Ben Graham Scan

[biaggio]

I found this treasure of scanned articles/interviews on Ben Graham on Matt Paul's web site- I hope he does not mind me posting. -http://mattpauls.com/assets/BenGrahamJournalScans.pdf

 

I just started reading his site http://investinginknowledge.com/.

 

Appears to have a lot of good stuff.

 

I was surprised to read in the first article of a 1976 interview that he kind of believed in EMT and that in depth researching (reading all the SEC filings of the company plus all its competitors as advised by one of our old posters) an investment in a specific stock maybe a mistake (waste of time), because of the intense research done by others it is unlikely that you will have an advantage. Good for us that he believed that individuals can have an advantage over institutions

 

Edit: second article(stuff you guys all know) clarifies re EMT- the market has access to knowledge and knows all that is knowable. The difference for us value investors is judgement and if  market prices fully reflect underling value. i.e we re still not likely to get an edge from reading all the 10K's. Just pick high quality predictable enterprises at a discount (margin of safety)

Sorry I am trying to speed read + sometimes my reading comprehension is lacking.

[txitxo]

I found this treasure of scanned articles/interviews on Ben Graham on Matt Paul's web site- I hope he does not mind me posting. -http://mattpauls.com/assets/BenGrahamJournalScans.pdf

 

I just started reading his site http://investinginknowledge.com/.

 

Appears to have a lot of good stuff.

 

I was surprised to read in the first article of a 1976 interview that he kind of believed in EMT and that in depth researching (reading all the SEC filings of the company plus all its competitors as advised by one of our old posters) an investment in a specific stock maybe a mistake (waste of time), because of the intense research done by others it is unlikely that you will have an advantage. Good for us that he believed that individuals can have an advantage over institutions

 

Edit: second article(stuff you guys all know) clarifies re EMT- the market has access to knowledge and knows all that is knowable. The difference for us value investors is judgement and if  market prices fully reflect underling value. i.e we re still not likely to get an edge from reading all the 10K's. Just pick high quality predictable enterprises at a discount (margin of safety)

Sorry I am trying to speed read + sometimes my reading comprehension is lacking.

 

So after a life of investing and of thinking about investing, what did Ben Graham advocate?: Buying baskets of stocks selected through relatively simple stock screens, a foolproof method  "not on the basis of individual results but in terms of the expectable group outcome".

 

 

[Liberty]

So after a life of investing and of thinking about investing, what did Ben Graham advocate?: Buying baskets of stocks selected through relatively simple stock screens, a foolproof method  "not on the basis of individual results but in terms of the expectable group outcome".

 

The question is 'who was he advocating that to'? Warren Buffett, or the average investor?

 

Buffett also advocates index funds to the average investor.

 

I guess we here are all hoping we're not average :)

[Kraven]

This stuff has been rehashed here in various threads numerous times.  By the time Graham was near the end of his life he no longer believed in individual security analysis and felt that baskets of securities bought via various screens would outperform.  By the time he retired from the investment business in the mid 1950s he had essentially burnt out on investing.  It was a new chapter in his life.  He had moved to Southern California and while he was still teaching classes at UCLA he no longer cared about the business really.  He spent his time on various other pursuits - everything from translating various works from Greek to English, to working on inventions, etc.  His primary pursuit during this time was his newfound affair with his dead son's significant other.  Graham ended up splitting his life between his third wife and his mistress and between Los Angeles (later La Jolla) and France.  He had never really cared that much about money once his needs were met and he didn't care at all by the later stages of his life.  It's always been my contention that those who want to attribute to Graham support for EMT and the like are barking up the wrong tree.  He was old, tired and had completely different interests.

[oddballstocks]

This stuff has been rehashed here in various threads numerous times.  By the time Graham was near the end of his life he no longer believed in individual security analysis and felt that baskets of securities bought via various screens would outperform.  By the time he retired from the investment business in the mid 1950s he had essentially burnt out on investing.  It was a new chapter in his life.  He had moved to Southern California and while he was still teaching classes at UCLA he no longer cared about the business really.  He spent his time on various other pursuits - everything from translating various works from Greek to English, to working on inventions, etc.  His primary pursuit during this time was his newfound affair with his dead son's significant other.  Graham ended up splitting his life between his third wife and his mistress and between Los Angeles (later La Jolla) and France.  He had never really cared that much about money once his needs were met and he didn't care at all by the later stages of his life.  It's always been my contention that those who want to attribute to Graham support for EMT and the like are barking up the wrong tree.  He was old, tired and had completely different interests.

 

Excellent points, usually overlooked.  This is why I prefer the second and third editions of Security Analysis over anything else he wrote.  He was still in the thick of it when he wrote these books, and still as interested.  The fourth edition of Security Analysis has some stuff about just buying the biggest companies in each sector, and some chapters on estimating growth based on GDP etc.  I think even by then he'd lost interest.

 

People's interests change over time, it's not a bad thing, but we need to realize it.

[txitxo]

This stuff has been rehashed here in various threads numerous times.  By the time Graham was near the end of his life he no longer believed in individual security analysis and felt that baskets of securities bought via various screens would outperform.  By the time he retired from the investment business in the mid 1950s he had essentially burnt out on investing.  It was a new chapter in his life.  He had moved to Southern California and while he was still teaching classes at UCLA he no longer cared about the business really.  He spent his time on various other pursuits - everything from translating various works from Greek to English, to working on inventions, etc.  His primary pursuit during this time was his newfound affair with his dead son's significant other.  Graham ended up splitting his life between his third wife and his mistress and between Los Angeles (later La Jolla) and France.  He had never really cared that much about money once his needs were met and he didn't care at all by the later stages of his life.  It's always been my contention that those who want to attribute to Graham support for EMT and the like are barking up the wrong tree.  He was old, tired and had completely different interests.

 

Perhaps. I did not have the chance to interview Ben Graham at that stage in his life and analyze him to see whether he meant what he said, or whether he actually was old and tired, and just rationalizing his distaste for reading balance sheets. But we should also consider the possibility that perhaps we are the ones rationalizing. The facts are that he was making 20% a year with real money, using a basket of net-nets, and that those same net-nets apparently keep generating similar performance nowadays. There are very, very few, pure Graham and Dodd value investors which match those numbers. So maybe he was on to something. Specially if making 20% for decades left him time to enjoy other pursuits. 

 

[Kraven]

This stuff has been rehashed here in various threads numerous times.  By the time Graham was near the end of his life he no longer believed in individual security analysis and felt that baskets of securities bought via various screens would outperform.  By the time he retired from the investment business in the mid 1950s he had essentially burnt out on investing.  It was a new chapter in his life.  He had moved to Southern California and while he was still teaching classes at UCLA he no longer cared about the business really.  He spent his time on various other pursuits - everything from translating various works from Greek to English, to working on inventions, etc.  His primary pursuit during this time was his newfound affair with his dead son's significant other.  Graham ended up splitting his life between his third wife and his mistress and between Los Angeles (later La Jolla) and France.  He had never really cared that much about money once his needs were met and he didn't care at all by the later stages of his life.  It's always been my contention that those who want to attribute to Graham support for EMT and the like are barking up the wrong tree.  He was old, tired and had completely different interests.

 

Perhaps. I did not have the chance to interview Ben Graham at that stage in his life and analyze him to see whether he meant what he said, or whether he actually was old and tired, and just rationalizing his distaste for reading balance sheets. But we should also consider the possibility that perhaps we are the ones rationalizing. The facts are that he was making 20% a year with real money, using a basket of net-nets, and that those same net-nets apparently keep generating similar performance nowadays. There are very, very few, pure Graham and Dodd value investors which match those numbers. So maybe he was on to something. Specially if making 20% for decades left him time to enjoy other pursuits.

 

I think you are reading something in to my post that wasn't there.  The point wasn't that he didn't believe what he was saying, but that his interests had changed over time.  He was at a different place in his life.  I am not sure that one needs to have interviewed him and analyzed him.  This can all be ascertained from various writings.  If required, I am sure that your assertion that he made 20% a year "for decades" was made by auditing his financials for each of those years, yes?  Note too that by the time he left the investment business in the mid 1950s he held few to no stocks other than his shares in GEICO which he held into his later years (and perhaps died with, it's not clear to me).  While he made a few stock investments in his later years (this was in fact how he met Charles Brandes who at the time was just a young stockbroker in La Jolla, CA), he basically held his entire wealth in munis.  Graham's statements may very well be good evidence for formulaic investing. 

 

But the truth was there were 2 major stages in Graham's life.  So did his views on investing change because he felt there was a better way, or did they change because his interests and stage in life changed?  I believe the latter, you clearly believe the former.  There is no right answer, but it is a fact that when he spoke at his 80th birthday party and reflected on his life he didn't even mention his investing career.  In my view this does not provide much support for the notion that he had considered all the angles and believed that formlaic investing was preferable to fundamental analysis.  Those are the words he said of course, but said while jet setting between CA and France mistress in tow. 

[twacowfca]

This stuff has been rehashed here in various threads numerous times.  By the time Graham was near the end of his life he no longer believed in individual security analysis and felt that baskets of securities bought via various screens would outperform.  By the time he retired from the investment business in the mid 1950s he had essentially burnt out on investing.  It was a new chapter in his life.  He had moved to Southern California and while he was still teaching classes at UCLA he no longer cared about the business really.  He spent his time on various other pursuits - everything from translating various works from Greek to English, to working on inventions, etc.  His primary pursuit during this time was his newfound affair with his dead son's significant other.  Graham ended up splitting his life between his third wife and his mistress and between Los Angeles (later La Jolla) and France.  He had never really cared that much about money once his needs were met and he didn't care at all by the later stages of his life.  It's always been my contention that those who want to attribute to Graham support for EMT and the like are barking up the wrong tree.  He was old, tired and had completely different interests.

 

Perhaps. I did not have the chance to interview Ben Graham at that stage in his life and analyze him to see whether he meant what he said, or whether he actually was old and tired, and just rationalizing his distaste for reading balance sheets. But we should also consider the possibility that perhaps we are the ones rationalizing. The facts are that he was making 20% a year with real money, using a basket of net-nets, and that those same net-nets apparently keep generating similar performance nowadays. There are very, very few, pure Graham and Dodd value investors which match those numbers. So maybe he was on to something. Specially if making 20% for decades left him time to enjoy other pursuits.

 

I think you are reading something in to my post that wasn't there.  The point wasn't that he didn't believe what he was saying, but that his interests had changed over time.  He was at a different place in his life.  I am not sure that one needs to have interviewed him and analyzed him.  This can all be ascertained from various writings.  If required, I am sure that your assertion that he made 20% a year "for decades" was made by auditing his financials for each of those years, yes?  Note too that by the time he left the investment business in the mid 1950s he held few to no stocks other than his shares in GEICO which he held into his later years (and perhaps died with, it's not clear to me).  While he made a few stock investments in his later years (this was in fact how he met Charles Brandes who at the time was just a young stockbroker in La Jolla, CA), he basically held his entire wealth in munis.  Graham's statements may very well be good evidence for formulaic investing. 

 

But the truth was there were 2 major stages in Graham's life.  So did his views on investing change because he felt there was a better way, or did they change because his interests and stage in life changed?  I believe the latter, you clearly believe the former.  There is no right answer, but it is a fact that when he spoke at his 80th birthday party and reflected on his life he didn't even mention his investing career.  In my view this does not provide much support for the notion that he had considered all the angles and believed that formlaic investing was preferable to fundamental analysis.  Those are the words he said of course, but said while jet setting between CA and France mistress in tow.

 

Much earlier in his career, Graham advocated somewhat similar screens for "the defensive investor", for someone who didn't have the time or inclination to do security analysis.  In his later years, Graham himself had become a defensive investor.  :)

[txitxo]

 

If required, I am sure that your assertion that he made 20% a year "for decades" was made by auditing his financials for each of those years, yes? 

 

  Kraven, it is not my assertion; It is Ben Graham himself who says that he made 20% a year with net-nets for decades: "We used this approach extensively in managing investment funds, and over a 30-odd year period we must have earned an average of some 20 per cent per year from this source". Later in the letter he says: "I consider it a foolproof method of systematic investment--once again, not on the basis of individual results but in terms of the expectable group outcome". I am very reluctant to doubt his word on this unless I see strong evidence to the contrary.

 

  If I am not wrong, Ben Graham average returns were 15% during his career. So one hypothesis which fits very well the empirical information we have is that he used different investment strategies and with the years he realized that the one which worked best was, precisely, mechanical or formulaic investing. In addition, it left him spare time to womanize. Win-win.

 

[Kraven]

 

If required, I am sure that your assertion that he made 20% a year "for decades" was made by auditing his financials for each of those years, yes? 

 

  Kraven, it is not my assertion; It is Ben Graham himself who says that he made 20% a year with net-nets for decades: "We used this approach extensively in managing investment funds, and over a 30-odd year period we must have earned an average of some 20 per cent per year from this source". Later in the letter he says: "I consider it a foolproof method of systematic investment--once again, not on the basis of individual results but in terms of the expectable group outcome". I am very reluctant to doubt his word on this unless I see strong evidence to the contrary.

 

  If I am not wrong, Ben Graham average returns were 15% during his career. So one hypothesis which fits very well the empirical information we have is that he used different investment strategies and with the years he realized that the one which worked best was, precisely, mechanical or formulaic investing. In addition, it left him spare time to womanize. Win-win.

 

Txitxo,

 

Sure, of course I know that Graham reported his 20% returns in net nets.  Of course, it always troubled me slightly that the number we all rely on as the possibility for a net net portfolio was stated by Graham as "we must have earned", that is, it isn't as specific as I would have liked, but I don't doubt it either.  You are right.  If it isn't 20% then it's 15% or something.  When I asked whether you had the numbers audited, I said that a bit tongue in cheek.  You relied on a statement by Graham, his words.  So did I.  It may not be as exact, but remember we don't need to know a man's weight to know he's fat or a woman's age to know she is old enough to vote.  You implied that I could not know his interests and such changed because you had not been there to analyze him and interview him.  However, he was interviewed enough for the words to be there.  Certainly there are more statements he made that his interests were different than that he returned 20% in net nets.

 

I have never made the statement either that he didn't believe it when he said late in life that a mechanical investing approach was preferable.  You may be right.  After a lifetime of investing he may have decided against individual security analysis in favor of the mechanical.  However, my point was that while he changed his view, his interests and place in life had changed.  Surely you know of this.

 

To take a step back for a second, until around the mid 1950s investing, while perhaps not his primary interests, certainly took up the bulk of his time.  During this time he had 3 editions of Security Analysis and the first edition The Intelligent Investor.  While he talks about more mechanical approaches for defensive investors, for more enterprising or aggressive investors he believed in individual security analysis (as well as net nets of course).  But net nets were more or less the sole mechanical approach he recommended in those days to those analyzing individual securities.  Even then, while it was certainly a basket approach, he didn't advise just purchasing them "blindly" as he did to some extent late in life.

 

So his investment career ends, he moves to LA and more or less disappears from the investing community.  He teaches a class at UCLA, but that seems to be about his only tie to investing.  During this time other than GEICO he generally only owns bonds.  More than 10 years later, in 1968, Buffett organizes the first "Graham Group" at the Hotel Del Coronado in San Diego.  At this meeting is not only his prize pupil, but all his other favorites and various other brilliant investors and past employees.  He shows up, gives some kind of odd quiz and leaves early.  He then spends the next few years shuttling between France and La Jolla with his mistress.  He seems to become interested again in investing as an intellectual pursuit (in interviews during this time he still maintains he doesn't generally invest in stocks any more and his money is in bonds) and does some interviews and prepares to update The Intelligent Investor.  At his 80th birthday party, with all manner of friends and family about, he reflects on his life and doesn't mention investing at all.

 

At this time he now, for the first time, begins to argue that the mechanical approach is superior and he no longer believes in individual analysis.  My contention isn't that he didn't believe what he said, but that given the changes in his life, his advanced age, etc that it isn't good support for the assertion that a mechanical approach is superior.  If it is, then everything Graham did before is worthless.  There is no point in reading Security Analysis or The Intelligent Investor.  All one needs to do is buy a basket of net nets that appear on a screen.  Note too, it wasn't just net nets he suggested, but combinations of low p/e and low equity/assets and so forth.  For me, given his actions and place in life, I cannot view this as sufficient support especially as weighed against the body of his life's work.  If Mick Jagger gave an interview and said he's thought about it, but sex, drugs and rock n' roll is no way to live a life, would that be good evidence or simply the fact that he's closing on 70 and in a different place?  One could argue of course that he considered the issues and has changed his mind, but I guess it wouldn't be enough for me.

[biaggio]

Kraven, thanks for your posts and sharing about Ben graham's life- though I read his security books I did not know anything about his personal life, nor his differing investment philosophy late in his life.

 

I think in advancing age you kind of get burned out (i.e lose the passion and enthusiasm you have in your 20's), and you look for safety , short cuts and the desire to enjoy the finer things in life (wine, women and travel). I think you get wiser (I hope so anyways). There may be a lesson here as well for all of us.

[Kraven]

Kraven, thanks for your posts and sharing about Ben graham's life- though I read his security books I did not know anything about his personal life, nor his differing investment philosophy late in his life.

 

I think in advancing age you kind of get burned out (i.e lose the passion and enthusiasm you have in your 20's), and you look for safety , short cuts and the desire to enjoy the finer things in life (wine, women and travel). I think you get wiser (I hope so anyways). There may be a lesson here as well for all of us.

 

You're welcome.  I agree with what you say.  We all change as we age and grow.  The things that interest you when you're younger no longer seem as important or doable as you grow old.  It doesn't necessarily mean though that it invalidates your earlier viewpoints.    There is no doubt in my mind at least that Graham in his 70s and 80s, rich and with various interests, did not feel the need to sit there and pore over balance sheets.  He didn't need or want the money and the intellectual satisfaction it had given him was no longer there. 

 

It reminds me of a story of my grandfather.  He was only slightly younger than Graham and had come from Eastern Europe by way of London and then Ellis Island, finally settling in Chicago.  He had unbelievable strength, not physically but of mind and character.  He had an intestinal fortitude not uncommon of men of his day and almost completely gone now.  He knew what was right and he stood up for it no matter what the consequences.  So as I said, he was in Chicago and was an adult in the Great Depression.  He held various jobs as people did then, those who could find them, and was everything from a lawyer to a construction worker to a carpenter to a bee keeper (not sure exactly how that last one played out). 

 

Family history held that during the Depression, while he was a lawyer he had a small time case (the only kind of case he had, when he had it).  He wasn't a super lawyer, he was a nobody.  This was Al Capone's time and supposedly a case my Grandfather was working on had reached his attention somehow.  A man stopped by his "office" (a hole in the wall) and said somethin to the effect that "the Big Boss wants you to stop this case".  He knew of course who the man was and who the "Big Boss" was.  He never knew why this case mattered, but it did apparently.  His response was "the Boss knows his business and I know mine.  I don't get in anyone's way, but I need to do what is right in this matter.  I hope the Boss understands."  The other man shook his head and walked out. 

 

That was the end of it.  My Grandfather never heard another word and thought that Capone may have respected someone politely standing up to him, or maybe he just forgot about it.  In any case, I remember as kids us asking him about it and whether he'd do it again.  His response was "I must have been meshugana! [Yiddish for crazy]  What was I thinking?  Of course in those days if Capone tells you something you do it!"

[txitxo]

 

If required, I am sure that your assertion that he made 20% a year "for decades" was made by auditing his financials for each of those years, yes? 

 

  Kraven, it is not my assertion; It is Ben Graham himself who says that he made 20% a year with net-nets for decades: "We used this approach extensively in managing investment funds, and over a 30-odd year period we must have earned an average of some 20 per cent per year from this source". Later in the letter he says: "I consider it a foolproof method of systematic investment--once again, not on the basis of individual results but in terms of the expectable group outcome". I am very reluctant to doubt his word on this unless I see strong evidence to the contrary.

 

  If I am not wrong, Ben Graham average returns were 15% during his career. So one hypothesis which fits very well the empirical information we have is that he used different investment strategies and with the years he realized that the one which worked best was, precisely, mechanical or formulaic investing. In addition, it left him spare time to womanize. Win-win.

 

Txitxo,

 

Sure, of course I know that Graham reported his 20% returns in net nets.  Of course, it always troubled me slightly that the number we all rely on as the possibility for a net net portfolio was stated by Graham as "we must have earned", that is, it isn't as specific as I would have liked, but I don't doubt it either.  You are right.  If it isn't 20% then it's 15% or something.  When I asked whether you had the numbers audited, I said that a bit tongue in cheek.  You relied on a statement by Graham, his words.  So did I.  It may not be as exact, but remember we don't need to know a man's weight to know he's fat or a woman's age to know she is old enough to vote.  You implied that I could not know his interests and such changed because you had not been there to analyze him and interview him.  However, he was interviewed enough for the words to be there.  Certainly there are more statements he made that his interests were different than that he returned 20% in net nets.

 

I have never made the statement either that he didn't believe it when he said late in life that a mechanical investing approach was preferable.  You may be right.  After a lifetime of investing he may have decided against individual security analysis in favor of the mechanical.  However, my point was that while he changed his view, his interests and place in life had changed.  Surely you know of this.

 

To take a step back for a second, until around the mid 1950s investing, while perhaps not his primary interests, certainly took up the bulk of his time.  During this time he had 3 editions of Security Analysis and the first edition The Intelligent Investor.  While he talks about more mechanical approaches for defensive investors, for more enterprising or aggressive investors he believed in individual security analysis (as well as net nets of course).  But net nets were more or less the sole mechanical approach he recommended in those days to those analyzing individual securities.  Even then, while it was certainly a basket approach, he didn't advise just purchasing them "blindly" as he did to some extent late in life.

 

So his investment career ends, he moves to LA and more or less disappears from the investing community.  He teaches a class at UCLA, but that seems to be about his only tie to investing.  During this time other than GEICO he generally only owns bonds.  More than 10 years later, in 1968, Buffett organizes the first "Graham Group" at the Hotel Del Coronado in San Diego.  At this meeting is not only his prize pupil, but all his other favorites and various other brilliant investors and past employees.  He shows up, gives some kind of odd quiz and leaves early.  He then spends the next few years shuttling between France and La Jolla with his mistress.  He seems to become interested again in investing as an intellectual pursuit (in interviews during this time he still maintains he doesn't generally invest in stocks any more and his money is in bonds) and does some interviews and prepares to update The Intelligent Investor.  At his 80th birthday party, with all manner of friends and family about, he reflects on his life and doesn't mention investing at all.

 

At this time he now, for the first time, begins to argue that the mechanical approach is superior and he no longer believes in individual analysis.  My contention isn't that he didn't believe what he said, but that given the changes in his life, his advanced age, etc that it isn't good support for the assertion that a mechanical approach is superior.  If it is, then everything Graham did before is worthless.  There is no point in reading Security Analysis or The Intelligent Investor.  All one needs to do is buy a basket of net nets that appear on a screen.  Note too, it wasn't just net nets he suggested, but combinations of low p/e and low equity/assets and so forth.  For me, given his actions and place in life, I cannot view this as sufficient support especially as weighed against the body of his life's work.  If Mick Jagger gave an interview and said he's thought about it, but sex, drugs and rock n' roll is no way to live a life, would that be good evidence or simply the fact that he's closing on 70 and in a different place?  One could argue of course that he considered the issues and has changed his mind, but I guess it wouldn't be enough for me.

 

  Kraven, it is a pleasure to read you, but the facts are what they are. I try to look at them and be as little speculative as possible. You say "all one needs to do is buy a basket of net nets that appear on a screen". Well, try it. Have a look at that garbage. I can't bring myself to invest that way, so I have to use other screens which produce better looking stocks. You need the absolute rationality of a Mr. Spock to put a big fraction of your money on net-nets. 

 

And I would not disparage so easily the insights that you get with old age. I have seen people in their 60's realize that they have fought all their lives for a religious or political idea which was stupid. And they were absolutely right. It is not just that they were old. They just woke up.

 

  Same thing could have happened to Ben Graham. After all those years perhaps he realized that most of what he had done was worthless. That is why he did not even bother to speak about his investment achievements when he was 80...

 

  ...you see, the problem with speculating about what other people truly think or feel is that we can fit any hypothesis.

 

[Palantir]

I don't think it was simply advancing age. How old is WEB? Rather Graham simply realized something that's quite true, with a more competitive market with investors who have more and more information available to them, markets do become more efficient, especially compared to Graham's heyday. I wonder what he'd think about current markets.

[oddballstocks]

I think he believed they were somewhat effecient back in the 1930s and 1940s as well, at least in what he termed leading issues.  These would be things like the S&P 500 companies today, well watched, well researched.

 

Graham always seemed to avocate the secondary stocks as being an area where bargains exist, I think it's still true today.  Small caps, pink sheets, unloved and unfollowed companies are where opportunities still exist. 

 

plus ça change, plus c'est la même chose

[Kraven]

  Kraven, it is a pleasure to read you, but the facts are what they are. I try to look at them and be as little speculative as possible. You say "all one needs to do is buy a basket of net nets that appear on a screen". Well, try it. Have a look at that garbage. I can't bring myself to invest that way, so I have to use other screens which produce better looking stocks. You need the absolute rationality of a Mr. Spock to put a big fraction of your money on net-nets. 

 

And I would not disparage so easily the insights that you get with old age. I have seen people in their 60's realize that they have fought all their lives for a religious or political idea which was stupid. And they were absolutely right. It is not just that they were old. They just woke up.

 

  Same thing could have happened to Ben Graham. After all those years perhaps he realized that most of what he had done was worthless. That is why he did not even bother to speak about his investment achievements when he was 80...

 

  ...you see, the problem with speculating about what other people truly think or feel is that we can fit any hypothesis.

 

As are you, my friend.  First, I don't disparage the insights people get with old age.  Not at all.  You are right.  He may have woken up after 50 years of believing in the possibility of individual security analysis and realized it was all a big waste of time.  That is quite possible.  I have never once said he didn't believe what it is he said.  I think he did.  My contention is simply that I don't think Graham circa 1974 is better support for mechanical investing vs Graham from approximately 1917-1960 being support for individual analysis.  We will never be able to definitively know for sure which is right.

 

You say you look at the facts.  So do I, you just don't see them as facts.  But let's turn it around a little.  You contend that he achieved superior results in net nets.  The entire value world has based this on a single statement Graham made to the effect that he "must have earned" about 20% a year on them.  Let's imagine a different conversation:

 

Interviewer:  Mr. Ackman, what is your most successful approach to investing?

Bill Ackman:  Well, when we build a big position and take an activist role.  We must have earned around 20% when we do that.

 

Or,

 

Interviewer:  Mr. Einhorn, what do you attribute your success to?

David Einhorn:  Taking a large short position and publicizing it has done wonders for us.  We must have earned around 20% when we do that.

 

Facts, right?  It IS a fact that Graham said he must have earned around 20%.  But we don't know for sure whether it is a fact that he obtained those returns.  To my knowledge no one has audited his financials and determined exactly what his returns in net nets were.  Do I doubt they were superior?  No.  Do I think your argument is fact while mine relating to his position in life is not?  No again.

 

I am not speculating as to his different interests.  This is a fact, just in the same way you use his own words to prove his returns.  He stated on several occasions that he no longer was interested generally in the market.  He also remarked about having the "standard pessimism" of an older individual.

 

I have never speculated as to his beliefs.  Those are your words.  I have said repeatedly he believes what he said.  My point is simply that it isn't good support for mechnical investing because a few random quotes late in life don't impair a lifetime of work.  Maybe it can.  I just don't believe it in this case based on the facts as I know them. 

[oddballstocks]

There's an excellent paper posted on FRMO's website where the Horizon Kinetics guys try to "prove" the 20% per year.  They come to the conclusion it is impossible he did this, but he did have a high return.

 

There is another interesting essay on Graham on that site, discussing his other outside interests other than investing.  They mention his autobiography is a memoir, which is less stringent, and apparently Graham insisted on that vs a fact checked autobiography.

 

It's like a grandfather telling a story to a grandchild, the essence is correct, but the facts might not exactly accurate, was it in 1942, or 1939 that it happened...

 

http://www.frmocorp.com/_content/essays/Benjamin%20Graham%20Part%20II%20April%202010.pdf

[Kraven]

There's an excellent paper posted on FRMO's website where the Horizon Kinetics guys try to "prove" the 20% per year.  They come to the conclusion it is impossible he did this, but he did have a high return.

 

There is another interesting essay on Graham on that site, discussing his other outside interests other than investing.  They mention his autobiography is a memoir, which is less stringent, and apparently Graham insisted on that vs a fact checked autobiography.

 

It's like a grandfather telling a story to a grandchild, the essence is correct, but the facts might not exactly accurate, was it in 1942, or 1939 that it happened...

 

http://www.frmocorp.com/_content/essays/Benjamin%20Graham%20Part%20II%20April%202010.pdf

 

Very interesting.  In fact his memoir was spotty in certain areas.  It was his book and he was willing to open up on various things, but not others.  Strangely, he essentially stopped as of the mid-1950s in the description of his life. 

 

I also wasn't aware that Horizon tried to prove the 20%.  I will need to look at that.  At the end of the day I think we all tend to over emphasize our successes and minimize our failures.  Look at Greenblatt's Magic Formula.  Wes Gray, a professor who has a website that escapes me (but is working on a book with the Greenbackd guy), tried to prove the reported returns that Greenblatt provides and was unable to do so.  If memory serves, they were no where close, although still very good.

[racemize]

Look at Greenblatt's Magic Formula.  Wes Gray, a professor who has a website that escapes me (but is working on a book with the Greenbackd guy), tried to prove the reported returns that Greenblatt provides and was unable to do so.  If memory serves, they were no where close, although still very good.

 

Not trying to derail your conversation here, but I was pretty concerned about Greenblatt's magic formula reported results and that study as well.  I still don't understand why Greenblatt didn't post specifics on the formula--I was worried he cherry picked the best day/month specific date combo with the highest results.

[oddballstocks]

It was the turnkey analyst blog that tried to recreate the magic formula results and couldn't: http://turnkeyanalyst.com/2011/06/909/

 

If I recall the guy is a finance professor and researcher.  It's slightly troubling that he couldn't replicate the results.  If anyone's interested in the magic formula there's a yahoo newsgroup with members who have been trying to replicate Greenblatt's numbers since 2007 if not earlier.  I say possibly earlier because I joined in 2007 and they've been discussing it ever since, I never searched the archives.

 

The magic formula yahoo group is worth a read if anyone is interested in quant strategies.  For how simple the magic formula is in real life most of these people got absolutely slaughtered in 2008, and they haven't come back yet.  The ones who've done well have integrated technical analysis, or simple scoring systems.  The ones who followed exactly what Greenblatt mentioned have done the worst.

[LC]

Look at Greenblatt's Magic Formula.  Wes Gray, a professor who has a website that escapes me (but is working on a book with the Greenbackd guy), tried to prove the reported returns that Greenblatt provides and was unable to do so.  If memory serves, they were no where close, although still very good.

 

Not trying to derail your conversation here, but I was pretty concerned about Greenblatt's magic formula reported results and that study as well.  I still don't understand why Greenblatt didn't post specifics on the formula--I was worried he cherry picked the best day/month specific date combo with the highest results.

 

Warning: anecdotal evidence ahead.

 

I spoke to a person who will remain nameless who worked on Greenblatt's magic formula website, they said it was both difficult working with him (the person managing the job made it hard to contact Greenblatt for feedback, etc.). Additionally their opinion was that the "magic formula" didn't quite work so well in real life.

 

Relatively meaningless information on its own but just to add another dimension to the debate from someone who actually worked on that project.

[thomcapital]

Look at Greenblatt's Magic Formula.  Wes Gray, a professor who has a website that escapes me (but is working on a book with the Greenbackd guy), tried to prove the reported returns that Greenblatt provides and was unable to do so.  If memory serves, they were no where close, although still very good.

 

Not trying to derail your conversation here, but I was pretty concerned about Greenblatt's magic formula reported results and that study as well.  I still don't understand why Greenblatt didn't post specifics on the formula--I was worried he cherry picked the best day/month specific date combo with the highest results.

 

Through http://csinvesting.org/ and the blogger's uploaded "library" I read class notes from someone who audited Greenblatt's class over multiple years. There are some nice tidbits of information in there from Greenblatt on how he ran that backtest and some of the minutia involved that I haven't seen elsewhere. That helped me (partially) reconcile his results vs. the turnkey analyst author's work, but I'm still not fully convinced however.

[oddballstocks]

Look at Greenblatt's Magic Formula.  Wes Gray, a professor who has a website that escapes me (but is working on a book with the Greenbackd guy), tried to prove the reported returns that Greenblatt provides and was unable to do so.  If memory serves, they were no where close, although still very good.

 

Not trying to derail your conversation here, but I was pretty concerned about Greenblatt's magic formula reported results and that study as well.  I still don't understand why Greenblatt didn't post specifics on the formula--I was worried he cherry picked the best day/month specific date combo with the highest results.

 

Warning: anecdotal evidence ahead.

 

I spoke to a person who will remain nameless who worked on Greenblatt's magic formula website, they said it was both difficult working with him (the person managing the job made it hard to contact Greenblatt for feedback, etc.). Additionally their opinion was that the "magic formula" didn't quite work so well in real life.

 

Relatively meaningless information on its own but just to add another dimension to the debate from someone who actually worked on that project.

 

Anecdotal as well, I talked with someone who had a similar impression of Greenblatt after interacting with him a few years ago. Not that it means anything, but it confirms (as much as possible) your story.

[txitxo]

It was the turnkey analyst blog that tried to recreate the magic formula results and couldn't: http://turnkeyanalyst.com/2011/06/909/

 

If I recall the guy is a finance professor and researcher.  It's slightly troubling that he couldn't replicate the results.  If anyone's interested in the magic formula there's a yahoo newsgroup with members who have been trying to replicate Greenblatt's numbers since 2007 if not earlier.  I say possibly earlier because I joined in 2007 and they've been discussing it ever since, I never searched the archives.

 

The magic formula yahoo group is worth a read if anyone is interested in quant strategies.  For how simple the magic formula is in real life most of these people got absolutely slaughtered in 2008, and they haven't come back yet.  The ones who've done well have integrated technical analysis, or simple scoring systems.  The ones who followed exactly what Greenblatt mentioned have done the worst.

 

As far as I know, nobody has been able to replicate the magic formula results. It got a lot of publicity from Greenblatt's book, but if you backtest it you see that it is actually a pretty mediocre strategy. There are plenty of  screens which work better, for instance Graham's criteria (enterprising, defensive and net-nets). Of course the better a screen works, the smaller the basket of stocks it produces. That is why you need several of them. But  remember that screens work blindly, by definition. You measure the performance of all the stocks. I have never seen a backtest of a net-net screen using only the "stocks which look good to a Graham and Dodd investor". 

 

  The 2008 debacle was widespread, many people with value small cap portfolios got creamed that year, remember what happened to Pabrai. In fact, the main advantage I see to Graham&Dodd investing is psychological. You get to know your stocks, you develop an attachment to them, so when they tank you have enough confidence to keep buying them and survive something like 2008. With mechanical screens as soon as things go down by 20% most people look at the junk they are holding and sell in a panic. And that is if you are a retail investor. Imagine having to explain your portfolio to the customers. To be able to do mechanical investing and keep a steady hand you  need to understand very well what you are doing from a mathematical point of view.

 

 

[txitxo]

As are you, my friend.  First, I don't disparage the insights people get with old age.  Not at all.  You are right.  He may have woken up after 50 years of believing in the possibility of individual security analysis and realized it was all a big waste of time.  That is quite possible.  I have never once said he didn't believe what it is he said.  I think he did.  My contention is simply that I don't think Graham circa 1974 is better support for mechanical investing vs Graham from approximately 1917-1960 being support for individual analysis.  We will never be able to definitively know for sure which is right.

 

You say you look at the facts.  So do I, you just don't see them as facts.  But let's turn it around a little.  You contend that he achieved superior results in net nets.  The entire value world has based this on a single statement Graham made to the effect that he "must have earned" about 20% a year on them.  Let's imagine a different conversation:

 

Interviewer:  Mr. Ackman, what is your most successful approach to investing?

Bill Ackman:  Well, when we build a big position and take an activist role.  We must have earned around 20% when we do that.

 

Or,

 

Interviewer:  Mr. Einhorn, what do you attribute your success to?

David Einhorn:  Taking a large short position and publicizing it has done wonders for us.  We must have earned around 20% when we do that.

 

Facts, right?  It IS a fact that Graham said he must have earned around 20%.  But we don't know for sure whether it is a fact that he obtained those returns.  To my knowledge no one has audited his financials and determined exactly what his returns in net nets were.  Do I doubt they were superior?  No.  Do I think your argument is fact while mine relating to his position in life is not?  No again.

 

I am not speculating as to his different interests.  This is a fact, just in the same way you use his own words to prove his returns.  He stated on several occasions that he no longer was interested generally in the market.  He also remarked about having the "standard pessimism" of an older individual.

 

I have never speculated as to his beliefs.  Those are your words.  I have said repeatedly he believes what he said.  My point is simply that it isn't good support for mechnical investing because a few random quotes late in life don't impair a lifetime of work.  Maybe it can.  I just don't believe it in this case based on the facts as I know them.

 

Dear Kraven, I think we have reached a point where we have to agree to disagree. These are more or less the conclussions.

 

Let's state again the plain facts:

 

- Graham said that he had an experience of 30-odd years buying net-nets and that he estimated that they yielded 20% during this period.

 

- He was so convinced of the formulaic approach working better than classical Graham and Dodd that he actually made it his main strategy.

 

Words and actions match, they are consistent. He literally put his money where he put his mouth. So my interpretation is to take them at face value, and assume that they were true.

 

Correct me if I am wrong, but you think that he was tired and burn out of investing and that he was just rationalizing his laziness, because you implicitly assume that Graham and Dodd investing must necessarily produce better results that applying a mechanical formula. 

 

We would really need an audit of Graham's returns to know who is right.