Before the stock market crash of 1929, portfolio investment was a disordered and muddled activity. Benjamin Graham and David L. Dodd’s Security Analysis, first published in 1934, brought structure and logic to the field, creating an intellectual framework for sound investment. In an area where much looks foolish shortly after publication, Graham’s principles have proved reliable for over sixty-five years. Moreover, as Warren Buffett wrote in a remembrance about Graham in the Financial Analysts Journal, their value has often been “enhanced and better understood in the wake of financial storms that demolished flimsier intellectual structures."
Graham mostly operated in a business environment conditioned by the extreme economic collapse of the 1930s. Indeed, the majority of investors remained shell-shocked for many years thereafter. As a result, Graham and his disciples could readily find extraordinary bargains in the public securities markets. However, in investing, like in life, one must adapt to the conditions at hand.
Investors in the United States eventually gained insight from the recognition that stocks had been chronically mispriced on the low side. Accordingly, investors bid stock prices higher and higher, and, by and large, the most obvious bargains of the type Graham had always searched for vanished. Thus, in order to remain successful, the Ben Graham disciples had to change their definition of a bargain in various ways. Graham’s most famous pupil, Warren Buffett of Omaha, Nebraska, is generally credited with refining and enlarging his mentor’s principles. Both because of the enormous size of Buffett’s chief investment vehicle, Berkshire Hathaway, and because he finds businesses more interesting than did Graham, Buffett tries to find businesses whose cash flows he expects to grow substantially in the future.
This paper will trace the evolution of Graham’s and Buffett’s ideas in response to changes in both economic conditions and their own experiences.