Why I'm no fan of Benjamin Graham

Having just finished my first full Buffett book over the weekend, I finally understand what all fuss is about.

Roger Lowenstein's superb book, Buffett: The making of an American capitalist is not just a biography of a great investor; it's an excellent introduction into Buffett's investment approach. I have previously held out against reading too much Buffett because I associated his approach with another famous investor, one I consider to be highly over-rated; Benjamin Graham.

Having just finished my first full Buffett book over the weekend, I finally understand what all fuss is about.

Roger Lowenstein's superb book, Buffett: The making of an American capitalist is not just a biography of a great investor; it's an excellent introduction into Buffett's investment approach. I have previously held out against reading too much Buffett because I associated his approach with another famous investor, one I consider to be highly over-rated; Benjamin Graham.

I have read our company namesake, The Intelligent Investor and spent some time with Security Analysis, Graham's twin value investing bibles. At the risk of sounding heretical and having (heavy) things thrown at me by my colleagues, I didn't like them.

James, in an earlier blog, asked What's your investing style; mine is not that of classical Graham. The Graham approach to investing is, in my view, too heavily reliant on quantitative methods at the expense of understanding what makes a great business. It is overly cautious and, while followers may not lose money, the cost of missed opportunities is large.

As Lowenstein's book makes clear, Buffett made many investments that Graham probably would not have; Coke and The Washington Post are two famous examples, but there are plenty more. The book clearly distinguishes between the Graham method and the Buffett way.

Where Graham was obssessed with buying assets on the cheap, Buffett has shown skill in identifying excellent quality assets and a willingness to pay for that quality. The man's patience is extraordinary, waiting years to buy companies at prices he was comfortable with.

Graham always felt that value was a function of a low price, whereas Buffett could see the quality of a business and was not afraid to pay what, in Graham's view, was a 'high price' for that quality. Surely an investor should be willing to pay more for a company with the characteristics of a Cochlear rather than a Caltex. And if they don't, opportunities go begging.

Graham would typically identify how cheap a company was by sighting the numbers. He rarely looked into the workings of companies, but argued that the absence of quantitative proof of value was akin to speculating. But is it speculative to buy a company with a strong franchise or market position because it isn't at a discount to working capital, NTA or some other arcane measure?

When Graham came up with his approach, US market participants were mostly private and non corporate. It is possible such investors did not have the time, resources or skill to spend on their investing activities. For many decades now, however, the vast majority of market participants have been professional investors who have the time, resources and incentives (if not the skill) to spend uncovering the very inefficiencies that Graham method relies on to work.

Markets don't always get value right and certainly exhibit extremes of fear and greed that can lead to mispricing. But the obvious discount-to-cash-backing type of opportunities that were Graham's bread and butter are now rare. Waiting for those to the exclusion of everything else would mean missing out on great opportunities; would Graham have invested in Macquarie Bank, CSL, Woolworths, Woodside Petroleum or any number of businesses that have performed splendidly over a long period?

Graham's ideas may have had some currency in the 1960s but today, they're relics. Buffett's success was greatest when he departed from his teacher's techniques, and I think his methods hold more relevance. I'm a Buffett fan now.

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