The Following Article, Written in February 2009, Introduces the Non-Financial Reader to Benjamin Graham and Value Investing Concepts:
For Investors: Is This The Financial Apocalypse? Understanding The Current Crisis Via A Historical Perspective
Dow drops another 300 points! Gold soars! Bank bailouts approved! And on and on. The financial headlines these days are upsetting as well as confusing. How can the average person even begin to comprehend what is happening when even knowledgeable people experienced in investing are suffering huge losses and are at a loss (pun intended) as to what to do. The answers do not come easily and are not very reassuring, but a historical perspective can help one to understand things a little better.
The 1950-2000 time period is regarded by most investors as "normal", and this period plus the years since is the only living memory, investment-wise, for most people alive today. Since 2000, we have experienced two severe declines, and of course the current decline may have further to go. However, if you expand your time frame back to include the years 1900 to 1950, a different picture emerges. First, how bad, really, were the declines of 2000-2002 and 2007-2008 when compared to the catastrophic decline of 1929-1932? Consider the Dow Jones Industrials (DOW) and Standard & Poorís 500 (SPX) stock averages for all three declines:
2000 High: 11750 / 1552.87
2002 Low: 7197 / 768.63
Decline: 38% / 50%
2007 High: 14198 / 1576.09
2009 Low: 6470 / 666.79
Decline: 54% / 57%
(keep in mind this one is not over) [later note added: lows updated to the March 2009 lows]
1929 High: 386 / 31.70
1932 Low: 42 / 4.40
Decline: 89% / 86%
The current decline is severe, but (so far) is not in the same league as the 1930ís drop. But this information doesnít help us much. Yes, today things are not nearly as bad as in the 1930ís, but on the other hand it could get a lot worse and still not be as bad as it was then. In fact, the media more and more frequently references that time in our history in various articles and comparisons, and we have to go back to then to find a person who really understood the nature of securities and markets and laid it all out for us in two timeless works. Who was that person and what were the texts?
Benjamin Graham (with co-author David Dodd) 1894-1976, the "father of value investing"
Security Analysis, first edition published 1934, 6th edition released 2008
("the most influential financial book ever written")
Intelligent Investor, first published 1949, most recently revised 2003
("the greatest book on investing ever written")
You may rightly ask how can Grahamís books be updated and re-issued years after his passing? The answer is Grahamís "disciples", recognizing the timeless value of his wisdom, have expanded upon his fundamental works and have issued updated texts, with Grahamís original text preserved and supplemented by new sections carefully placed adjacent to the original prose.
In Grahamís time, certainly after the 1929 crash, many if not most financial types did not believe that stocks could ever be bought for investment-only well-selected bonds were worthy. Stocks were by definition speculative (many people today might now agree with this view). Graham actually was going out on a limb a bit by making the case that stocks, if properly researched and selected, could be acquired as part of a conservative investorís portfolio. His books detail how to approach the task. Study of Grahamís approach is timely today because the current crisis is resulting in valuations (stock prices) approaching levels that they may be attractive based on his principles, which has not usually been possible in recent years. Even more important than any specifics of stock selection, the books reveal the nature of the markets and investing, and a philosophy and mindset that can allow one to survive and even prosper, or at least understand the nature of the environment one is dealing with. That in itself would be a huge leap forward for most people, allowing a reality view that might help them avoid the worst investing outcomes.