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Shortly before Benjamin Graham died, he gave an interview reflecting on all he had learned during his 60+ year career. The interview – entitled A Conversation with Benjamin Graham – was conducted by the Financial Analyst Journal. Graham’s profound answers offer exceptionally powerful lessons for investors still to this day.
During the course of Benjamin Graham’s unparalleled career, he published a vast number of articles, speeches, and reports which documented his investment principles. By far, the most referenced of these publications are two time-tested books, Security Analysis and The Intelligent Investor.
A Conversation With Benjamin Graham
While there is tremendous wisdom found in all of Graham’s writings, no document is more valuable to an individual investor today than his interview with the Financial Analyst Journal in 1976. After all, Daniel Webster famously said, “Wisdom begins at the end.”
This article is the first of a multi-part series called, Lessons from a Conversation with Benjamin Graham. In this series, we look at each of Graham’s answers and see how they are relevant to investors today.
Part 1 breaks down the first four questions of A Conversation with Benjamin Graham. These questions focus on Graham’s view of common stocks and the financial industry as a whole.
Ben Graham's View on Stocks
Question: In the light of your 60-odd years of experience in Wall Street what is your overall view of common stocks?
Ben Graham: Common stocks have one important characteristic and one important speculative characteristic. Their investment value and average market price tend to increase irregularly but persistently over the decades, as their net worth builds up through the reinvestment of undistributed earnings--incidentally, with no clear-cut plus or minus response to inflation. However, most of the time common stocks are subject to irrational and excessive price fluctuations in both directions, as the consequence of the ingrained tendency of most people to speculate or gamble--i.e., to give way to hope, fear and greed.
Translation: In the short-term, stocks go up and stocks go down. That’s inevitable. What’s also inevitable, is that in the long-term, stocks always go up. There’s no sense trying to profit in the short-term because price fluctuations are “irrational and excessive.” Investors who can resist fear and greed by avoiding the natural human tendency to gamble in the stock market will ultimately prove successful.
Ben Graham's View on Wall Street
Question: What is your view of Wall Street as a financial institution?
Ben Graham: A highly unfavorable--even a cynical--one. The Stock Exchanges appear to me chiefly as a John Bunyan type of Vanity Fair, or a Falstaffian joke, that frequently degenerates into a madhouse--"a tale full of sound and fury, signifying nothing." The stock market resembles a huge laundry in which institutions take in large blocks of each other's washing--nowadays to the tune of 30 million shares a day--without true rhyme or reason. But technologically it is remarkably well-organized.
Translation: It would be an understatement to say Graham wasn’t too impressed with Wall Street. When he describes it as “a huge laundry” he’s referring to the countless number of unnecessary transactions occurring each day. Graham wouldn’t even be able to fathom the amount of trades occurring today. He complains that 30 million shares were traded per day back then. In 2016, the daily share volume of just the NYSE and NASDAQ totaled over 3 billion! The implication of Graham’s discontent is that individual investors should ignore all the noise coming from Wall Street. Don’t get caught up in all the action, but focus on what you can control.
Ben Graham's View on the Finance Industry
Question: What is your view of the financial community as a whole?
Ben Graham: Most of the stockbrokers, financial analysts, investment advisers, etc., are above average in intelligence, business honesty and sincerity. But they lack adequate experience with all types of security markets and an overall understanding of common stocks--of what I call "the nature of the beast." They tend to take the market and themselves too seriously. They spend a large part of their time trying, valiantly and ineffectively, to do things they can't do well.
Translation: Professionals in the financial industry are smart, decent people but are overall not good at their jobs. The same is true in any industry, but it’s important to note that Graham made it about the financial industry. When he says they “take themselves too seriously” he’s implying that they think they’re more important than they really are. Investing in the stock market shouldn't be complicated. Most professionals make things harder than they need to be in order to come across as indispensable.
Question: What sort of things, for example?
Ben Graham: To forecast short- and long-term changes in the economy, and in the price level of common stocks, to select the most promising industry groups and individual issues-- generally for the near-term future.
Translation: This is a follow up question to Graham’s statement that the financial community “spend(s) a large part of their time trying, valiantly and ineffectively, to do things they can’t do well.” Too many investment professionals act like fortune tellers and try to predict the future. Graham makes it clear that it is a waste of time to base investment decisions on economic forecasts and detailed analysis. As you’ll see in the subsequent parts of this series, Graham came to favor simple investment strategies.
Grahams's answers from A Conversation with Benjamin Graham demonstrate that the financial industry really hasn’t changed much in the last 40 years. It has expanded exponentially as technology allowed markets to go global, but the underlying nature has remained the same.
Part 2 of this series will discuss Benjamin Graham’s opinions on how individual investors can best navigate the investment landscape. As you’ll see, the underlying principles are just as applicable to investors today, as they were then.
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.