Difficulties with Ben Graham’s Approach

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The Great Investors: Lessons on Investing from Master Traders (Financial Times Series) by Glen Arnold, discusses difficulties with Ben Graham’s approach to investing which capitalideasonline posted today. First a little on the book and then an excerpt from Capital Ideas Online…

The Great Investors is the story of a number of remarkable men: John Templeton, George Soros, Warren Buffett, Benjamin Graham, Philip Fisher, Peter Lynch, Anthony Bolton and John Neff. Whether you’re new to investing, have had success in the markets, or you’re a professional investor or fund manger, you’ll benefit from reading about their proven, and successful, trading philosophies.

The Great Investors will show you how to:

  • Be a business analyst rather than a security analyst
  • Do your homework and develop a broad social, economic and political awareness
  • Control emotion so as not to get swept away by the market
  • Be consistent in your approach, even when you have bad years
  • See the wood for the trees and not over complicate your portfolio
  • Learn from your investing
  • Be self reliant, stand aside from the crowd and follow your own logic
  • Take reasonable risk

‘Whether a complete novice, or a professional portfolio manager, this book will give you access to the mindset and techniques of the most successful investors of our time and more importantly, it will help you avoid mistakes. The Great Investors will have a permanent place on my desk.’

Mark Sheridan , Executive Director, Nomura International PLC

Leading investors such as Warren Buffett, Benjamin Graham, Sir John Templeton, George Soros and Anthony Bolton are known throughout the world. How did these people come to be so successful? Which strategies have they used to make their fortunes? And what can you learn from their techniques?

In The Great Investors, Glen Arnold succinctly and accurately describes the investment philosophies of the world’s greatest investors. He explains why they are the best, gives details of their tactics for accumulating wealth, captures the key elements that led to their market-beating successes and teaches you key lessons that you can apply to your own investing strategies.

Difficulties with Ben Graham’s Approach

In a wonderful book, well worth reading,The Great Investors”, the author, Glen Arnold, writes on the difficulties and drawbacks of Ben Graham’s approach to investing.


“There are some serious difficulties for us in trying to implement a Grahamite investment approach. The first comes from not fully understanding what Ben Graham was saying, or from over-simplifying the technique. For example, not allowing for qualitative factors in net current asset investing.

Torturing the Data

There are a number of derisory terms used in academic circles to describe the process of examining past data for patterns leading to a formula for success – ‘torturing the data until they confess’ is one. Here the ‘researcher’ tries out dozens of formulae on past data until he or she finds the one that gives the desired result. Along the same lines, we have ‘mining the data-set’ until something ‘useful’ is found. The point the academics are making is this: just because you have found some sort of statistical relationship in the numbers you have in front of you, does not mean that it is a reliable relationship upon which you can make decisions about the future; it could be a pure fluke. Alternatively, perhaps it was a reliable relationship in the past, but because so many people are aware of its past existence it no longer exists, because security buyers have acted on new information, and thus the price discounts it. Even Ben Graham’s purely quantitative approach – defensive value investing – has a long list of tests for a stock to pass before it is accepted. Ben Graham goes further; he says this simple approach with its inattention to qualitative factors (e.g. management quality, competitive position of industry and firm, etc.) will produce merely satisfactory results and not the extraordinary returns that investors using simple criteria are looking for.

See full article via Capital Ideas Online

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