The Einstein of Money: The Life and Timeless Financial Wisdom of Benjamin Graham
- Joe Carlen
- 316 pp.
- Reviewed by Randy Cepuch
- October 10, 2012
A man who idolized Benjamin Franklin and mentored a young Warren Buffet, Benjamin Graham revolutionized investment strategy through statistical security analysis.
Reviewed by Randy Cepuch
Warren Buffett credits much of his financial expertise to a Columbia University professor named Benjamin Graham, but he also took some of the teacher’s other lessons to heart — including an unusually liberal interpretation of marriage.
Author Joe Carlen’s new The Einstein of Money: The Life and Timeless Financial Wisdom of Benjamin Graham devotes ample space to Graham’s famous parable for investors, in which the stock market is described as a bipolar business partner named Mr. Market, who bounces from one extreme to another. The characterization, outlined in Graham’s classic 1949 book, The Intelligent Investor, changed the world for many who had previously believed the ups and downs of stock prices always made sense.
Carlen’s book shows how Graham came to know quite a bit about ups and downs both in the financial world and his personal life, and how some of his conclusions influenced a then-young man from Omaha who is now, according to Forbes magazine, the third richest man in the world.
Graham was born in London, in 1894, to a family whose success with a kitchenware import business landed them on Park Avenue, but his father died young and in short order the money was gone. By age 9, the future professor was peddling newspapers on the streets of Manhattan (similarly, Buffett delivered The Washington Post in his early teens).
He was an inquisitive young man who eagerly embraced non-required reading (as Buffett always has) and was able to skip several grades in school. Unfortunately, he became a little too sure of himself and made it a point to finish an important high school exam as quickly as possible. Although his answers to five questions posed on the blackboard at the front of the room were flawless, he’d been so hasty that he missed hearing that there were two additional questions on a blackboard in the back of the room! Eventually he won a scholarship to Columbia.
When Graham went to work as a bond salesman at a securities firm, it was rapidly apparent to all concerned that the position wasn’t a good fit. So he convinced his boss to let him pursue “statistical work” and proceeded to invent security analysis — determining what a company is really worth and using that information to decide when the share price is truly a bargain with an all-important “margin of safety.” One of his earliest successes was noticing that DuPont’s ownership stake in General Motors alone roughly equaled the cumulative value of DuPont’s shares, so investors effectively got DuPont’s assets and potential for free. Graham was soon a junior partner with significant portfolio management responsibilities. He made mistakes but learned from them and was confident enough to establish his own investment partnership in 1923.
He began teaching at Columbia five years later, using his own analyses of companies as teaching materials — which led some Wall Streeters to enroll in his classes to take advantage of the insights. The additional workload meant Graham wasn’t spending much time with the woman he’d married in 1917. When he caught her in an affair, he divorced her. While he married again (twice), he developed a reputation as a swinger — confessing later in life that he shared some of the weaknesses of his idol, Ben Franklin, “especially for the fairer sex” — and eventually told his third wife he wanted to split his time with her and the former lover of his second son, who’d committed suicide. His spouse said no and the couple never divorced, but Graham lived out his years with the other woman, largely in Southern California and France. (Warren Buffett and his wife separated after 25 years but remained married until her death in 2004. Two years later, he tied the knot with a woman his wife had arranged for him to meet and whom he’d been quietly living with for more than 30 years.)
The Great Depression was an unwelcome reminder of his own riches-to-rags childhood, and Graham made it a point to ensure that his investors were whole when it was over. Meanwhile he was a prolific writer, responsible for co-writing a book called Security Analysis (1934) as well as a play, “Broadway Pompadour,” that made it to Broadway, but failed. He even found time to pioneer accreditation standards for financial analysts.
Buffett came into Graham’s life in 1950, after he devoured The Intelligent Investor (generally considered to be more accessible than Security Analysis) and enrolled at Columbia to learn from the master. Upon graduating, Buffett was so smitten he offered to work at Graham’s firm for free. Graham turned him down, but then changed his mind. When Graham retired in 1956, Buffett — the obvious successor — decided to return to Omaha, reasoning that he’d only wanted to be in New York to work with Graham.
Not surprisingly, Graham was an active retiree. He taught at UCLA. He invented a slide rule that used triangles rather than logarithms (not long before calculators came along) and a system for memorizing Morse Code (not long before advances in electronic communications made it obsolete). He spoke out against companies enriching executives at the expense of shareholders and suggested that money managers should eat their own cooking. And he gave generously to charities, while strongly encouraging others to do the same. (Although Buffett had long said he would give his fortune to charity at his death, he changed his mind and began making huge donations in 2006.)
Just a few months before his death in 1976, Graham said, “I have lost most of the interest I had in the details of security analysis which I devoted myself to so strenuously over so many years,” and added that he had come to favor using a simple criterion for picking stocks — such as considering only those selling for two-thirds of book value or less, “regardless of the industry and with very little attention to the individual company.” This would seem to be a shocking reversal and it’s somewhat disappointing that it is mentioned only briefly at the end of Carlen’s book. Despite it, Warren Buffett and other Graham disciples have continued to profit by exploiting the manic tendencies of Mr. Market when they see a sufficient margin of safety.
If this book only served to remind readers to do the same, it would still be well worth any investor’s time.
Randy Cepuch has been a financial writer for more than 25 years and is the author of A Weekend With Warren Buffett and Other Shareholder Meeting Adventures (Basic Books, 2007).