Ben Graham the Growth Investor?

We’re all for debunking myths, and given the performance of growth stocks recently,we’re making a pre-emptive strike in defense of the father of value investing.

Every once-in-a-while, a rumor will re-surface that Benjamin Graham “made all of his money from growth investing.”  The implication is that his value principles didn’t work as well as everyone thinks;and if you are a growth monkey, there is nothing more satisfying than reading that Benjamin Graham was also a growth monkey.  The “growth stock” that supposedly renders useless Graham’s value-investing success is Geico. There are many articles discuss the subject[1],and this is a summary.

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The History

In 1934, Ben Graham was just 40 years old, and published – with David Dodd – the seminal value investing book Security Analysis.  Fifteen years later, at the age of 55, he published the first edition of The Intelligent Investor.  At that time Graham was teaching at Columbia,and co-managing an investment partnership with Jerome “Jerry” Newman, aptly called the Graham-Newman Partnership.  Shortly before publication of the first edition of The Intelligent Investor, the Graham-Newman partnership purchased a controlling 50% interest in The Government Employees Insurance Company (or GEICO) for $712,500.  This represented about 20% of the partnership’s $3.5 million in AUM.  At the time, according to Graham “the price was moderate in relation to current earnings and asset value.”  No one else was interested, and in Graham’sown words “for some reason the industry did not have Wall Street appeal at the time and the deal had been turned down by quite a few important houses.”  The insurance industry was reeling from post-WWII inflation losses, and he took advantage of the panic (or lack of interest) by making the purchase at a 10% discount to book value.

By the time he wrote his final (fourth) edition of The Intelligent Investor in 1973 at the age of 79, the stock had performed so well that Graham felt it necessary to add a postscript to the edition. What gets the anti-value guys so excited is the comment that Graham made in his final edition, where he claimed that the aggregate profits from their partnership’s investment in Geico alone exceeded the sum of the gains in all other positions that partnership held over the previous 20 years.

After revisiting this postscript (which becomes a very popular pursuit whenever valuation multiples reach historical highs) the natural conclusion of the growth crowd is that value doesn’t work, and that growth does.  We’ll grant that in regard to a few individual names (FAMANGs?) some of this may be a fair assessment, although identifying the winner in hindsight is much, much easier than it is prospectively,and sticking to it through thick and thin is even harder.  

And in this case, Geico was surely a winner, but we need some perspective here and need to see how things ultimately played out.

Long before publishing The Intelligent Investor, and long before GEICO started its march of outperformance, Benjamin Graham was already a tremendously successful investor based on tenants of value investing, and an influential teacher and communicator of its virtues.[2]  

He wrote Security Analysis in 1934 and had started training some of the sharpest investing minds to do the same.  The fact that, nearly 40 years later, at the age of 79, he mentioned that he did incredibly well over his last two decades with an initial bargain that became a 200-bagger doesn’t damage, or even dent, his value legacy.[3] 

And What About Buffett?

For what it is worth, the growth crowd also likes to tarnish Warren Buffett with the same brush.  Buffett started getting to know Geico in the 1950s while studying under Graham at Columbia and even wrote an article about it, describing it as a tremendous growth company.  

Fast forward 200 bags later to 1972 (with Geico at $62), and – as mentioned above – Graham was naturally extolling the luck-or-skill driven virtues of owning Geico shares during such a run.  

Yet, within four years, the stock was off 95%.  After a government-led introduction of no-fault insurance, regulator-mandated premium reductions, poor risk underwriting, and a dozen class action lawsuits, the stock was trading at $2per share.  

The growth guys don’t like to talk about the risk, only the reward.   Some growth story,eh?  

But after that collapse, someone saw value when no one else did.  Guess who?[4]