Thursday, 1 October 2009

Book Review: Benjamin Graham on Investing, ed. by Rodney Klein, commentary by David Darst

Job ad ... Value Investor: must be highly skilled in dissecting financial statements, especially reading between the lines and uncovering what management may be deliberately or unwittingly concealing; must have great patience and diligence in calculating and estimating data; must be able to separate wheat data from chaff data; must combine internal financial data with external market psychology and national or global economic forces; must have the courage and confidence in one's conclusions to go against the flow of popular and/or professional market opinion or prices; must have the judgement to know when to hold 'em or fold 'em.

Those are some of the thoughts coming to my mind while reading this collection of original writings by the seminal value investor Benjamin Graham. We can see how the master thinks and assembles data into a cohesive analysis. The big question for the individual investor - could I do the same?

Graham speaks for himself in the book through the articles. I wish the editor Klein and commentator Darst had done more to enhance their teaching value by drilling into Graham's analysis, as for example, Jason Zweig does in the Graham classic The Intelligent Investor. For instance, in this day of information overload, it easy to get swamped by irrelevant or misleading details. Could Klein/Darst not have reconstructed the moment in time to say what Graham left aside, or even better to say what he missed? I was asking myself, "so no one is perfect, how good were Graham's analyses in retrospect?" After all, one feature of good investing is to learn from one's mistakes.

Further to that line of thought, I made a small effort to delve into one article, that comparing American Agricultural Chemical (AGR) and Virginia-Carolina Chemical (VC). In the book, Graham says VC is the better buy. Was he right? There's not much to be found through Google for those companies, neither of which exists today (more on that in a minute). From what I did find, Graham was correct, sort of. As of Graham's writing around September 1918, AGR's common share price was $100 and VC's $53. A scant four years later at the end of 1922, their prices were: AGR $32, down 68% and VC $25, down 53%. The Dow Jones Index had moved up from the low 80s to the mid 90s. VC was thus better than AGR in a relative sense but neither was good in an absolute sense. What was Graham's mistake? This, I believe: "... the particular strength of both companies lies in the benefits they will experience from the return of peace. (p.70) ... They have more to hope and less to fear from the future than perhaps any other industry (p.73) ..." In fact, the US suffered a severe postwar recession during 1920 and 1921, not a peace bonus. As fine as was Graham's backward looking analysis, he got the forecasting bit wrong it seems. I did not trace AGR's and VC's history to know whether Graham's conclusion would have made money at any point - that's what Klein and Darst should have done, instead of waxing lyrical about the Aeneid. (It's a bit over the top to say that Graham's writings, well crafted as they are, rank on the same level.)

As for disappearing companies, it is remarkable how few of those mentioned in the book exist today. Capitalism sees companies rise and fall quickly. The mighty of yesterday are gone today. To some degree the foundation of value investing is that the future will be like the past and/or present for a company, e.g. when we buy companies with a record of steady dividend growth, we assume that will continue. For those who don't pretend to know, there's passive index investing.

As a result, this book has no direct investing value relative to today's markets and companies. It is of some pedagogical value for value aficionados, since it is always worthwhile reading the original of any sector's leading mind, like Graham is acknowledged to be.

My rating: 3 out of 5

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