Benjamin Graham’s rediscovered 1946 lectures


Having recently re-read and reviewed Security Analysis (4th ed. pub. 1962), I was pleased to come across Wiley’s web publication of the so-called “Rediscovered Benjamin Graham” lectures from 1946.* Full of nuggets of wisdom these lectures, the tenth and final was particularly gratifying. To each investor or intelligent speculator, his or her own takeaways from Graham & Dodd and said lectures, the latter from which I’d like to call to attention two items in this post (1) index investing and (2) Graham’s parting observations on the conduct of business on Wall Street.

On index investing, it is intriguing that Graham observed the following some 65 years ago. The first paragraph basically espouses the concept of “margin of safety.” The subsequent two paragraphs, representing separate thoughts from the preceding paragraph during his lecture, show Graham identified value in index investing before the means to do such existed.

I am more and more impressed with the possibilities of history’s repeating itself on many different counts. You don’t get very far in Wall Street with the simple, convenient conclusion that a given level of prices is not too high. It may be that a great deal of water will have to go over the dam before a conclusion of that kind works itself out in terms of satisfactory experience. That is why in this course we have tried to emphasize as much as possible the obtaining of specific insurance against adverse developments by trying to buy securities that are not only not too high but that, on the basis of analysis, appear to be very much too low. If you do that, you always have the right to say to yourself that you are out of the security market, and you are an owner of part of a company on attractive terms. It is a great advantage to be able to put yourself in that psychological frame of mind when the market is not going the way you would like.

There are great advantages in dealing with a group valuation, because you are more likely to be nearly accurate, I am sure, when you are considering a number of components together — in which your errors are likely to cancel out — than when you are concentrating on an individual component and may go very wide of the mark in that one.

Furthermore, there is nothing to prevent the investor from dealing with his own investment problems on a group basis. There is nothing to prevent the investor from actually buying the Dow-Jones Industrial Average, though I never heard of anybody doing it. It seems to me it would make a great deal of sense if he did. (Ref. Lecture Number Six)

The likes of Warren Buffett and David Swensen have been advocates of index investing for individual investors. Generally, index investing makes sense to the author, too, with the requirement that expenses are kept as low as possible. However, there is an inherent flaw when indices are weighted by market capitalization, and investors are buying more of what’s going up the most and relatively less of everything else; the exact opposite of the strategy of dollar-cost-averaging. Not intending to get into a long discussion, I merely wanted to share Graham’s comments above.

Secondly, in regards to Graham’s parting observations on the conduct of business on Wall Street:

If you can throw your mind, as I can, as far back as 1914, you would be struck by some extraordinary differences in Wall Street then and today. In a great number of things, the improvement has been tremendous. The ethics of Wall Street are very much better. The sources of information are much greater, and the information itself is much more dependable. There have been many advances in the art of security analysis. In all those respects we are very far ahead of the past.

In one important respect we have made practically no progress at all, and that is in human nature. Regardless of all the apparatus and all the improvements in techniques, people still want to make money very fast. They still want to be on the right side of the market. And what is most important and most dangerous, we all want to get more out of Wall Street than we deserve for the work we put in.

There is one final area in which I think there has been a very definite retrogression in Wall Street thinking. That is in the distinctions between investment and speculation, which I spoke about at the beginning of this lecture. I am sure that back in 1914 the typical person had a much clearer idea of what he meant by investing his money, and what he meant by speculating with his money. He had no exaggerated ideas of what an investment operation should bring him, and nearly all the people who speculated knew approximately what kind of risks they were taking.

It goes without saying today that the sources of information are greater; perhaps there is an overabundance?  Overall, information published by companies can be said to be dependable, with varying levels of dependability (and transparency) on a firm-by-firm basis. The wide variety of third-party information is really a mixed bag in terms of dependability. As for advancements in the art of security analysis, I’m not sure Graham would be pleased to see the lack of intelligent investing or speculating today, but he probably wouldn’t be surprised either. That’s because there’s a constant, as he observed then: “In one important respect we have made practically no progress at all, and that is in human nature.” Which leads me to his comment on the then much improved ethics of Wall Street, where progress since seems dubious, and in the worst case maybe a regression or even retrogression has transpired. Certainly there are plenty of good apples, but how about the various mutations of the bad. The desire to make both a quick buck and to take more than is deserved has widespread deleterious effects as is vividly evidenced by the “great financial crisis.”

*See Jacob Wolinksy’s, where he maintains a repository of  what he calls “timeless reading” about all things value investing.