Some people who walk this earth are able to touch the lives of many others by their accomplishments. Benjamin Graham was one of them. The lives they have led are the lives that some of us dream of … or not?
This is a summary based on excerpts from Benjamin Graham on Value Investing: Lessons from the Dean of Wall Street (1994) by Janet Lowe.
- “There is only one Dean in our profession, if security analysis can be said to be a profession. The reason that Benjamin Graham is undisputed Dean is that before him, there was no profession and after him they began to call it that.” Adam Smith
- “On a lot of people’s compasses, Ben was true north.” Warren Buffett
- “Pascal said that ‘the heart’ has its reasons that the reason doesn’t understand.’ For ‘heart’ read ‘Wall Street.’” Benjamin Graham
Ben Graham’s ghost resembles those of Marilyn Monroe, JFK, and Elvis. He has inspired his followers by the authenticity of his thinking, living, working—of his being. The longer he is gone, the greater is his luminescence, especially in the investment community.
In 1968, the stock market was floundering badly and Omaha investor Warren Buffett was baffled and worried because he could not find worthy securities to buy. Over the 12 years that it operated, Buffett’s Partnership had compounded funds at an average annual rate of 29.5 percent and he wanted to maintain the returns that his investors had come to expect.
“The market wasn’t very good,” said Walter Schloss, a New York money manager and a longtime friend of Buffett’s, “and Warren said let’s go out and see Ben and ask him what he would do.”
The “Ben” was Benjamin Graham. He had managed the respected Graham-Newman investment fund, taught finance classes at Columbia and authored the most successful books on investing that have ever been published. He served as mentor to Buffett and to dozens of other American money masters. Buffett called him and asked if Graham would be willing to meet with him and some others for a ‘little cross-fertilization’ of ideas.
Those people, whom Buffett invited to make the pilgrimage to the coast to see Graham in 1968, had already earned reputation as investment superstars and they were moderately well-to-do even by then. They all went to see Graham for two simple reasons: Graham knew more about the subject of stocks and bonds than anyone they knew and they trusted his insight.
“He gave us a quiz,” Buffett said, “A true-false quiz. And there were all these guys who were very smart. He told us ahead of time that half were true and half were false. There were 20 questions. Most of us got less than 10 right. If we’d marked every one true or every one false, we would have gotten 10 right.”
Graham made up the deceptively simple historical puzzler himself, Buffett explained. “It was to illustrate a point, that the smart fellow kind of rigs the game. It was 1968, when all this phony accounting was going on. You’d think you could profit from it by riding along on the coattails, but the quiz was to illustrate that if you tried to play the other guy’s game, it was not easy to do.”
This was the first of a famous series of outings by the longtime Wall Street pals. This group that called on Ben Graham is today informally known as Buffett Inc. and has grown to include up to 60 other close friends Buffett accumulated over the years, who also happen to be the most affluent people in the investment community today. They still meet every other year at a luxurious resort.
The year after the group consulted with Ben, Buffett disbanded the Buffett Partnership to await the stock markets’ decline and another cyclical loss that would allow the acquisition of a new portfolio. Three years later, Wall Street suffered the collapse of 1973-1974. If it had not been for Ben’s advice, we do not know if Buffett would be where he is today.
An Immigrant
Born in London on May 8, 1894, Benjamin Grossbaum (later Graham) spent the first year of his long life in cool, foggy Britain. Even though Benjamin was only one year old when the Grossbaums decided to move to New York, the British formality, emotional reserve and wry sense of humor lingered with him for life.
The family moved to New York to expand the family business. The Grossbaums imported china, pottery and bric-a-brac from Austria and Germany. Ben’s father died only a few years after the family arrived in New York, leaving behind his 3 sons with his wife, Dora.
Dora and the children strove to keep the fledgling china-importing business going, but it finally failed. She then tried for several years to run a boardinghouse, and though she was strong-willed and energetic, that enterprise also faltered.
Her efforts to better the family fortune gave young Benjamin his first brush with the stock market when he was 13 years old. That year, his mother opened a margin account to buy an odd lot of U.S. Steel shares. The stock market, stimulated by excessive speculation and then squeezed by tight money, went into seizure. It lost 49 percent of its value in 22 months. The legendary panic of 1907 wiped out Dora’s small account, draining even more of the widow’s meager reserves. Hers was a classic case of an investor entering the investment arena at an overvalued stage and losing everything. The market was fully recovered by 1909, but that did not help small investors like Dora Grossbaum who had no staying power.
The Grossbaums were forced into a hand-to-mouth existence. For many of those early years, Dora and the children lived with Dora’s older brother, Maurice Gerard, and his family. Maurice was both a scientific thinker and a fatherly disciplinarian. He had a profound influence on young Benjamin’s intellectual development.
Benjamin came to be known as the “brains” of the family. Being his mother’s darling, he grew up with the self-confidence of a favorite son. Like many intelligent children, Ben was emotionally sensitive and easily hurt and he struggled with ways to live with his sensitivity. He began choosing personal heros and role models from his literature and history books. Ulysses, Marcus Aurelius, Isaac Newton and his own namesake, Benjamin Franklin were his favorites. At his 80th birthday celebration, this is what he told his family:
“In a way it is strange that the Odyssey has meant so much to me, since Ulysses’s character is as different as possible from my own. He was a great fighter and plunderer, while I have never fought with anyone or plundered anything in my life. He was crafty and devious, while I pride myself on being straightforward and direct. Yet, I was continuously attracted to the wandering Ulysses.”
Benjamin Franklin, whose autobiography included guidance on how to choose a mistress, also was among his favorite authors:
“He had all the good characteristics I wanted to have—high intelligence, application, inventiveness, also humor, kindness and tolerance of others’ faults, and many more. Perhaps too—without trying, I shared some of his weaknesses.”
School Years
Along with his brothers and cousins, Ben attended Public School Number 10 at 117th Street and Nicholas Avenue. Following grammar school, he progressed to Boys High School in Brooklyn. Despite the fact that he was not very tall and was hindered by an inborn awkwardness, Ben enjoyed sports and was active. Among the lifelong friends he made were young Douglas Newman and his brother Jerome. The young men took home medals for their performance on the 90-pound relay team. Even though the family’s money problems persisted, Ben graduated at the top his class.
After he graduated from high school, he took a national scholarship examination. Everyone was astounded when they found out that Ben had scored poorly on the exam. It was simply impossible, because Ben had a phenomenal memory, he had learned to read in six languages and he was simply a brilliant young man. Benjamin’s disappointment was further magnified by the fact that a relative with the same last name had earned the second highest score ever given and had been awarded a scholarship to Columbia. Accepting his destiny, he went out and got a job.
Surprisingly, after several months, scholarship officials discovered that the tests had been mixed up—and the relative was not doing well at Columbia—and they offered the scholarship to Ben instead. And so did Ben enroll at Columbia, his haven for the rest of his life.
Even with the righted wrong, money was tight and finally Ben was compelled to drop out of day classes and take a full-time job with U.S. Express. At U.S. Express, he was given responsibility for an intriguing research project to find the effect on revenues of a proposed revolutionary new system of computing express rates. For this purpose, they used the so-called Hollerith machines, leased out by the then Calculating-Tabulating-Recording Company. They comprised card-punches, card-sorters and tabulators—tools almost unknown to businessmen then. The experience with the CTR equipment not only introduced Ben to principles of accounting; it left him with the sense that he was in touch with the very smartest technology. Some time later CTR changed its initials to IBM.
Around this time, World War I was simmering in Europe. Even though the U.S. did not enter the conflict until 1917, anti-German and anti-Semitic sentiment was rampant in the U.S. and the Grossbaums, along with many thousands of recent immigrants, felt the strain and ended up changing their names to Graham.
At Columbia, Ben threw his energies into mastering mathematics, philosophy, English, Greek, Latin and music and is said to have graduated Phi Beta Kappa, the second in his class. He made an excellent impression on his professors and was asked by the deans of three departments—English, mathematics, and philosophy—to accept teaching positions. In his uncertainty over which post to accept, Ben sought the advice of Columbia’s Dean Frederick Keppel, who as it turned out, now and then liked to steer a bright graduate into a business career.
Becoming a Famous Investor
As fate would have it, a member of the New York Stock Exchange came to campus to talk to Dean Keppel about his son’s woeful grades. While he was there, the father asked the dean to recommend one of his best students for a position with his firm. That is how Ben ended up with his first job in the Wall Street firm of Newburger, Henderson & Loeb. At the time, most students at Columbia expected distinguished careers in law, medicine or academia. The securities industry was not a glamorous place to work. In fact, Wall Street wafted a slightly tainted cologne. At Columbia, a preoccupation with money was considered tasteless. Nonetheless, Ben took the job after his graduation in 1914, earning, as a special favor from his employer, $12 per week.
For the first month, he worked as a runner, delivering securities and checks, but he quickly showed he was capable of more. In the second month, he advanced to assistant in a two-man bond department. Ben’s new assignment was to frame short, concise descriptions of every bond that was listed on Newburger, Henderson & Loeb’s daily list of recommendations. Within six weeks, Ben was handed the additional duty of writing the daily market letter for the firm’s Philadelphia office.
This was heady progress for a young man on his first job, but the rumbling of war grew louder from Europe and soon echoed through the securities industry. Within months after Ben reported for work, Archduke Ferdinand of Austria was assassinated in Sarajevo and war exploded in Europe. European investors, in a rush to liquidate their American stocks and bonds, sparked a panic in New York. As a result, the New York Stock Exchange was forced to shut down for five months. Ben found his salary accordingly had been cut back to $10 per week, but at least he had a job.
Trading soon resumed on a limited basis and to the surprise of many, investor confidence was stimulated by the war. Caught short-staffed, Newburger put Ben’s talents to work in a multitude of ways that gave him a thorough indoctrination in the operations of a trading firm. During these years, Ben worked hard at his job and he also conducted some business for his family and friends. His fame grew as he also started writing for financial publications.
Ben’s financial success was becoming more important to him. However, despite his heavy workload, he wanted to get married. He met the vivacious, strong-willed Hazel Mazur through his brother. She was a teacher of dance and elocution when they were married and at the time, Hazel earned more money than Ben did.
In 1919, World War I ended and Ben and Hazel’s first child was born. Named Isaac Newton after his own father and the scientist that Graham so greatly admired, the baby would be the young couple’s greatest source of joy.
In 1920, Ben took his place as a partner in Newburger, Henderson & Loeb, having proved that though he was only 26, he could manage unusual and complex investment strategies. As a partner, Ben kept his salary and gained a 2.5 percent interest in the profits without liability for losses.
Considering that the postwar bull market of 1919-1921 was both chaotic and dangerous, his promotion was all the more significant an achievement. All the least attractive stock market motivating factors—fear, greed, imprudence, gullibility—were at work. The DJIA made its fourth stab at breaking 100 since the beginning of the century, then scampered back to prewar levels. Yet Ben already was well on his way to the philosophy ascribed to him by Warren Buffett in the introduction to ‘The Intelligent Investor’: “The sillier the market’s behavior, the greater the opportunity for the businesslike investor.” Buffett told readers that if they followed Graham’s suggestions, they would “profit from folly rather than participate in it.”
These were busy years for Graham—full of investment activity. In the midst of all this frenzied work life, Ben took the time to become a naturalized U.S. citizen and in 1921 to welcome a second child, Marjorie. Marjorie showed all the intelligence and spark of her older brother Newton, and though she was graced with her father’s affection she was, after all, a girl. In her father’s eyes, females were emotional in nature and therefore had limited potential. Newton, a boy, was destined to be a rational thinker.
The DJIA was at a tender 95 when Grahar Corporation, Ben’s first stab at independence, kicked off operations on June 1, 1923. The company was named for Graham, its 29-year-old money manager, and Louis Harris, a luggage store owner, and the major investor. Grahar was a private fund, or one in which investors were gathered from among friends and other contacts, but no offering was made to the general public. Ben was able to draw about $500,000 in this way. He, as a result, was not the dominant shareholder but the one who controlled investment policy. Ben concentrated on finding either deeply undervalued securities, overvalued stocks that he might sell short or promising arbitrage opportunities. All was going well with his career, and equally well at home. In 1925, a second daughter, Elaine, was born.
Unfortunately, this bliss state did not last for long. In 1927, his first child, the bright, healthy and happy Newton developed an earache. Very quickly, the minor illness developed into meningitis, and without the benefit of antibiotics, Newton suddenly died.
The entire family was sunk in grief for years afterward. Always a reserved person, Ben seemed to withdraw from his family, and to shy away from future emotional entanglement. His desolation over the death of the boy he adored was apparent even to Ben’s clients; he seemed to seek escape from the pain by burying himself more deeply in his work. Ben’s reputation for business acumen spread swiftly and his dealings became increasingly sophisticated.
Back to School
Ben had accumulated nearly a dozen years of experience on Wall Street and his career was moving exceedingly well when he had a new idea. Ben’s magazine writing had met with success, so he began thinking about a more demanding project. Ben believed that there was a need for a book laying down the fundamental principles of investing and he felt that he had something worthwhile to say about the subject.
Ben figured that if he could teach a class on investment principles, the classroom would provide an ideal framework for organizing his material and testing his presentation. It was both customary and convenient for Wall Street practitioners to study and to instruct at the nearby New York University’s Graduate School of Finance. He chose another way. Never mind that it would mean a long afternoon subway ride from his work, Ben applied for a position at his alma mater instead. Columbia accepted his proposal and he began teaching in 1928.
Among the Columbia faculty members in the first class was David L. Dodd, who was asked to record class discussions and transcribe them each week. Dodd had graduated from The Wharton School in 1920 and then enrolled at Columbia for his master’s degree in economics. After graduation, he worked for three years in the research department at the National Bank of Commerce. Dodd then returned to Columbia to teach.
Ben used the Harvard case system in his classes. He never asked his students to believe what he said unless there were concrete examples to support what he said. An adherent of the Socratic philosophy of instruction, Ben stimulated discussion and guided his students to the correct answer by intense questioning, not only by the professor himself, but by fellow students as well. When a student reached the right conclusion and saw the point Ben was making, the result in many cases was a kind of epiphany.
The 1929 Crash
Investment funds were gaining popularity in late 1920s and the prospects were superb. Ben started organizing a trust fund with Hentz and the Hentz-Graham trust fund became ready to go in September 1929. However, by that time cracks were spidering across the stock market. The fissures widened and spread so swiftly that Ben soon found himself too busy to even think about the new fund. The funny thing was Ben had turned down a partnership with Bernard Baruch and in their discussions about securities market behavior, they had both agreed that stock prices had reached a rarified altitude and that a crash was likely. Between 1921 and 1929, the market had surged by 450%, driven in large part by easy margin rules. In 1928, the last full year of the bull market, the return on the DJIA was 51%. Ben himself had said, “By the law of compensation, someday, the reverse should happen.”
It was the vulnerability of the smaller stocks and the margin calls that ambushed Ben, along with thousands of other investors. When the first storm quieted down, Ben finished the year with a loss of 20%. However, the next year, 1930, turned out to be the worst in Ben’s entire career. It is to his credit that he survived. By the end of the year, his account had suffered a 50% skid compared to a 29% tumble for the DJIA. Many of his investors withdrew all or part of their funds, which made it even more difficult for Ben to make up his losses. The family’s money was completely gone also and none of them could afford the comfortable life they had been leading anymore.
The 1929 Crash was a lesson Ben never forgot.
It was during these difficult times that “little” Newton was born, bringing the family a ray of happiness. This second son was named for the beloved child whose death two years earlier still haunted the family. Little Newton grew up to have an unstable mental state. Later when he had been drafted into the U.S. Army during the Korean War, his mental state deteriorated. Ben tried to bring his son back, but little Newton ended up committing suicide overseas.
Back on His Feet
The worst was over for Ben by 1932. He managed to regain all his losses and return them to their owners. Ben’s high-risk days were also over: From then on, he always avoided aggressive deals in which someone would be hurt.
Ben continued teaching at Columbia during the Great Depression and he also accepted a position instructing at the New York Stock Exchange’s in-house school, the New York Institute of Finance. In the process of teaching, he organized his thoughts and was able to test and retest some of the theories he had developed. David Dodd continued to take and transcribe the proceedings of the classes at Columbia. These notes would become the basis for Ben and Professor Dodd’s classic text, ‘Security Analysis.’
The theme of ‘Security Analysis’ echoed both what Ben had been teaching in the lecture hall and practicing daily on Wall Street: The stock market is a highly illogical place where sheep-like participants follow the flock and buy when prices rise and just as mindlessly sell as prices fall. The disciplined, rational investor neither follows popular choice nor plays market swings; rather he searches for stocks selling at a price below their intrinsic value and waits for the market to recognize and correct its errors. It invariably does and share price climbs. When the price has risen to the actual value of the company, it is time to take profits, which then are reinvested in a new undervalued security.
And so the book became the Investors’ Bible for many years to follow. When the book was published in 1934, life at home was brightened by another baby: Winifred. A little charmer, Winnie was the freest spirit of the Graham children.
Graham’s next hit book was ‘The Intelligent Investor’, which was published a decade after his first hit. In this book, Ben clearly distinguished between investing and speculating. An investment, he explained, was based on incisive, quantitative analysis, while speculation depends on whim and guesswork. The book focused more on stocks. As with his earlier book, Wall Street professionals found the book indispensable and because the book was so widely read, it brought greater visibility, respect and prestige to the field of security analysis.
A Male Chauvinist and a Womanizer
Benjamin Graham had a phenomenal personality, great sense of humor and he possessed a brilliant mind. However, he was also known to be a womanizer and a male chauvinist. Ben’s students got a chuckle, both from their professor’s jokes, and from his other caprices. A former student tells of the afternoon that Ben hurried into the classroom and on his way dropped a sheet of paper. The student glanced at the page to see whom to return it to and was astonished to find a love poem. It was ludicrously purple prose addressed to a blond model whom Ben had fallen for. His colleagues and students knew Ben took an avid interest in the ladies.
Ben’s affairs with other women eventually ended up brewing trouble at home. He got separated from his wife, who could not tolerate his affectionate affairs with other women.
Final Word
Despite his successful investment tactics that was utilized by many (e.g., Warren Buffett!) for many decades, Benjamin Graham did not become a man of luxury. He preferred a modest life and kept teaching. He was a natural when it came to teaching. In his last interview before he died, this is what he said:
“On the whole I’ve had a very happy life, but perhaps I have not had enough enthusiasms, I never was enough of a gourmet, for example, or really appreciated nature or the aesthetic part of life. Perhaps I should regret not having made more mistakes.”
Ben died peacefully during the night of September 21, 1976. He was 82 years old. A memorial service was held at Columbia. For his gravestone, Ben chose the closing lines from a poem he loved, Tennyson’s ‘Ulysses’:
“To strive, to seek, to find, and not to yield!”
Sadly, when asked years later, none of Benjamin Graham’s children knew for sure the location of their father’s grave. His ashes, in fact, are in the same plot with his first son, young Isaac Newton. They are buried together at the Stephen Wise Free Synagogue Westchester Hills Cemetery at Hastings-On-Hudson, just north of New York City.
Last Note: The Famous Graham Technique
This is the way Benjamin Graham has made money during the 50 years he has been on the market with an average return of 15% a year or better in total investment, plus dividends and minus commissions. When asked if this is the return he has gotten over 50 years, this was his response:
“Yes, and the results have been very consistent for successive periods as short as five years. I don’t think a shorter period gives the strategy a really fair chance to prove itself. In applying the approach every investor should be prepared financially and psychologically for the possibility of poor short-term results. For example, in the 1973-1974 decline the investor would have lost money on paper, but if he’d held on and stuck with the approach, he would have recouped in 1975-1976 and gotten his 15% average return for the five-year period. If we get a repeat of that situation, the investor should be prepared to ride out the downturn.”
Below is a brief outline of the Graham Technique:
- Look at the average current yield on top-quality (triple-A) corporate bonds.
- Multiply that by 2.
- Divide the number found in (2) by 100.
- The number in (3) gives you the P/E ratio of the stocks that you can choose from.
- Note: Never go for stocks with P/E ratios greater than 10. P/E ratios of 7 or lower should always be chosen.
- Ratio of stockholders’ equity to total assets should be at least 50%. E.g., if a company has stockholders’ equity of $30 million and total assets of $50 million, a ration of 60%. Since that is over 50%, the company passes the test.
- Form a portfolio of at least 30 stocks: this is the ideal minimum.
- Hold onto the stocks until you make a 50% profit. As soon as the stock goes up that much, sell it.
- If a stock has not met your objective profit of 50% by the end of the second calendar year from the time of purchase, sell it regardless of price. For example, if you bought a stock in September 2002, you would sell it no later than the end of 2004.
- When times are bad for the stock market, i.e., when stocks are selling at low P/E levels, take advantage of the situation and put up 75% of your investment capital into common stocks. In good times, when the market is overpriced, when you have trouble finding stocks with low P/E ratios, then you should have no more than 25% of your funds in stocks and the rest in other less risky assets.