Monday, February 27, 2012

Where Have You Gone Benjamin Graham?

    Benjamin Graham was an American economist and professional investor.  However, he is probably more famously known as Warren Buffett’s mentor.  Though he passed away in 1976, Graham’s legend continues to grow.  Annually, you can find declarations from financial journalists, professional stock pickers and infamous bloggers, whom all declare to know what stocks Graham would be buying in the current market environment.  Great material to present to readers and followers, but I tend to avoid putting words in the mouths of deceased individuals.
    I owe all of my professional success to Graham.  It was his teachings, many years ago, that led to my very successful investment philosophy, which has been detailed in my popular book titled “Master the Markets with Mutual Funds: A Common Sense Guide to Investing Success”.  I assume performance is a measure of success, so my 9.12% 10 year average annual return, and my 144% gain during the “Lost Decade” (2000-2009) should qualify.  Keep in mind these returns were achieved while maintaining an average beta between .45 and .50 when measured against the S&P 500. 
   What my success has taught me is that you cannot try to learn from others while wearing blinders.  I have never seen discussed, as a topic, anywhere in the financial media the message that I took from the writings of Graham.  Yet they meant everything to me.  Everyone wants to talk about Graham’s process of security selection, and his interpretation of what constitutes of value stock.  That is exactly what people are looking for when they pick up his books, and therefore that is all they will walk away with when they are finished.  We are a society that wants a quick system to rely upon.  We do not want to hear about balance, re-balancing and diversification.  That is boring.  We want to get rich now, and maybe, just maybe, we can achieve instant wealth by reading about this Graham fellow. 
    I do not pick stocks and I am, at best, a clumsy security analyst.  I picked up the writings of Graham fifteen years ago looking for no quick answers or with prejudice.  The following are the words that I walked away with and that shaped my successful investment philosophy:

-        “the simplest choice would be to maintain a 50-50 proportion between high-grade bonds and leading common stocks, with adjustments to restore the equality”
-        “Nonetheless we are convinced that our 50-50 version of this approach makes good sense for the defensive investor.  It is extremely simple; it aims unquestionably in the right direction; it gives the follower the feeling that he is at least making some moves in response to market developments; most important of all, it will restrain him from being drawn more and more heavily into common stocks as the market rises to more and more dangerous heights.
-        “Furthermore, a truly conservative investor will be satisfied with the gains shown on half his portfolio in a rising market, while in a severe decline he may derive much solace from reflecting how much better off he is than many of his more venturesome friends.”

    The subtleness of Grahams suggestions are my strategy at its finest.  My successful 50-50 allocation strategy adheres to everything Graham suggested in the above writings.  He wasn’t just suggesting a 50-50 weighting for the defensive investor, but also maintaining that 50-50 weighting.  Well, what is that called?  It is called rebalancing. Even more exciting is the fact that we have access to asset classes that Graham never envisioned the average investor would be able to access.  That has led to an increase in diversification on the 50% equity side and an increase in disparity amongst equity holdings.  Do you think Graham’s star pupil has relied more on security selection or common sense over the years?  Well in the words of Mr. Buffett, “it isn’t a high IQ that produces superior investment performance, it’s rationality and curbing your emotions.”  That was the message I took from Graham.
    The point I am trying to make is that if you are constantly seeking the sensationalized approach, or the quick fix, then you will miss some of the greatest messages passed down by the world’s greatest teachers.  Graham is not here to tell us what stocks he would be buying today.  If he were, I believe he would be delivering a greater message, as he had in the past.  Sadly that message, would be once again lost on the average investor.

Jon R. Orcutt, founder of Allocation For Life, is an asset allocation strategist and author of “Master the Markets with Mutual Funds: A Common Sense Guide To Investing Success”