Never listen to an investor
Posted on November 26, 2007 by Richard Beddard
Filed Under Investing |
Evidence, if any were needed, that buying shares in undervalued companies doesn’t protect the investor from losing money in a bear market. Between 1929 and 1932 funds run by Benjamin Graham, the father of value investing, lost 70% of their value:
“We were convinced,” Graham explains, “that all of our long securities were intrinsically worth their market price. Although many of our issues were little known to active Wall Street hands, similar ones had previously shown a praiseworthy tendency to come to life at a decent interval after we bought them and give us the chance to sell them out at a nice profit, replacing them with other bargain issues which we were constantly digging up.”
It might have been for penance that Graham, with the editorial assistance of David L. Dodd, began to write his magnum opus, “Security Analysis”—for penance and for money. Certainly, there was no money coming in from the money-management business.
And evidence, perhaps, the market can overwhelm even the even the smartest financial intellect:
Yet Graham, a human being quite as fallible as the next very smart human being, sometimes lost his sense of perspective. He, too, could become historically disoriented. One sees it at the end of the second edition of “Security Analysis,” which was published in 1940. Fresh in the author’s mind was not only the Depression. Even fresher was the brutal, trap-door bear market of 1937-38. Graham had been through the mill, and he seemed to let it show in the words of advice he tendered to the managers of trust funds, mutual funds, endowments and other such institutions. How should they invest? Well, Graham proposed, if they could afford to, they should buy bonds—then yielding all of 2% or 3%. They should do themselves a favor and give wide berth to common stocks. What? Steer clear of the very asset class on which he had held forth for most of the preceding 725 pages? Astonishingly, yes. “We doubt,” Graham writes, “if the better performance of common-stock indexes over past periods will, in itself, warrant the heavy responsibilities and the recurring uncertainties that are inseparable from a common-stock investment program.” There you have it. Some of the worst long-term investment advice ever proferred by one of the best investors, and thinkers about investing, who ever lived.
From a speech by James Grant earlier this month, found on Value Investing News. Controlled Greed also comments.
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Great post. Very informative.
Thanks.