 of The Intelligent Investor, you can get off the self-destructive path that sends so many people astray in their financial lives.

As a historian, Graham had a mastery of the facts about everything and everyone important that had come before him. The razor of his logic, sharpened by repeated readings of Aristotle and Plato, made mincemeat out of contemporaries who argued that “valuations don’t matter” or that “you can’t overpay for a great stock.” History taught Graham that the financial markets obey fundamental laws as inexorable as Newton’s laws of thermodynamics. Throughout his books, Graham shows that regression to the mean — what goes up must come down, and what goes way up must come down even harder  — is the first law of financial physics.

Graham’s commanding knowledge of history made him a formidable prophet, since the best way to predict the financial future is simply to understand the past. To avoid disastrous losses in the 2000-2002 bear market, you needed only to have read and understood Graham’s warnings about past bubbles. And there’s no better way to brace yourself against the booms and busts of the future than by learning what Graham has to say.

As a writer, Graham was a master of formal but clear and classic prose. Large parts of The Intelligent Investor are set up as compare-and-contrast exercises. The distinctions that Graham draws between stocks and companies, price and value, investment and speculation, “projection” and “protection,” show how to think about the big picture. And his pairing of stocks — one glamorous and overpriced, the other stodgy and cheap — show how to analyze individual investments.

Finally, Graham’s imaginative brilliance shines forth in his metaphor of “Mr. Market,” the manic-depressive neighbor who remains the single best image ever devised for explaining how the stock market really works.

Although Graham was born in 1894 and died in 1976, the proofs continue to pile up with the passage of the years: He was not just the greatest investing mind of his time, but he remains one of the greatest investing minds of all time. Every investor, no matter how much or little you know, can benefit from Graham’s ideas.

Note: This article is adapted from a speech I gave to a conference at the CFA Institute in 2003, which is freely available here.