There was once a group of men born blind who were being asked to describe what something is like by using only their sense of touch. Given the exact same object to touch, one says it’s like a pillar; one says it’s a rope; one says it’s a hand-fan, and yet one says it’s a solid pipe. How can that be? Well, the above is a well-known parable about blind men feeling different parts of an elephant. All the men were correct (the pillar’s the leg, the rope’s the tail, the hand-fan’s the ear, and the solid pipe’s the tusk),…
There was once a group of men born blind who were being asked to describe what something is like by using only their sense of touch. Given the exact same object to touch, one says it’s like a pillar; one says it’s a rope; one says it’s a hand-fan, and yet one says it’s a solid pipe. How can that be?
Well, the above is a well-known parable about blind men feeling different parts of an elephant. All the men were correct (the pillar’s the leg, the rope’s the tail, the hand-fan’s the ear, and the solid pipe’s the tusk), but yet wrong at the same time. They couldn’t see reality for what it really is because they relied on only their own subjective experiences instead of the broader truth.
I’d come back to this later to point out how it’s related to investing (The Motley Fool Singapore is after all, an investing website), but for now, let’s turn to the great investor, Benjamin Graham.
When the legend falls…
Graham was by all accounts a brilliant investor. For a 20 year span between 1936 and 1956, he led his hedge fund to compounded annualised returns of 20%, charging way ahead of the US stock market’s annualised gains of 12.2% in the same period.
Such returns would make any investor the stuff of legends – and it certainly has for Graham. He’s revered as the father of the value investing discipline in which its practitioners seek out cheap shares which are selling for lower than their intrinsic net worth. But for some other equally legendary investors, even Graham wasn’t nearly good enough. Take for instance, Charlie Munger’s recent assessment of Graham’s investing legacy as recounted by renowned financial journalist Jason Zweig (emphasis mine):
“…I have to say, Ben Graham had a lot to learn as an investor. His ideas of how to value companies were all shaped by how the Great Crash and the Depression almost destroyed him, and he was always a little afraid of what the market can do. It left him with an aftermath of fear for the rest of his life, and all his methods were designed to keep that at bay.
I think Ben Graham wasn’t nearly as good an investor as Warren Buffett is or even as good as I am. Buying those cheap, cigar-butt stocks [companies with limited potential growth selling at a fraction of what they would be worth in a takeover or liquidation] was a snare and a delusion, and it would never work with the kinds of sums of money we have. You can’t do it with billions of dollars or even many millions of dollars. But he was a very good writer and a very good teacher and a brilliant man, one of the only intellectuals – probably the only intellectual — in the investing business at the time.”
Reading these words struck me on how the Great Depression of the early 1930s had affected Graham so profoundly that his investing methods – as successful as they are – still seemed to leave a lot to be desired, at least according to the maverick investor Munger.
Missing out on opportunities
Munger has a point – Graham’s insistence on wanting to protect his investments from worst-case-scenarios also led to him missing out on shares which went on to become spectacular successes. One such instance was revealed by Graham’s former employee Walter Schloss (Schloss is himself an investor with a phenomenal track record) in an interview with the Outstanding Investor’s Digest:
“Another time, I recommended we buy a company called Haloid. It had the rights to a promising new process called xerography. It’d been paying a dividend all through the 1930s. I went into Graham and said, “You know, you’re not paying a hell of a lot for a process with this much potential.”
He said, “Walter, I’m not interested. It’s not cheap enough at $21.”
Of course, that was Xerox. And you know the rest of the story…
…The only thing I should add is that if Graham-Newman [Graham’s hedge fund] had bought Xerox at $21, I can almost guarantee that we would have sold it at $50. The fact it went to $2,000 would have been beside the point.”
The way the Great Depression had shaped Graham’s investing philosophy into something that’s arguably sub-optimal is actually something all investors have to note.
The importance of knowing history
As my colleague Morgan Housel recently pointed out, “everyone gets their own version of history based on their own unique life experiences.” He expounds further:
“Take how stocks performed when you were age 13 to 29. Depending on what year you were born, your experience varied by an order of magnitude (these charts are adjusted for both dividends and inflation):
Source: Robert Shiller’s recreation of the S&P 500, author’s calculations.
If you were born in 1970, your impressionable youth was spent watching stocks practically go straight up. If you were born in 1950, your early years were spent watching stocks crash, recover, crash again, and over a 16-year period return pretty much nothing after inflation.
There is no way that living through these two periods didn’t influence your view of the market. “Truth” is shaped by what you have experienced in life, and what you have experienced in life is entirely dependent on what year you were born.”
Now, our own investing experiences in life are important. But, they can be dangerous in giving us only a partial view of what investing-reality really is – just like what had happened with the blind men and the elephant.
It’s only by taking a long hard look at history, apart from what you’ve experienced, can you know what things really are like over long stretches of time. Graham didn’t have the luxury of looking back at history to realise how rare an event the Great Depression was – he ended up spending the rest of his career trying to guard against a once-in-a-life-time event as though it was just right around the corner. In the process, Graham’s investment strategy came out to be slightly flawed, according to Munger.
Today, in comparison with Graham’s time, we’re drowning in data relating to the history of the financial markets and how economies work. This gives us the perfect opportunity to avoid the same mistake Graham did – but we first have to accept how important history is and not chuck it aside as some useless pursuit.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.