Ben Graham’s Fundamentals Are Still Relevant
The influence of the “father of value investing,” Ben Graham, is still widely felt today in this age of high frequency, options and day trading. My first read of The Intelligent Investor had an enormous impact on my career and interest in the markets. While a good portion of that was at Cantor Fitzgerald working with Howard Lutnick after 9/11, I find Graham is still impacting my thinking here at BEA. If you believe that fundamentals and active investing still have a place in today’s markets, here's a survey of some of the great value investors for you to study.
Graham was born Benjamin Grossbaum in London, England. He moved to New York City with his family when he was only one-year old. After the death of his father and being raised in poverty, he excelled at his studies, graduating as salutatorian of his class at Columbia at the age of 20 where he would eventually come back and teach. Graham started his career on Wall Street and eventually founded the Graham-Newman partnership. His partnership posted annualized returns of about 20% from 1936 to 1956, far outpacing the 12.2% average return for the broader market over that time. Graham was the author of Securities Analysis in 1934. Following the processes in that book generated substantial returns and led to his famous second book, The Intelligent Investor in 1949.
Graham’s investment philosophy stressed investor psychology, minimal debt, buy-and-hold investing, fundamental analysis, concentrated diversification, buying within the margin of safety, activist investing, and contrarian mindsets. It is no wonder that many young eager and smart minds would grab onto his teachings and take them in their own direction. Graham’s list of disciples includes many of the greatest of all time. Warren Buffett, Seth Klarman, William Ruane, Irving Kahn and Walter Schloss are on this list.
Ben Graham the mentor
Graham mentored the world’s most famous investor, Warren Buffett, who described him as the most influential person in his life after his father. Another disciple is Seth Klarman of the Baupost Group, who also made his own contributions to investing in Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor.
Among others influenced by Graham (and Buffett) was William J. Ruane, about whom Buffett was quoted as saying “.. if they wanted to be in the market, he recommended only one fund manager: William J. Ruane, manager of the Sequoia Fund.”
Irving Kahn, former research assistant to Graham, passed away at 107 years old, but only after leaving a legacy of success as a value investor, practicing Graham’s principles with a disciplined and fundamental style. While he didn’t leave us any books, much of his approach is preserved in this John Tobey article from Forbes.
Walter J. Schloss was another highly regarded value investor, former employee of Graham and a notable disciple of the Benjamin Graham school of investing. While he was named by Warren Buffett as one of “The Superinvestors of Graham-and-Doddsville,” his discipline was legendary. Warren Buffett had this to say about Schloss:
“He knows how to identify securities that sell at considerably less than their value to a private owner: And that's all he does... He owns many more stocks than I do and is far less interested in the underlying nature of the business; I don't seem to have very much influence on Walter. That is one of his strengths; no one has much influence on him.”
These men applied Graham’s teachings to achieve substantial success in the investment world. Graham and his disciples developed the building blocks of investing, added their own refinements along the way and, like Ray Dalio, applied new tools to complement their approach, not change it.
Tools for value investors
It is with these fundamentals in mind that our team at Boulder Equity Analytics (BEA) began development of new AI tools for investors. The tools for financials and trading data are mature and widely available, providing powerful assistance for the analysis of that type of data. But the value investor has long relied, to a substantial degree, on information contained in filings, annual reports, industry news and conference calls to determine “where the puck is going”.
Our roadmap at BEA is to provide AI tools that don’t just index this content to enable searching but “read” the content and provide analytics that surface the patterns value investors are looking for.
As an example, our Boulder Earnings Call Tracker (BECT) looks deep into the language management uses to explain their numbers. Understanding the themes, tone, and other textual attributes allows investors to look behind the spin. While an investor could listen to all the calls, this would take up time that is in precious supply.
Graham’s investor of 20 or 30 years ago didn’t have to keep up with the volume and velocity of today’s markets and an interconnected global economy. The principles haven’t changed. But new and better tools are needed to apply those principles. It’s time for an upgrade.