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I'm a pretty serious student of Ben Graham, and just saw this the other day. Pretty disappointed.

"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 a great deal 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 the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost. To that very limited extent, I'm on the side of the "efficient market" school of thought now generally accepted by the professors."

So does he totally discredit value investing? I haven't read this in its entire context, so it may not be over. I would love to find out what he actually meant, and how someone like Buffett would respond.

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Comments (51)

  • mb666's picture

    Warren Buffet initially came to be who he came to be by investing in growth companies.... especially insurance companies. Not sure if he would admit it though.

  • In reply to mb666
    Nabooru's picture

    mb666:
    Warren Buffet initially came to be who he came to be by investing in growth companies.... especially insurance companies. Not sure if he would admit it though.

    he's pretty clear in his letters that a lot of the money he invested with was the float from the insurance companies

  • Markov's picture

    Ben Graham has always wavered back and forth on the idea that one really could get superior results. In The Intelligent Investor, he outlines something very much like the Efficient Market Hypothesis, pointing out the difficulty for the average investor of discovering a market inefficiency that all of the research analysts and money managers on Wall Street have missed.

    I have read in several other places that late in life he moved further away from the belief that value investing could provide superior returns. Your quotation from Graham does not seem like a big break with his past views, but instead a moderate change in belief brought about by new circumstances.

  • Terriers12's picture

    So the father of value investing now believes that value investing doesn't work? That's pretty disappointing to hear. Why isn't this topic blown up more? Everyone talks about how great value investing is, but no one mentions how Graham thinks it is not relevant anymore. I'm assuming it's alive today because of Buffett.

  • 09grad's picture

    can you share where this quote was from? nice find

  • Terriers12's picture

    I first saw it from an article on seeking alpha. I'm a adamant value investor, and this is just disheartening to see.

  • eriginal's picture

    I hate EMH and dislike the idea that Ben Graham would discredit the best idea in finance - especially since he came up with the fuckin' thing. Wow, I really hope everyone starts abiding by the EMH principles so I can make some money - it's easy to win a race if no one else even tries.

    Some quotes from Warren Buffet that Mr. Graham should read:
    - "Diversification is a protection against ignorance. It makes very little sense for those who know what they're doing."
    -"If a business does well, the stock eventually follows."
    - "Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it."
    - "Price is what you pay. Value is what you get."
    - "Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised."

    "One man with courage makes a majority." -- Andrew Jackson

  • SlikRick's picture

    BP fell as low as $30 a share after the Oil Spill. Its decline in price was 100% based on market emotion, with no financial analysis justifying the fall in share price. Needless to say, any value investor could have picked up on this. Made a 33% return in about a month.

  • In reply to SlikRick
    Chazz Reinhold's picture

    SlikRick:
    BP fell as low as $30 a share after the Oil Spill. Its decline in price was 100% based on market emotion, with no financial analysis justifying the fall in share price. Needless to say, any value investor could have picked up on this. Made a 33% return in about a month.

    This. Some of the share prices hit by the financial crisis didn't deserve to be, and there's definitely money to be made in the long-run if you spot them.

    Damn you Rodger!

    My WSO Blog

  • Gate_Crasher's picture

    It would be nice to have a link to the original quote.
    And yes value investing is very tough in developed economies, but the pie lies in the developing (third world) economies.

  • In reply to eriginal
    drexelalum11's picture

    eriginal:
    I hate EMH and dislike the idea that Ben Graham would discredit the best idea in finance - especially since he came up with the fuckin' thing. Wow, I really hope everyone starts abiding by the EMH principles so I can make some money - it's easy to win a race if no one else even tries.

    Some quotes from Warren Buffet that Mr. Graham should read:
    - "Diversification is a protection against ignorance. It makes very little sense for those who know what they're doing."
    -"If a business does well, the stock eventually follows."
    - "Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it."
    - "Price is what you pay. Value is what you get."
    - "Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised."

    It would actually be almost impossible to win such a race. You can identify the best company in the world, but if no one else knows/cares how good it is, the price is going to say "mehhhh"

  • In reply to Chazz Reinhold
    lekman's picture

    SynergyWeek:
    SlikRick:
    BP fell as low as $30 a share after the Oil Spill. Its decline in price was 100% based on market emotion, with no financial analysis justifying the fall in share price. Needless to say, any value investor could have picked up on this. Made a 33% return in about a month.

    This. Some of the share prices hit by the financial crisis didn't deserve to be, and there's definitely money to be made in the long-run if you spot them.

    I wouldn't say it was purely on emotion, there were real concerns that BP could face huge fines and regulatory uncertainty for a long time following the oil spill. No one really knew how long it was going to last and no one really knew what the political reaction would be. Its really easy to look back and think the guys who sold BP were idiots, but history is full of firsts, and there was a possibility it could severely damaged the firm's long term profitability.

  • Tandem's picture

    Why should Graham's view influence yours? If you find yourself profitable following his/your principles, then keep doing it.

    The investing/trading game is all about getting in earlier than someone else. What a value investor does is buy when no one has the balls to do it, and sell when everyone believes the stock is God's gift to humanity. That is the key to his superior returns. He makes the decisions the market cannot, before the market decides it's the right thing to do.

    In any case, all Graham is really saying is that there is no mechanical solution to the market puzzle. Understand the game, and you'll do fine.

  • JeffSkilling's picture

    There is no value to be found today, it's all HFT bots trading amongst themselves in a sea of liquidity from the Fed. We don't have markets anymore, we have theatre.

  • In reply to JeffSkilling
    Walkerr's picture

    JeffSkilling:
    There is no value to be found today, it's all HFT bots trading amongst themselves in a sea of liquidity from the Fed. We don't have markets anymore, we have theatre.

    What does this mean for value and LT investors and students wanting to become one of them? If there's no market anymore, than it would follow that there will be a reduction in jobs. Is this, too, a dying industry?

    I can hardly imagine, I think there will always be markets to invest in and I don't believe that HFT will increase long term due to future regulations.

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  • BeastMode's picture

    I think Graham was talking more about how much more efficient markets have gotten, especially in the U.S. and Europe, so that it's a lot more difficult to find opportunities than it was in his time. Doesn't mean value investing's dead, but actually that it's tougher to pull off because more and more people have adopted it.

  • Futures Trader Man's picture

    Interesting... i have read both the intelligent investor and security analysis and for a time i was the most astute value investor you would ever come across. Fast forward a few years and the portfolio i had constructed based on Graham's rules was still relatively flat, furthermore, Buffet's BRK.A and BRK.B have been under performing the S&P for the past 5 years. I do not discredit Mr. Graham 100% but i do agree with the point he brings up that the markets have changed. You have to take into account that his first book was written based on the performance of his theory dating back to the 1920s. That being said, it isn't impossible to find value stocks, just substantially harder, and takes a lot more effort than it once did.

    "Well, you know, I was a human being before I became a businessman." -- George Soros

  • arant's picture

    Buffett always talks about value investing but if you look at his investments especially in the last 5 years he has made most of his money through special situations/event based plays

    Simplicity is the highest form of sophistication ~ Leonardo da Vinci

  • mb666's picture

    Didn't Graham lose a fortune in the 1920s and 1930s?

    Arant, agreed.... that's what I wrote in my first post in this thread. Buffet made money on growth and then shifted to more value/dividend names. Also helps to be doing this during the greatest bull market in the US (1980s/1990s) and avoiding tech.

  • Terriers12's picture

    Graham provided the framework, but Buffett blew it up and owned it.

  • bananadine's picture

    Have you guys read Security Analysis? The techniques in that book are things like adding up the liquidation value of inventories, receivables, and cash, and buying the stock when it trades at two thirds of that or less. In the 40's and 50's, Buffett was able to buy a life insurance stock at a P/E of 1. 1! Those bargains disappeared thanks to the resurgence of equity investors, and--especially--the growth of go-go mutual funds and conglomerates in the 60's. Both groups indiscriminately bought small-caps based on fairly simple valuation metrics.

    Graham isn't saying value is dead; he's saying that it's harder than it used to be. But the general attitude--that stocks can be underpriced due to non-fundamental reasons, and that it can be fruitful to invest on this basis--is self-evidently sound. Or, at least, it's true to the extent that people don't believe in it.

    I think the fairest way to state this is: early in Graham's career, the ROI on fundamental research was insanely high, to the point that lots of fairly ordinary people could earn annual returns in the teens by doing pretty formulaic work. But because that stuff was fairly easy, people invested and then overinvested in research. Now, an ordinary person can't achieve outstanding returns just based on buying quantitatively cheap stocks. But it's still possible to juice your returns by investing in qualitatively superior companies, at sane prices.

    Plus, late in his career Graham was depressed due to personal issues, the near-collapse of GEICO, and the fact that he was probably manic-depressive or at least psychologically fucked in some way.

  • In reply to bananadine
    Futures Trader Man's picture

    bananadine:
    Have you guys read Security Analysis? The techniques in that book are things like adding up the liquidation value of inventories, receivables, and cash, and buying the stock when it trades at two thirds of that or less. In the 40's and 50's, Buffett was able to buy a life insurance stock at a P/E of 1. 1! Those bargains disappeared thanks to the resurgence of equity investors, and--especially--the growth of go-go mutual funds and conglomerates in the 60's. Both groups indiscriminately bought small-caps based on fairly simple valuation metrics.

    Graham isn't saying value is dead; he's saying that it's harder than it used to be. But the general attitude--that stocks can be underpriced due to non-fundamental reasons, and that it can be fruitful to invest on this basis--is self-evidently sound. Or, at least, it's true to the extent that people don't believe in it.

    I think the fairest way to state this is: early in Graham's career, the ROI on fundamental research was insanely high, to the point that lots of fairly ordinary people could earn annual returns in the teens by doing pretty formulaic work. But because that stuff was fairly easy, people invested and then overinvested in research. Now, an ordinary person can't achieve outstanding returns just based on buying quantitatively cheap stocks. But it's still possible to juice your returns by investing in qualitatively superior companies, at sane prices.

    Plus, late in his career Graham was depressed due to personal issues, the near-collapse of GEICO, and the fact that he was probably manic-depressive or at least psychologically fucked in some way.

    "Well, you know, I was a human being before I became a businessman." -- George Soros

  • atomic's picture

    http://greenbackd.com/2012/04/25/value-investing-w...

    None of this is a rebuttal of Benjamin Graham's claim, of course, but I think there's still alpha to be had in a disciplined value investment strategy.

    Why?

    Because I think people are naturally impatient, naturally likely to follow along with the herd, and naturally emotional. Even if you're susceptible to all three qualities, following a disciplined value investment approach protects you from your baser instincts.

  • ggsonny's picture

    All of you talking about value vs. growth obviously do not know what value investing is. Value is just a broad framework to buy at a price substantially less than the amount the company can earn back in the long run. Special sits, growth and so on comes under Buffett's definition of value.

  • In reply to ggsonny
    mb666's picture

    ggsonny:
    All of you talking about value vs. growth obviously do not know what value investing is. Value is just a broad framework to buy at a price substantially less than the amount the company can earn back in the long run. Special sits, growth and so on comes under Buffett's definition of value.

    Not trying to have an argument in semantics but value and growth are different approaches, hence why so many mutual exist and the majority of them are classified as one or the other.

    Value is a subjective word, but let's say that Buffett dislikes technology companies.... you could have bought AMZN after the tech bubble very cheaply but you were still buying a company with negative earnings. Whether that constitutes value at that time is subjective... based on fundamental ratios that's more of a growth play.

    You can't just call high P/E relative to their industry stocks (yes I know Buffett dislikes this ratio) value because you think that future earnings will justify the current price. That's growth.

  • Kenny_Powers_CFA's picture

    So "it's hard"=totally discredited? Good to know.

    There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.

  • In reply to arant
    Kenny_Powers_CFA's picture

    arant:
    Buffett always talks about value investing but if you look at his investments especially in the last 5 years he has made most of his money through special situations/event based plays

    Not mutually exclusive. Complicated transactions and poorly understood situations are a common creator or undervalued securities.

    There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.

  • Gray Fox's picture

    There have been a lot of ideas thrown around here so I'm not sure about the most logical way to address all of them but here goes:

    -Graham blew up very bad at one point in his career. I can't find the actual dates, returns, etc, but he was down well over 50% (I think it may have been 70-80%). The only reason he became so cheap was because he got torched so bad. It is hard to lose money on a classic "Net-Net" (100% of cash, 75% of A/R, 50% of inventories less liabilities). These opportunities were actually around in the 30's and 40's and he made money off of them. A generation long bull market got started in 1949 and these opportunities dried up, only to reappear amidst the "death of equities" in the 70's. Even at the very bottom in March 2009, stocks weren't as cheap then as they were in much of the 30's, 40's, or 70's.

    -I believe the OP's quote comes from an interview Ben Graham did with a the Financial Analyst Journal in 1976 right before he passed away. I can't find the actual journal PDF but this is a presentation he gave around the same time that covers the same topic.
    http://www.grahaminvestor.com/wp-content/uploads/2...

    Graham goes onto say that

    "To that extent I share the skepticism expressed by the "efficient market" theoreticians as
    to the ability of all but very superior security analysts to do a good job of individual stock
    selection. But this is far from saying that I think that individual stock prices reflect in
    general and under most conditions the "fair value" of each issue. On the contrary, my
    present emphasis on the tendency of most stocks to fluctuate widely and often wildly in
    price over the years should show my conviction that stock prices are often out of line
    with their fair or intrinsic values."

    He admits that both it is very hard to pick individual stocks and make money but at the same time there are many mispriced securities.

    Graham goes on in the paper linked above to talk about how he tested three different strategies, systematically applied, that generated excess returns (Low P/E, Low P/B, and a price more that 50% below the high of the past two years). All three of them worked well, with the low P/E working the best. Graham was not completely writing off all of the work he had done for the past decades or the validity of fundamental analysis, but rather saying there might be easier, more effective ways to make money. Security analysis can be difficult work and with the proliferation of information, just about anybody can do it. That doesn't change the fact that it is important to buy stocks that are cheap, but it might be a lot easier to just buy a basket of cheap stocks rather than picking through all of the cheap stocks and finding the best ones.

    I think about Value Investing the same way Winston Churchill described democracy: It's the worse form except for all of the others that have been tried." Graham was on to something 80 years ago and much of it still rings true today. It doesn't mean it is a bullet-proof Bible to profits. Value stocks did very well once the tech bubble popped all the way up until the credit bubble popped. They have not done much of note in the past three years with correlations through the roof. The fact that a lot of the big name guys have done so well since 2001 have made it a crowded field - there are a lot of charlatans. Stock picking is tough when markets are totally driven by central banks in the short term. It creates opportunities but a lot of pain in the interim.

    I could ramble on and on, but that is enough for now.

  • In reply to Gray Fox
    Kenny_Powers_CFA's picture

    Gray Fox:
    There have been a lot of ideas thrown around here so I'm not sure about the most logical way to address all of them but here goes:

    -Graham blew up very bad at one point in his career. I can't find the actual dates, returns, etc, but he was down well over 50% (I think it may have been 70-80%). The only reason he became so cheap was because he got torched so bad. It is hard to lose money on a classic "Net-Net" (100% of cash, 75% of A/R, 50% of inventories less liabilities). These opportunities were actually around in the 30's and 40's and he made money off of them. A generation long bull market got started in 1949 and these opportunities dried up, only to reappear amidst the "death of equities" in the 70's. Even at the very bottom in March 2009, stocks weren't as cheap then as they were in much of the 30's, 40's, or 70's.

    -I believe the OP's quote comes from an interview Ben Graham did with a the Financial Analyst Journal in 1976 right before he passed away. I can't find the actual journal PDF but this is a presentation he gave around the same time that covers the same topic.
    http://www.grahaminvestor.com/wp-content/uploads/2...

    Graham goes onto say that

    "To that extent I share the skepticism expressed by the "efficient market" theoreticians as
    to the ability of all but very superior security analysts to do a good job of individual stock
    selection. But this is far from saying that I think that individual stock prices reflect in
    general and under most conditions the "fair value" of each issue. On the contrary, my
    present emphasis on the tendency of most stocks to fluctuate widely and often wildly in
    price over the years should show my conviction that stock prices are often out of line
    with their fair or intrinsic values."

    He admits that both it is very hard to pick individual stocks and make money but at the same time there are many mispriced securities.

    Graham goes on in the paper linked above to talk about how he tested three different strategies, systematically applied, that generated excess returns (Low P/E, Low P/B, and a price more that 50% below the high of the past two years). All three of them worked well, with the low P/E working the best. Graham was not completely writing off all of the work he had done for the past decades or the validity of fundamental analysis, but rather saying there might be easier, more effective ways to make money. Security analysis can be difficult work and with the proliferation of information, just about anybody can do it. That doesn't change the fact that it is important to buy stocks that are cheap, but it might be a lot easier to just buy a basket of cheap stocks rather than picking through all of the cheap stocks and finding the best ones.

    I think about Value Investing the same way Winston Churchill described democracy: It's the worse form except for all of the others that have been tried." Graham was on to something 80 years ago and much of it still rings true today. It doesn't mean it is a bullet-proof Bible to profits. Value stocks did very well once the tech bubble popped all the way up until the credit bubble popped. They have not done much of note in the past three years with correlations through the roof. The fact that a lot of the big name guys have done so well since 2001 have made it a crowded field - there are a lot of charlatans. Stock picking is tough when markets are totally driven by central banks in the short term. It creates opportunities but a lot of pain in the interim.

    I could ramble on and on, but that is enough for now.

    What a post.

    There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.

  • In reply to SlikRick
    andyinsandiego's picture

    SlikRick:
    BP fell as low as $30 a share after the Oil Spill. Its decline in price was 100% based on market emotion, with no financial analysis justifying the fall in share price. Needless to say, any value investor could have picked up on this. Made a 33% return in about a month.

    So you're saying the reaction to the Macondo spill was "100% based on emotion"?

    That's quite bold. Considering its still not back to pre-Deepwater price levels.

    It's very easy to say something was undervalued or the market overreacted after the fact. Its much more difficult to analyze the financial impact of an event like Macondo in real time. Especially when everyone on the planet is going after BP's head.

  • cyoungmark's picture

    I think profitability in the stock market game comes from being able to predict. I'm guessing there isn't many ways to make money mechanically anymore unless you have HFT edges. There is just too many people making edges obsolete. Maybe the best things to do is to do nothing at all. Buy the S&P and call it a day.

  • In reply to lekman
    streetwannabe's picture

    lekman:
    SynergyWeek:
    SlikRick:
    BP fell as low as $30 a share after the Oil Spill. Its decline in price was 100% based on market emotion, with no financial analysis justifying the fall in share price. Needless to say, any value investor could have picked up on this. Made a 33% return in about a month.

    This. Some of the share prices hit by the financial crisis didn't deserve to be, and there's definitely money to be made in the long-run if you spot them.

    I wouldn't say it was purely on emotion, there were real concerns that BP could face huge fines and regulatory uncertainty for a long time following the oil spill. No one really knew how long it was going to last and no one really knew what the political reaction would be. Its really easy to look back and think the guys who sold BP were idiots, but history is full of firsts, and there was a possibility it could severely damaged the firm's long term profitability.

    "History doesn't repeat itself, but it does rhyme."

  • In reply to cyoungmark
    mb666's picture

    cyoungmark:
    I think profitability in the stock market game comes from being able to predict.

    Um...

  • In reply to cyoungmark
    mb666's picture

    cyoungmark:
    I meant prediction as in, it's not just in the numbers anymore.

    Not sure what you mean. Also, from your earlier post, what do you mean about making money mechanically? Do you mean consistently or with a systemic approach?

  • cyoungmark's picture

    Prediction as in.. you must predict situations such as... I think the deal with company A will go through because of B. With B being unknown to the general public. You have to come up with your own Ideas. I meant making money mechanically as in making money based off of "systems." Such as buying low "valued" stocks which everyone is already doing. Basically anything that is already known or being implemented by a great number of people. The more I learn about investing and the more knowledge I gain from my own endeavors, I seem to think the market is almost completely efficient. This means you must predict a situation or a catalyst which is unknown or not included in the price already.

  • In reply to cyoungmark
    mb666's picture

    cyoungmark:
    Prediction as in.. you must predict situations such as... I think the deal with company A will go through because of B. With B being unknown to the general public. You have to come up with your own Ideas. I meant making money mechanically as in making money based off of "systems." Such as buying low "valued" stocks which everyone is already doing. Basically anything that is already known or being implemented by a great number of people. The more I learn about investing and the more knowledge I gain from my own endeavors, I seem to think the market is almost completely efficient. This means you must predict a situation or a catalyst which is unknown or not included in the price already.

    I see but how is this different than any market in history? Isn't it the nature of speculation, and in essence this never changes.

  • cyoungmark's picture

    Your right. I'm discounting Graham's method. It should be known that I am a value investor myself.

  • cyoungmark's picture

    I do believe that there is value in value investing. To me it helps make sure I don't invest in something extremely overvalued in which I will get my ass handed to me if one bad earnings report comes out.

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