Robert F. Bierig
Duke University
Durham, North Carolina
April 2000


Before the stock market crash of 1929, portfolio investment was a disordered and muddled activity. Benjamin Graham and David L. Dodd’s Security Analysis, first published in1934, brought structure and logic to the field, creating an intellectual framework for sound investment. In an area where much looks foolish shortly after publication, Graham’s principles have proved reliable for over sixty-five years. Moreover, as Warren Buffett wrote in a remembrance about Graham in the Financial Analysts Journal, their value has often been “enhanced and better understood in the wake of financial storms that demolished flimsier intellectual structures.”

Graham mostly operated in a business environment conditioned by the extreme economic collapse of the 1930s. Indeed, the majority of investors remained shell-shocked for many years thereafter. As a result, Graham and his disciples could readily find extraordinary bargains in the public securities markets. However, in investing, like in life, one must adapt to the conditions at hand.

Investors in the United States eventually gained insight from the recognition that stocks had been chronically mispriced on the low side. Accordingly, investors bid stock prices higher and higher, and, by and large, the most obvious bargains of the type Graham had always searched for vanished. Thus, in order to remain successful, the Ben Graham disciples had to change their definition of a bargain in various ways. Graham’s most famous pupil, Warren Buffett of Omaha, Nebraska, is generally credited with refining and enlarging his mentor’s principles. Both because of the enormous size of Buffett’s chief investment vehicle, Berkshire Hathaway, and because he finds businesses more interesting than did Graham, Buffett tries to find businesses whose cash flows he expects to grow substantially in the future.

This paper will trace the evolution of Graham’s and Buffett’s ideas in response to changes in both economic conditions and their own experiences. We emphasize that this paper does not argue for the merits of “value investing” or claim that “value investing” is the “correct” approach. Nor does the paper present a biography of Benjamin Graham or Warren Buffett – although we introduce some biographical material in order to contextualize the development of their thought. After all, like all ideas and beliefs, the ideas and beliefs held by Graham, Buffett, and their fellow “value investors” shaped and were shaped by personal and social experience.

We note that this paper does not simply reprise material that already appears in the widely available books and articles on Buffett and Graham. Rather, it narrates an evolving business/investment philosophy – and, therefore, it may be seen as a case study of specific kinds of ideas as we ask how thought in the discipline of “value investing” has changed, why it has changed, and how these changes have affected investment strategy and practice. In conducting our research, we have drawn on the voluminous writings, speeches, and lectures of Graham, Buffett, their associates, and fellow practitioners; many biographies, interviews, and business histories; and relevant articles in newspapers, magazines, and professional journals.

This paper first examines Benjamin Graham and the origins of “value investing” and then takes up Warren Buffett and his redefinition of value. The “Graham section” is divided into three
main parts. First, we discuss Graham’s early years on Wall Street, with special attention given to Graham’s tenure at Newburger, Henderson & Loeb, his activities during the 1920s, his course on security analysis at Columbia Business School, and the lessons from the stock market crash of 1929.

Second, we examine Graham’s two major works on investing and the stock and bond markets, Security Analysis and The Intelligent Investor. This section focuses on the genesis of the Security Analysis project, the basic message and intellectual system delivered in Security Analysis, the contributions of The Intelligent Investor, and Graham’s legacy.

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