Sunday, May 1, 2011

Review of Benjamin Graham, Building a Profession: The Early Writings of the Father of Security Analysis

I picked up a copy of Benjamin Graham, Building a Profession: The Early Writings of the Father of Security Analysis. I like to read these books about historical finance because everyone has forgotten about what investing was like in olden times. To remember what has just happened requires a constant struggle!

When Graham started in 1914, investors often had to go to the library of the NYSE to view annual reports. There was much less information, and what was available was harder to obtain. Of course, now the situation has inverted, and it is easier and cheaper to invest from somewhere else. Basing your investment operation in Manhattan is obsolete.

Investors were also much more skeptical of stocks: "[T]he determiners of price change were thought to be an entirely different set of factors - all of them very human," a concept which validates Prechter's theory of the market. In 1924, when Common Stocks as Long Term Investments was written, the title was intended to be provocative, as "no respectable person believed that stocks should be regarded as investments at all." Or, as we say on Credit Bubble Stocks, "stocks are for selling, bonds are for buying."

The most interesting takeaway was the extremely low valuations that prevailed during Graham's early years. There is an amazing story of IBM stock in 1916 (then known as CTR, Computer-Tabulating-Recording Co).  At that time, the stock had a 7% dividend yield, traded at a third of book value, and less than ten times earnings! And people still said it was overpriced and they wouldn't "touch it with a ten-foot pole"!

Valuations were spectacularly low in 1932 at the stock market bottom. Graham studied 600 industrial companies listed on the NYSE and found that 200 were selling for less than their net quick assets. As he put it, businesses had come to be valued "on an entirely different basis from that applied to private enterprise." But, "if the commitment would be attractive as an ordinary business venture, it should be even more attractive as part of a publicly held enterprise, with the added advantage of... ready marketability."

Corporate governance is the same sad story it has always been; the intractable agency problem in human affairs. It is telling that by the end of his career, Graham basically gave up on it.

I give the book 3/5. If you're only going to read one Ben Graham book, make it Security Analysis.

Further reading:
Benjamin Graham: The Memoirs of the Dean of Wall Street

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