Enough: The Forgotten Lesson of Ben Graham's Life

Did Buffett miss Graham's most important insight?

Hello everyone,

I used to think I knew exactly what to make of Ben Graham’s life. The first level lesson was to understand the key tenets of value investing (treat a stock as ownership in a business; view ‘Mr. Market’ as a servant not a master; and the concept of ‘margin of safety’).

The second level was to recognize that Graham’s approach eventually became outdated and that much of his success rested on his ownership in GEICO, not on picking deep value stocks.

Charlie Munger, who lacked Warren Buffett’s close personal relationship with Graham, never shied away from pointing out the flaws in Graham’s approach. During this year’s Daily Journal Shareholder Q&A (transcript) he explained:

A lot of Ben Graham’s rise in life was during a period when there was plenty of low hanging fruit among mediocre businesses that were way too cheap. He was relatively rare in doing his hunting in that garden, and so he made a pretty good living.

That low hanging fruit eventually went away as the aftermath of the Great Depression went away. And Graham actually made more than half of all the money he made in his life out of one stock. That stock was Geico, which was a great business. So if you actually look at the great man’s own life, you’ll see that what he taught wasn’t the way he got rich himself.

Quite true. Without their shares in GEICO, partners in Graham-Newman would have underperformed the market (this despite GEICO’s troubles in the ‘70s):

Graham-Newman ex GEICO was calculated from 1945-1956. Graham-Newman and GEICO was calculated from 1948-1976 (proceeds of the fund distribution were assumed to be invested in the S&P 500). All of this is from a 1977 paper on Ben Graham.

Though to be fair, Graham-Newman’s returns were much less volatile than the market. In his paper on Ben Graham, Kahn wrote that “the fund did 7.7 percent per year better than would have been expected considering its low beta (sensitivity to market fluctuations).”

Why didn’t Graham alter his message to the public? Why didn’t he abandon deep value and recommend that investors dedicate themselves to finding wonderful companies like GEICO?

Munger explained:

Graham was looking to teach what any intelligent layman could do. If that’s the limitation, there’ll be a lot you won’t go into, because it’s too hard to figure out.

Scarred by 1929, Graham recommended that investors pick baskets of deeply undervalued securities and let mean reversion work its magic. Not only did this approach offer downside protection, it was available to any retail investor with access to basic financial information. Hence Munger compared Graham to someone playing a game of “pin the donkey” while “wearing dark glasses.” In his investment work, Graham held back. He refused to make use of all his resources. Buffett noted:

Ben sort of thought it was cheating if we talked to the management. He felt that the person who read his book could not go out and meet the management.

When I worked for Graham-Newman, I don’t think I ever visited management.

Graham never played the investment game as competitively as he could have. But an ambitious investor like Buffett was unlikely to adapt this reluctant attitude. Munger noted that instead of wearing dark glasses, “Warren would use the biggest search light he could find.”

Buffett added that he “found it fun to go out and talk about their businesses, or to check with competitors, or suppliers, or customers.”

Ben didn’t think there was anything wrong with that. He just felt that if you had to do that, then his book was not the complete answer. And he didn’t really want to do anything that the reader of his book couldn’t do.

Graham eventually retired from money management. He spent his time in the South of France and California and pursued his various other interests, including translating Greek and Latin classic texts. From his biography:

[Graham] was an avid reader of the great authors, many in their original languages … Always deeply interested in literature, the theater, the opera, and the concert hall, retirement gave Graham the leisure to immerse himself in these pleasures.

Not that he gave up the financial world entirely, but he watched it from an increasingly disinterested and lofty perspective. He felt no desire to make more money than he had and was relatively casual about his personal finances.

Buffett wrote in Graham’s obituary:

I have never met anyone with a mind of similar scope. Virtually total recall, un-ending fascination with new knowledge and an ability to recast it in a form applicable to seemingly unrelated problems.

Impressive. But does this strike anyone as a person who would enjoy meeting with management teams? Who would consider it fun to walk factories and warehouses and interrogate customers and suppliers? Graham was an intellectual and academic first, an investor second. Did he really aspire to spend his life talking shop with business owners and managers? I don’t think so. Buffett explained how his passion for business far surpassed that of his teacher:

I enjoyed making money more than Ben. I mean, candidly, the game did not interest him more than a dozen other things may have interested him. With me, I just find it interesting. And therefore, I’ve spent a way higher percentage of my time thinking about investing and thinking about businesses.

Graham’s approach to the market reflected his opportunity set (ample bargains), his ambition to practice his teachings, and his personality. Buffett on the other hand fully dedicated himself to the effort of compounding an increasingly large amount of capital.

A few weeks ago, I a note by Fernando del Pino and

Jawad Mian

. In his retirement, a journalist asked Graham why he’d quit investing.

Graham smiled warmly and said: 'Why should I try to get any richer?'

It reminded me of the anecdote in Kurt Vonnegut’s obituary of Joseph Heller:

Joseph Heller and I were at a party given by a billionaire on Shelter Island.

I said, "Joe, how does it make you feel to know that our host only yesterday may have made more money than your novel 'Catch-22' has earned in its entire history?"

And Joe said, "I've got something he can never have."

I said, "What on earth could that be, Joe?"

And Joe said, "The knowledge that I've got enough."

Graham had enough money. What he didn’t have enough of was time. So he refused to invest more of his most valuable asset in the pursuit of riches. For Graham, investing was one interest among many. For Buffett, compounding capital for himself and his shareholders became his life’s mission. Which is why, unlike Graham, he never retired. Did he miss Graham’s message? Did he never find the meaning of ‘enough’?

At least today, he no longer plays the game for its own sake. He is giving his wealth away and, like Graham, puts himself in service to the community by being a teacher. But even before deciding to return all of his wealth to charity, I don’t think he misunderstood his own pursuit of wealth. While Graham found meaning in his engagement with philosophy and languages, Buffett was happy to uncover the essence of companies and industries. It was just more interesting to him.

But the rest of us must remember this distinction. It’s possible to study someone like Buffett, yet retain Graham’s degree of emotional detachment. Investing and business can remain an occupation and not turn into life-consuming passions (though someone with Buffett’s intensity will over time become better at pinning the tail on that particular donkey).

As it relates to Ben Graham’s life, I find his generous spirit as a teacher worth remembering most. In Graham’s obituary, Buffett recalled him as a “teacher, employer and friend” with “an absolutely open-ended, no-scores-kept generosity of ideas, time and spirit.” Graham, he wrote, strived every day to do “something foolish, something creative and something generous.” Those are words to live by. Just avoid doing the foolish thing in your portfolio.

Thank you for reading,

Frederik