Friday, October 26, 2007

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.

1 comment:

Bud said...

I think you might like my new self-published book. My book, "The Four Filters Invention of Warren Buffett and Charlie Munger" examines each of the basic steps they perform in framing and making an investment decision. Here is a 10 min. audio book summary:

Here is the review that George at and did on my book.

As for my own views, “The Four Filters Invention of Warren Buffett and Charlie Munger” at is designed to be the next “Intelligent Investor.” It is a small book at 98 pages, and it concentrates mainly on the sequential process outlined by Warren Buffett. How do the best “frame” their investing decisions? The Four Filters cluster around the important business variables of Products, Customer-Sustainablility, Managers, and Price/Value.

The book also strives to prove that Buffett and Munger invented a Behavioral Finance Formula composed of three qualitative steps and one quantitative step, that is underappreciated by the
business and academic communities. In that respect, Buffett and Munger will have a greater long term impact on academics than the Efficient Market Hypothesis.

While my book is concentrated on Munger and Buffett’s approach to framing, this book contains the best of Graham, Carret, Fisher, Buffett and Munger. Read the summary a few times, and you will be motivated and hypnotized into thinking about ways you “frame” your important decisions. This is a subtle peek into sensible and optimal thinking within Behavioral Finance.