What Would Benjamin Graham Make of Today’s Market?

Although value stocks have lagged for a long time, an article by Wall Street Journal columnist Jason Zweig argues that the strategy’s champion, Benjamin Graham, still had the right idea.

Zweig notes, “faster-growing, higher-priced stocks have outperformed by such huge margins that the long-run advantage of value stocks has withered away. Will that last? Probably not. Was Graham wrong? Almost certainly not.”

The article points out three important tenets of Graham’s teachings:

  • A stock “isn’t a piece of paper or an electronic blip, but an ownership stake in an underlying business that can be evaluated based on the cash it is likely to produce;”
  • The stock market “may swing from euphoria to misery, but you aren’t obliged to share its moods;”
  • Investors must allow a “margin of safety—a cushion of value that comes from thinking in ranges and probabilities rather than believing in exact certainty.”

Zweig argues that value investing is still lagging in part because big tech companies continue to dominate, adding that Graham might have been unsure of a company like Amazon: whose stock “never looks cheap by conventional value measures.” Zweig notes that Graham was generally distrustful of companies that generate lots of cash but adds that today’s value investor must learn to evaluate those companies.

The article emphasizes the importance of investing “patiently in companies that measure their own progress against long-term goals rather than short-term earnings or recent stock-price changes.”