When Benjamin Graham Learned a Difficult Lesson

This comes courtesy of Frank Martin, CFA’s 2014 Annual Report to his clients. I had the pleasure of Skyping with Frank a few years ago.

“At the quarter-century mark of 1925, the great bull market was under way, and Graham, then 31, had enjoyed impressive success as an investor in the challenging years since 1915. During an early-1929 conversation with business associate Bernard Baruch, both agreed that the market had advanced to ‘inordinate heights, that the speculators had gone crazy, that respected investment bankers were indulging in inexcusable high jinx, and that the whole thing would have to end up one day in a major crash.’ Years later Graham lamented, ‘What seems really strange now is that I could make a prediction of that kind in all seriousness, yet not have the sense to realize the dangers to which I continued to subject the Account’s capital [money he managed for clients, family and friends],’ which, by 1932, had shrunk to 15% of its 1929 value. Graham’s prodigious intellect was not defense enough against what he later described as a ‘bad case of hubris.’”

Surely Graham was not alone in having at least a vague notion in the mid- to late-20s that things would end so badly in the summer of 1932. What he and others lacked was not so much the conviction, but the moral courage and the temerity to say ‘No’ when everyone else was saying ‘Yes.’”

It is not enough to use reason and diligent analysis to draw a conclusion that is different from the consensus.  One must also act on that conclusion. That is the most difficult part for even the smartest of investors. Investment success in this case is not a question of intelligence, but the ability to stand alone, which researchers have shown causes emotional pain akin to being ostracized by your tribe.

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