Benjamin Graham or John Maynard Keynes ?

“In journalism and blogging, a listicle is a short-form of writing that uses a list as its thematic structure, but is fleshed out with sufficient copy to be published as an article. A typical listicle will prominently feature a cardinal number in its title, such as “10 Ways to Warm Up Your Bedroom in Winter”, “The 5 Most Badass Presidents of All-Time”, or “25 Hairstyles of the Last Hundred Years”, with subsequent subheadings within the text itself reflecting this schema. The word is a portmanteau derived from list and article. It has also been suggested that the word evokes “popsicle“, emphasising the fun but “not too nutritious” nature of the listicle.”

–       Wikipedia entry for ‘Listicle’.

Given the number of outrageous, unlimited, uncontrolled and untested economic experiments being conducted largely in his name by desperate central bankers, it may seem bizarre to be comparing the British ‘stimulus’ economist John Maynard Keynes with the US ‘value’ investor Benjamin Graham. (That may have something to do with the fact that Keynes is being given a bum rap. The author of ‘The General Theory of Employment, Interest and Money’ was breathlessly lauded by Time magazine in 1999: “His radical idea that government should spend money they don’t have may have saved capitalism”. What the QE lobby fail to appreciate, or wilfully ignore, is that Keynes also advocated having governments run budget surpluses during periods of economic growth. But when you’re advising other people how to waste other people’s money, why expend any intellectual effort on the task ?) In any event, here is a listicle challenge for readers. Which of the following quotations were said by Keynes, and which by the father of ‘value’ investing, Ben Graham ?

 

On market volatility

 

  1. “One must not allow one’s attitude to securities which have a daily market quotation to be disturbed by this fact or lose one’s sense of proportion.”

 

  1. “Day-to-day fluctuations in the profits of existing investments, which are obviously of an ephemeral and non-significant character, tend to have an altogether excessive, and even an absurd, influence on the market.”

 

  1. “The investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizeable declines nor become excited by sizeable advances. He should always remember that market quotations are there for his convenience, either to be taken advantage of or to be ignored.”

 

  1. “It is largely the fluctuations which throw up the bargains and the uncertainty due to the fluctuations which prevents other people from taking advantage of them.”

 

  1. “The wider the fluctuations of the market, and the longer they persist in one direction, the more difficult it is to preserve the investment viewpoint in dealing with common stocks. The attention is bound to be diverted from the investment question, which price is attractive or unattractive in relation to value, to the speculative question, whether the market is near its low or its high point.”

 

On the significance, and psychological challenge, of being a contrarian investor

 

  1. “The central principle of investment is to go contrary to the general opinion, on the grounds that if everyone agreed about its merit, the investment is invariably too dear and therefore unattractive.”

 

  1. “The fact that other people agree or disagree with you makes you neither right nor wrong. You will be right if your facts and reasoning are correct.”

 

  1. “It is the one sphere of life and activity where victory, security and success are always to the minority and never to the majority. When you find anyone agreeing with you, change your mind.”

 

On the limitations of professional fund managers

 

  1. “An investment operation is one which, upon thorough analysis, promises safety of principle and a satisfactory return. Operations not meeting these requirements are speculative.”

 

  1. “It is a leading fault of all institutional investors that their portfolio gradually tends to contain a long list of forgotten holdings originally purchased for reasons that no longer exist.”

 

  1. [In response to the following statement: “Relative performance is all that matters to me. If the market collapses and my funds collapse less that’s okay with me. I’ve done my job.”]

 

“That concerns me, doesn’t it concern you ? ..I was shocked by what I heard at this meeting. I could not comprehend how the management of money by institutions had degenerated from the standpoint of sound investment to this rat race of trying to get the highest possible return in the shortest period of time. Those men gave me the impression of being prisoners to their own operations rather than controlling them.. They are promising performance on the upside and the downside that is not practical to achieve.”

 

On the importance of taking a long term perspective

 

  1. “Human nature desires quick results, there is a peculiar zest in making money quickly, and remoter gains are discounted by the average man at a very high rate.”

 

  1. “Undervaluations caused by neglect or prejudice may persist for an inconveniently long time, and the same applies to inflated prices caused by overenthusiasm or artificial stimulus.”

 

  1. “An investor is aiming, or should be aiming, primarily at long-period returns, and should be solely judged by these.”

 

On price and value

 

  1. “It is unsound to think always of investment character as inhering in an issue per se. The price is frequently an essential element, so that a stock may have investment merit at one price level but not at another.”

 

  1. “I believe now that successful investment depends on.. a careful selection of a few investments having regard to their cheapness in relation to their probably actual and potential intrinsic value over a period of years ahead.. a steadfast holding of these in fairly large units through thick and thin, perhaps for several years.”

 

  1. “All my experience goes to show that most investment advisers take their opinions and measures of stock values from stock prices. In the stock market, value standards don’t determine prices; prices determine value standards.”

 

  1. “Prices bear very little relationship to ultimate values.”

 

On a ‘margin of safety’

 

  1. “I am still convinced that one is doing a fundamentally sound thing, that is to say, backing intrinsic values, enormously in excess of the market price, which at some utterly unpredictable date will in due course bring the ship home.”

 

  1. “Another useful approach.. is from the standpoint of taking an interest in a private business. The typical common-stock investor was a businessman, and it seemed sensible to him to value any corporate enterprise in much the same manner as he would his own business.”

 

For a bonus point: On why ‘beta’ (volatility) and risk are not the same thing

 

  1. “Beta is a more or less useful measure of past price fluctuations of common stocks. What bothers me is that authorities now equate the beta idea with the concept of risk. Price variability, yes; risk no. Real investment risk is measured not by the percent that a stock may decline in price in relation to the general market in a given period, but by the danger of a loss of quality and earning power through economic changes or deterioration in management.”

 

So how did you fare ?

 

Answers:

 

  1. Keynes.

 

  1. Keynes.

 

  1. Graham.

 

  1. Keynes.

 

  1. Graham.

 

  1. Keynes.

 

  1. Graham.

 

  1. Keynes.

 

  1. Graham.

 

  1. Keynes.

 

  1. Graham.

 

  1. Keynes.

 

  1. Graham.

 

  1. Keynes.

 

  1. Graham.

 

  1. Keynes.

 

  1. Graham.

 

  1. Keynes.

 

  1. Keynes.

 

  1. Graham.

 

  1. Graham.

 

Intriguing, n’est-ce pas ? There is clearly more common ground between the Cambridge University ‘father of modern economics’ and the Columbia Business School ‘father of ‘value investing’ than one might have previously thought.

 

(With thanks to James Montier for the source material.)