The Last Lecture of Benjamin Graham
“There are two requirements for success in Wall Street," said Graham. "One, you have to think correctly; and, secondly, you have to think independently.”
On March 6, 1976 — six-and-a-half months before Benjamin Graham passed away — financial analyst Hartman L. Butler Jr. visited the 81-year-old father of value investing at his home in La Jolla, California, and spent an hour chatting with him about his illustrious career and the future of the money game.
This conversation would later be published in the Financial Analysts Journal as “An Hour with Mr. Graham” — and, in many ways, represented Graham’s final words on many different subjects.
(Yes, I admittedly took a bit of artistic license with the title of this article. “An Hour with Mr. Graham” is basically a transcript of Butler’s interview with Graham — but, for a man who spent his entire life teaching, I thought “lecture” sounds more fitting.)
I had read “An Hour with Mr. Graham” a few years ago, but a friend of the newsletter kindly sent me the PDF last month and, upon re-reading it, I was struck by the simple wisdom that Graham left us in this interview.
It’s a rare portal into the mind of a legend. One who had stepped back from the fray and frenzy of Wall Street, which afforded him the distance to provide an unvarnished take on his past triumphs and struggles — as well as the path forward for investors.
Above all, the interview reminded me that Graham’s most timeless contributions to human knowledge lie less in the complex calculations of Security Analysis and more in his commentary about mindset and emotional discipline. Decades on Wall Street taught Graham — and he, in turn, taught us — that an investor’s greatest enemy is usually the man or woman in the mirror.
Or, put another way, Graham might be most famous for creating the blueprint for value investing — but his insights into human nature (greed, fear, and patience) are what gives it life.
The early years of Benjamin Graham’s career on Wall Street were nothing if not eventful. He got his first job there in 1914 — just two months before the Great War shut down the stock exchange. After that, the Roaring Twenties and the shocking crash that shook Wall Street (and the nation) to its core.
✨ “All I knew was that prices were too high [in 1929]. I stayed away from the speculative favorites. I felt I had good investments. But I owed money — which was a mistake — and I had to sweat through the period 1929-1932. I didn’t repeat the error after that.”
✨ “In 1948, we made our GEICO investment and, from then on, we seemed to be very brilliant people.”
Graham told Butler how his firm bought half of GEICO for $720,000 — but, due to a legal technicality, had to distribute the shares to its clients. (An investment fund could not own more than 10% of an insurance company in those days.) GEICO quickly became an all-time winner for Graham and clients alike.
By the time of this interview, though, GEICO had fallen on hard times. “It makes me shudder to think of the amounts of money they were able to lose in one year,” said Graham.
They say that every cloud has a silver lining — and it was this very downturn (fueled by inflation and undisciplined underwriting) that opened the door for Warren Buffett to snap up GEICO shares at just $2 a piece.
✨ “We had no real problems in running our business. That’s why I kind of lost interest. We were no longer very challenged after 1950. The things that presented themselves were typically repetitions of old problems which I found no special interest in solving.”
✨ “I have lost most of the interest I had in the details of security analysis which I devoted myself to so strenuously for many years. I feel that they are relatively unimportant, which, in a sense, has put me opposed to developments in the whole profession. I think we can do it successfully with a few techniques and simple principles. The main point is to have the right general principles and the character to stick to them.”
Late in life, Graham grew to prefer a simpler, group-based investment approach as opposed to methodical analysis of individual companies. At the time of this interview, he was in the process of testing a strategy that focused on stocks with earnings yields at least twice as good as those of bonds. The names in this basket would be filtered by this one simple metric — “regardless of the industry and with very little attention to the individual company”.
The actual details of Graham’s new strategy, though, seem less important to me than the reason why he made this pivot in the first place. Buffett always said that his mentor did not really care about making money and that, despite achieving impressive wealth, he found greater fulfillment elsewhere.
Namely, in teaching others. And, for that reason, he opted for techniques that the layman could follow along with at home. “He didn’t really want to do anything that the reader of his book couldn’t do if he was on a desert island with just one line to a broker,” Buffett said in 1997. Which undoubtedly made this simple earnings-centered metric particularly attractive to him.
✨ “It’s hard for me to find a good connection between [the efficient market hypothesis] and practical investment results … The idea of saying that the fact that all the information is so widely spread that the resulting prices are logical prices — that is all wrong. I don’t see how you can say that the prices made in Wall Street are the right prices in any intelligent decision of what right prices would be.”
✨ “If I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting what’s going to happen to the stock market.”
Graham recommended that any doubters tune into a given week’s “Wall Street Week” television program and “see that none of [the experts] has any particular claim to authority … as to what will happen in the stock market”.
✨ “They used to say about the Bourbons that they forgot nothing and they learned nothing, and [all] I’ll say about the Wall Street people, typically, is that they learn nothing and they forget everything.”
✨ “I have no confidence whatever in the future of the Wall Street people. I think this business of greed — the excessive hopes and fears and so on — will be with us as long as there will be people.”
The erudite Graham then referenced English economist Walter Bagehot — who believed that whenever people have excess money, speculation is sure to follow. The presence — and prevalence — of money does not soothe the ego, but instead seems to spur it on to seek higher returns and riskier ventures. And once people are speculating on a wide scale, financial panic cannot be far behind.
Idle hands may or may not be the devil’s workshop, but (to Bagehot) idle money is.
✨ “I would tell [students who want to be investors] to study the past record of the stock market, study their own capabilities, and find out whether they can identify an approach to investment they feel would be satisfactory in their own case. And, if they have done that, pursue that without any reference to what other people do or think or say. Stick to their own methods. That’s what we did with our business. We never followed the crowd, and I think that’s favorable for the young analyst … If you start on a sound basis, you are half-way along.”
✨ “There are two requirements for success in Wall Street. One, you have to think correctly; and, secondly, you have to think independently.”
✨ “There has been plenty of sunshine since the middle of 1974 when the bottom of the market was reached. And my guess is that Wall Street hasn’t changed at all. The present optimism is going to be overdone and the next pessimism will be overdone — and you are back on the Ferris Wheel [or] whatever you want to call it, Seesaw, Merry-Go-Round. You will be back on that.”
This candid cynicism, delivered with a characteristic touch of humor, reveals a man who — after decades playing the money game — saw human nature as the unchanging driver of market folly. So it was and so it still is.
One can readily see why Warren Buffett has always loved him! Thank you for these pearls of wisdom.
Thanks for sharing!