Graham on Wall Street

By Ramesh Akkineni

A Conversation With Benjamin Graham

What is your view of Wall Street as a financial institution?

A highly unfavorable--even a cynical--one. The Stock Exchanges appear to me chiefly as a John Bunyan type of Vanity Fair, or a Falstaffian joke, that frequently degenerates into a madhouse--"a tale full of sound and fury, signifying nothing." The stock market resembles a huge laundry in which institutions take in large blocks of each other's washing--nowadays to the tune of 30 million shares a day--without true rhyme or reason. But technologically it is remarkably well-organized.

What is your view of the financial community as a whole?

Most of the stockbrokers, financial analysts, investment advisers, etc., are above average in intelligence, business honesty and sincerity. But they lack adequate experience with all types of security markets and an overall understanding of common stocks--of what I call "the nature of the beast." They tend to take the market and themselves too seriously. They spend a large part of their time trying, valiantly and ineffectively, to do things they can't do well.

What sort of things, for example?

To forecast short- and long-term changes in the economy, and in the price level of common stocks, to select the most promising industry groups and individual issues--generally for the near-term future.

Can the average manager of institutional funds obtain better results than the Dow Jones Industrial Average or the Standard & Poor's Index over the years?

No. In effect, that would mean that the stock market experts as a whole could beat themselves--a logical contradiction.

Turning now to individual investors, do you think that they are at a disadvantage compared with the institutions, because of the latter's huge resources, superior facilities for obtaining information, etc.?

On the contrary, the typical investor has a great advantage over the large institutions.

Why?

Chiefly because these institutions have a relatively small field of common stocks to choose from--say 300 to 400 huge corporations--and they are constrained more or less to concentrate their research and decisions on this much over-analyzed group. By contrast, most individuals can choose at any time among some 3000 issues listed in the Standard & Poor's Monthly Stock Guide. Following a wide variety of approaches and preferences, the individual investor should at all times be able to locate at least one per cent of the total list--say, 30 issues or more--that offer attractive buying opportunities.

"It is fortunate for Wall Street as an institution that a small minority of people can trade successfully and that many others think they can. The accepted view holds that stock trading is like anything else; i.e., with intelligence and application, or with good professional guidance, profits can be realized. Our own opinion is skeptical, perhaps jaundiced. We think that, regardless of preparation and method, success in trading is either accidental and impermanent or else due to a highly uncommon talent."

"...we must express some serious reservations and perhaps prejudices that we hold about the basic utility of industry analysis as it is practiced in Wall Street and as its results are exhibited in typical brokerage-house studies. Industry analysis relates to the past and the future. Insofar as it relates to the past, the elements dealt with have already influenced the results of the companies in the industry and the average market price of their shares. ...When industry analysis addresses itself to the future it generally assumes that past characteristics and trends will continue. We find these forward projections of the past to be misleading at least as often as they are useful."

"If we could assume that the price of each of the leading issues already reflects the expectable developments of the next year or two, then a random selection should work out as well as one confined to those with the best near-term outlook."


-- Security Analysis, Third Edition, 1951

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