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Benjamin Graham‘s influence on the investment industry paved the way for a group of aspiring investors to become “super investors”. Warren Buffett discussed the success of Graham’s superinvestors in a 1984 speech titled, “The-Superinvestors-of-Graham-and-Doddsville“
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Columbia Business School
In the three decades that Graham oversaw the investments at Graham-Newman Corporation, he also lectured at Columbia Graduate School of Business.
As an adjunct professor of finance, he taught a course on common stock evaluation. The lessons centered on market case studies and emphasized key insights regarding corporate accounting practices.
Graham’s commitment to teaching the two-hour security analysis class each week changed the lives of three generations of young, intelligent investors.
In the 1984 speech, Buffett demonstrated this impact by comparing Graham’s superinvestors to a group of “lucky” orangutans.
Buffett argued that the orangutans in his illustration, who were finalists in a nationwide coin-flipping contest, could not attribute their success to luck if they were trained by the same zookeeper.
Here is an abridged excerpt from that speech as reprinted by Columbia Business School:
The Superinvestors of Graham-and-Doddsville
“I would like for you to imagine a national coin-flipping contest. Let’s assume we get 225 million Americans up tomorrow morning and we ask them all to wager a dollar. They go out in the morning at sunrise, and they all call the flip of a coin. If they call correctly, they win a dollar from those who called wrong. Each day the losers drop out, and on the subsequent day the stakes build as all previous winnings are put on the line. After ten flips on ten mornings, there will be approximately 220,000 people in the United States who have correctly called ten flips in a row. They each will have won a little over $1,000.
Assuming that the winners are getting the appropriate rewards from the losers, in another ten days we will have 215 people who have successfully called their coin flips 20 times in a row and who, by this exercise, each have turned one dollar into a little over $1 million.
By then, this group will really lose their heads. They will probably write books on “How I Turned a Dollar into a Million in Twenty Days Working Thirty Seconds a Morning.” Worse yet, they’ll probably start jetting around the country attending seminars on efficient coin-flipping and tackling skeptical professors with, “If it can’t be done, why are there 215 of us?”
But then some business school professor will probably be rude enough to bring up the fact that if 225 million orangutans had engaged in a similar exercise, the results would be much the same – 215 egotistical orangutans with 20 straight winning flips.
I would argue, however, that there are some important differences in the examples I am going to present. For one thing, if (a) you had taken 225 million orangutans distributed roughly as the U.S. population is; if (b) 215 winners were left after 20 days; and if (c) you found that 40 came from a particular zoon in Omaha, you would be pretty sure you were on to something. So you would probably go out and ask the zookeeper about what he’s feeding them, whether they had special exercises, what books they read, and who knows what else. This is, if you found any really extraordinary concentrations of success, you might want to see f you could identify concentrations of unusual characteristics that might be causal factors.”
Common Intellectual Patriarch
Later in the speech, Buffett describes a group of successful investors who all have “a common intellectual patriarch, Ben Graham.” The individuals of this group have all achieved remarkable success by following Benjamin Graham’s principles and searching for discrepancies between thevalue and price of a business.
Buffett showcases four investors who were disciples of Benjamin Graham. Here is an overview of each, and the returns they achieved during their careers:
- Walter Schloss: Took a night course from Graham and worked for the Graham-Newman Corp. before starting his own fund. From 1956 to 2000, Schloss’ investment fund earned an average compounded annual rate of return of 15.7%.
- Tom Knapp: Obtained his MBA from Columbia Business School where he studied under Benjamin Graham and David Dodd. Also worked at Graham-Newman Corp. before joining the investment firm Tweedy, Browne Partnership. From 1968 to 1983 Tweedy, Browne Partners returned a 20% average annual compounded rate of return.
- Bill Ruane: Took Ben Graham’s course at Columbia and later became the successor to Warren Buffett’s Partnership in 1957. Ruane’s performance while managing Buffett’s Partnership from 1957 to 1969 was an astonishing 29.5% average annual compounded return. In 1970, he started managing the now famous Sequoia Fund which earned an average annual compounded return of 18.2%.
- Charlie Munger: Although Munger didn’t study directly under Graham, Warren Buffett “got to him” and Graham’s principles eventually rubbed off. Before teaming up with Buffett to run Berkshire Hathaway, Munger managed his own firm from 1962 to 1975. During this time, his performance averaged an annual compounded return of 19.8%.
To emphasize that these superinvestors found success by following Graham’s principles, rather than merely copying his stock picks, Buffett added the following clarification:
“I should add that, in the records we’ve looked at so far, throughout this whole period there was practically no duplication in these portfolios. These are men who select securities based on discrepancies between price and value, but they make their selections very differently.”
Benjamin Graham’s principle of buying companies for less than they are worth (value investing) is a tried and true approach to building wealth.
There is no one right way to implement this approach. Value investors are able to choose from a variety of styles depending on personal preference.
By using the stock screens on TheStockMarketBlueprint.com, investors can implement any number of strategies inspired by Benjamin Graham and his superinvestors.
Mitchell Mauer is the Founder of TheStockMarketBlueprint.com. The Stock Market Blueprint is a site that finds value stocks for investors building long-term wealth. The site’s investment philosophy is anchored in principles established by Benjamin Graham and his most reputable followers over the last 100 years.