I recently came across* a 1976 interview with Ben Graham for the CFA journal. It was very interesting to hear his reflections on the financial industry in his twilight years.
What struck me was his thinking on simplifying the investment process and a somewhat cynical view on the industry and its participants. I have heard Graham referred to as a financial behaviorist and this interview certainly backed up that premise.
For example, when asked if the industry had "learned its lessons" from the go-go era of the 1960's, Graham responded, "I have no confidence whatever in the future behavior of the Wall Street people. I think this business of greed- the excessive hopes and fears and so on- will be with us as long as there will be people."
When asked about his famous book, "the Bible of Graham and Dodd," instead of talking up its merits he was actually more measured in his opinion.
Yes, well now I have lost most of the interest I had in the details of security analysis which I devoted myself to so strenuously for many years. I feel that they are relatively unimportant. Which, in a sense, has put me opposed to developments in the whole profession. I think we can do it successfully with a few techniques and simple principles. The main point is to have the right general principles and the character to stick to them.
He had plenty to say on the Random Walk and the Efficient Markets Hypothesis, mainly questioning their relevance to the markets. He remarked, "Well, I am sure they are all very hardworking and serious. It’s hard for me to find a good connection between what they do and practical investment results."
“There are two requirements for success in Wall Street. One, you have to think correctly; and secondly, you have to think independently.
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Graham was very skeptical of experts' ability to correctly forecast the stock market.
Well, they would claim that if they are correct in their basic contentions about the efficient market, the thing for people to do is to try to study the behavior of stock prices and try to profit from these interpretations. To me, that is not a very encouraging conclusion because if I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting what's going to happen to the stock market.
He had strong opinions on how active managers should be compensated for adding value.
I have a feeling that the way in which institutional funds should be managed, at least a number of them, would be to start with the index concept- the equivalent of index results, say 100 or 150 stocks out of the Standard & Poor's 500. Then turn over to managers the privilege of making a variation, provided they would accept personal responsibility for the success of the variation that they introduced.
His most supportive comments on behavioral finance came toward the end of the interview, when he was asked about the coming years. Remember, he was asked this in March 1976.
Well, there has been plenty of sunshine since the middle of 1974 when the bottom of the market was reached. And my guess is that Wall Street hasn't changed at all. The present optimism is going to be overdone, and the next pessimism will be overdone, and you are back on the Ferris Wheel- whatever you want to call it- Seesaw, Merry-Go-Round. You will be back on that.
This was a quick read with fantastic insights from a pioneer of investment theory as well as an early advocate for behavioral finance. Highly recommend.
* DK note- applications like Pocket and Dropbox are fantastic productivity enhancers. The good news is I'm able to store up tons of articles and commentaries to review months down the road. The bad news is I rarely can remember where I originally found them! So apologies and thank you to whoever first put this article in front of me.
RR#6,
Dave
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