Benjamin Graham - The Renaissance of Value

Extract of an lecture by Benjamin Graham:

• The title implies that concept of value had previously been in eclipse in Wall Street ( ...) may be identified with the virtual disappearance of the once well-estabilished distinction between investment and speculation. In the last decade everyone became an investor - including buyers of stock options and odd lot short-sellers. In my own thinking the concept of value, along with that of margin of safety, has always lain at the heart of true investment, while price expectations have been at the center of speculation.

• (...) in my experience marketability has proved of dubious overall advantage. It has led investors astray at least as much as it has helped them. It has made them stock market minded instead of value minded. I have puritarian vision of the true investor as someone who is entirely disinterested in what the stock market does except on two sorts of occasions that meet his convenience. The first (...) when the market obligingly permits him to buy a group of common stock at less that their indicated value; the second is when, with equal courtesy, it permits him to sell at not more than one half their former high quotation those that are of no importance to him (...)

• (...) of course the investor may also use the stock market to switch out of issues he owns into others that offer more value at ruling prices (...)

• (...) There is another aspect of take-overs (...) an old and losing battle that I have long fought to make stockholders less sheeplike vis-a-vis their management. You will recall that the fist bid of INCO was termed "hostile act" by the ESB management, who vowed to fight it tooth and nail. Several managements have recently asked stockholders to vote charter changes that would make such acquisitions more difficult to accomplish against their opposition - in other words make it more difficult for stockholders to obtain an attractive price for their shares. The stockholders, still sheeplike, generally approve such proposals. If this movement become widespread it could really harm investors' interests. I hope that financial analysts will form a sound judgement about what is involved here and do what they can to dissuade stockholders from cutting their own throats in such a foolish and reckless fashion (...)

• (...) institutions were persuaded to pay outlandish multipliers for shares of the Avon type by a combination of three influences: First, the huge ammounts of money they have to administer, most of which they decided to place in equities. Second, that comparatively small number of issues to which their operations were confirmed, in part because they had to choose multi-million-share companies for their block transactions, and partly by their insistence on high growth prospects. The third influence was the cult of performance, especially in persion fund management. (...) Of course, in this fantasia the institutions were pulling themselves up by their own bootstraps - something not hard to do in Wall Street, but impossible to maintain forever. These institutional policies raise two implications of importance for financial analysts. First, what should a conservative analyst have done in the heady area and era of high-growth, high-multiplier companies? I must say mornfully that he would have to do the near impossible - namely, turn his back on them and let them alone. The institutions themselves had gradually transformed these investment-type companies into speculative stocks. I repeat that the ordinary analayt cannot expect long-term satisfactory results in the field of speculative issues, whether they are speculative by the comapny's circumstances or by the high price levels at which they habitually sell.

• My second interference is a positive one for the investing public and for the analyse who may advise a non-institutional clientele. We have many complaints that institutional dominance of the stock market has put the small investor at a disadvantage because he can't compete with the trust companies huge resources, etc. The fact are quite the opposite. It may be that the institution are better equipped than the individual to speculate the market (...) but I am convinced that an individual investor with sound principles (...) can do distinctly better over the long pull than a large institution. Where the trust company may have to confine its operations to 300 concerns or less, the individual has up to 3000 issues for his investigations and choice. Most true bargains are not available in large blocks; by this very fact the institutions are well-nigh eliminated as competitors of the bargain hunter.

• (...)How many financial analysts can earn a good living by locating undervalued issues and recommending them to individual investors? (...) I can assert that the influx of analysts into the undervalued sphere in the past has never been so great as to cut down its profit possibilities, through that kind of over-cultivation and over-competition. (The value analyst was more likely to suffer from loneliness).

• Bargain issues have repeatedly become scarce in bullmarkets, but that was not because all the analyst became value conscious, but becaue of the general upswing in prices. 

• (...) Let me close with a few words of counsel from an 80 year-old veteran (...) Do those things as an analysts that you know you can do well; and only those things. If you can really beat the market by charts, by astrology, or by some rare and valuable gift of yourown, then that's the row you should hoe. If you're really good at picking the stocks most likely to succeed in the next twelve months, base your work on the endeavor. If you can foretell the next important developement in the economy, or in technology, or in consumers' preference, and gauge its consequences for various equity values, then concentrate on that particular activity. But in each case you must prove yourself by honest, no bluffing self-examination, and by continuous testing of performance, that you have what it takes to produce worhtwhile results. 

• If you believe - as I have always believed- that the value appoach is inherently sound, workable, and profitable, then devote yourself to that principle. Stick to it, and don't be led astray by Wall Street's fashions, its illusions, and ist constant chase after the fast dollar. Let me emphasize that it does not take a genius or even a superior talent to be successful as a value analyst. What it needs is, fist, reasonable good intelligence; second, sound priciples of operation; third, and most important, firmness of character. But whatever path you follow as financial anaysts, hold on to oyur moral and interllectual integrity. 

•  Wall Street in the past decade fell far short of its ones praiseworthy ethical standards, to the great detriment of the publice it serves and of the financial community itself.