Quotable Quotes: Ben Graham

While preparing for the fall Equity Analysis classes that I teach for NYSSA, I came across this priceless quote from Ben Graham. Most fitting in the current age of financial wizardry.



"In a manuscript from 1936 (reprinted in Ellis 1991), Benjamin Graham pictures the chair of a major coproation outlining how his company will return to profitability in the middle of the Great Depression of the 20th Century:

"Contrary to expectations, no changes will be made in the company's manufacturing or selling policies. Instead, the bookkeeping system is to be entirely revamped. By adopting and further improving a number of modern accounting and financial devices the corporation's earning power will be amazingly transformed."

The top item on the chair's list gives a flavor of the progress that will be made: "Accordingly, the Board has decided to extend the write-down policy initiated in the 1935 report, and to mark down the Fixed Assets from $1,338,552,858.96 to a round Minus $1,000,000,000...As plant wears out, the liability becomes correspondingly reduced. Hence, instead of the present depreciation charge of some $47,000,000 yearly there will be an annual appreciation credit of 5 percent, or $50,000,000. This will increase earnings by no less than $97,000,000 per annum." Summing up, the chair shares the foresight of the Board: "...The Board is not unmindful of the possibility that some of our competitors may seek to offset our new advantages by adopting similar accounting improvements...Should necessity arise, moreover, we believe we shall be able to maintain our deserved superiority by introducing still more advanced bookkeeping methods, which are even now under development in our Experimental Accounting Laboratory."

"Equity Asset Valuation"
Stowe, Robinson, Pinto, and McLeavey

The more things change, the more they remain the same. Simply substitute credit derivatives for manufacturing and asset values for depreciation and viola!

Have a good weekend.