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Benjamin Graham and the Birth of Value Investing

Benjamin Graham and the Birth of Value Investing

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Published by rsepassi
Harvard History Senior Thesis (High Honors)
Author: Ryan Sepassi
Harvard History Senior Thesis (High Honors)
Author: Ryan Sepassi

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Published by: rsepassi on Sep 20, 2012
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01/10/2013

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INTELLIGENT INVESTINGInvesting Practice in the Early Twentieth Century: Benjamin Graham and the Birth of Value Investing byRyan Shayan SepassiA thesis submitted to theDepartment of Historyin partial fulfillment of the requirements for theDegree of Bachelor of Artswith HonorsHarvard UniversityCambridgeMassachusetts11 March 2010
 
TABLE OF CONTENTS
Introduction: An Unexamined Legend
................................................................................1
1. Early Investing Practice: 1915-1925
..............................................................................13Rise of Mass Participation.........................................................................................13Schools of Thought....................................................................................................19
2. Benjamin Graham: 1894-1929
.......................................................................................27The Early Years: 1894-1911......................................................................................27Beginnings on Wall Street: 1912-1919.....................................................................31Rise on Wall Street: 1920-1929.................................................................................37
3. The Great Crash & Its Aftermath: 1929-1934
.............................................................43The Boom...................................................................................................................43The Bust.....................................................................................................................47The Response.............................................................................................................52
4. Security Analysis: 1934-1940
.........................................................................................60An Investing Philosophy............................................................................................61Critiques of Competing Schools of Thought.............................................................64Reception....................................................................................................................67
5. Benjamin Graham’s Impact: 1940-
..............................................................................70Graham’s Life: 1940-1976.........................................................................................70Security Analysis Becomes a Profession..................................................................72Superinvestors of Graham-and-Doddsville...............................................................74Graham and the Efficient Market Hypothesis...........................................................77
Conclusion: Value Endures
.................................................................................................81Bibliography...........................................................................................................................84
 
INTRODUCTION
A
N
U
NEXAMINED
L
EGEND
Warren Buffett is no stranger to even the most infrequent follower of the stock market; he has spent his fair share of time among and atop the billionaire list, and since1970, he has served as Chairman and Chief Executive Officer of Berkshire Hathaway, hisinvestment holding company. Buffett has used Berkshire to build one of the bestinvestment records in history, and as his fame and fortune grew, he became an icon in theinvesting communities: more than 60 books have been written about him and his investingstrategies – including at least 3 biographies – and each year, nearly 30,000 of his mostdevoted fans descend upon Omaha, Nebraska for Berkshire Hathaway’s annual meeting.
1
The highlight of what has turned into a weekend event is a six-hour-long question andanswer session with Buffett – or the “Oracle of Omaha,” as some call him – and his partner Charlie Munger. The event has come to be half-jokingly known as “Woodstock for Capitalists” (which also happens to be the title of a documentary made about the annualmeeting).
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Less well known to those outside the cloistered world of finance, however, is a mannamed Benjamin Graham. Graham, by and large, formulated the very investing framework that Buffett has put to such good use over the years. Buffett studied under Graham atColumbia, where Graham was teaching an investing course, and would later work for Graham as an investment analyst, before striking out on his own in 1956.
3
Buffett idolized
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Warren Buffett, Letter to Shareholders (2008), http://www.berkshirehathaway.com. Compounded annualgain of 20.8% from 1965-2008 versus 8.9% for the S&P 500. These returns translate into a cumulativereturn of 362,319% for Berkshire versus 4,276% for the S&P 500 over the same time period.
2
 
Woodstock for Capitalists
, TV, directed by Ian Darling (March 15, 2001), Australian BroadcastingCorporation. Can be found at http://www.abc.net.au/tv/documentaries/.
3
Alice Schroeder,
The Snowball 
(New York: Bantam Books, 2008). Schroeder’s biography is by far the
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