Benjamin Graham teaches Value Investing at Columbia University

A Value Investing masterclass by Benjamin Graham — Warren Buffett's mentor — and dean Courtney Brown, at Columbia Business School (circa 1955).

Benjamin Graham

Benjamin Graham was salutatorian of the class of 1914 and, weeks before graduation, was offered teaching positions in three different faculties: Greek and Latin philosophy, English, and mathematics. He was all of 20 years old.

In 1949, he published The Intelligent Investor, which Warren Buffett has called "the best book about investing ever written."

From Benjamin Graham at columbia.edu

Read more at Value Investing History

Courtney Brown

Courtney Conrades Brown was born on Oct. 15, 1904, in St. Louis, studied at the Staunton Military Academy and Dartmouth College, worked for a decade in New York brokerage houses and banks and then taught and earned a doctorate in economics at Columbia.

Dr. Brown was a leading statistical economist as head of the economic research section of the Standard Oil Company of New Jersey (now Exxon), one of the largest departments of its kind in private business.

As Columbia's business school dean from 1954 to 1969, Dr. Brown introduced a required course on the ethical and philosophical aspects of business and oversaw the construction of the graduate school's present eight-story home, Uris Hall, on the Morningside Heights campus.

From nytimes.com on Courtney Brown

See It Now's Introduction

There is no shortage of experts on the market. As for us, we're barely able to tell the difference between a bull and a bear. So we sat in on part of a seminar at The Graduate School of Business at Columbia University. After all, it's older than the stock exchange, and we thought professors familiar with the language of the street might treat the market with detachment. Dean Courtney Brown and Professor Benjamin Graham were instructing future brokers and customers' men. Here is See It Now's short course in the market.

Dean Courtney Brown on Speculation

Dean Courtney Brown: First let me give a caution. I hardly need give it to a group of informed students such as you. No one knows precisely why the market behaves as it behaves, either in retrospect or in prospect. The best we can do, as you all know, is express informed judgments. But it is important that those judgments be informed. We do know that there has been a substantial rise. That rise has been going on for a number of years, particularly since the middle of 1953. And we do know that the rate of that rise has been very rapid, uncomfortably like that of the 1928-29 period. It has resulted in a lot of comparisons being made in the press. Moreover the present level of stock prices as measured by the Dow Jones averages is about equal to, indeed a little above, the peaks of 1929. A number of explanations have been advanced regarding the stock market rise, that suggests it may reflect a return to inflationary conditions. This doesn't seem to me to be very convincing. First because there is no evidence of inflation in the behavior of commodity prices, either at the wholesale or at the retail level; and there hasn't been over the past a year and a half, extraordinary stability in the behavior of both indexes. There is so much surplus capacity around in almost every direction, that it's hard to conceive of a strong inflationary trend reasserting itself at this time. Still another explanation is that the stock market has gone up because there has been a return of that kind of speculative fever that has from time to time in the past gripped the country. The Florida land boom, the 1929 stock boom, they've occurred in history as you know all the way back from the Tulip speculations in Holland. I suspect there's a certain element of truth to this one. However, it doesn't seem to me that it gives us too much concern because there has been no feeding of this fever by the injection of credit. I think it is important for us to observe that the amount of brokers' loans, loans made to brokers for the financing of securities of their customers that have been bought on margin, are less than two billion dollars at present. In 1929, they were in excess of eight and a half billion dollars; and there is now a larger volume of securities on the stock exchange. Gentlemen, Professor Graham will pick up the story at that point.

Professor Benjamin Graham on Investor Psychology

Professor Benjamin Graham: One of the comparisons that is interesting is one not between 1929, which is so long ago; but 1950, which is only a few years ago. It would be very proper to ask why are prices twice as much as they are now, when the earnings of companies both in 1954, and probably in 1955, are less than they were in 1950. Now that is an extraordinary difference, and the explanation cannot be found in any mathematics; but it has to be found in investor psychology. You can have an extraordinary difference in the price level merely because not only speculators, but investors themselves, are looking at the situation through rose-colored glasses rather than dark blue glasses. It may well be true that the underlying psychology of the American people has not changed so much, and that what the American people have been waiting for many years has been an excuse for going back to the speculative attitudes which used to characterize them from time to time. Now if that is so, then the present situation can carry a very large degree of danger to people who are now becoming interested in common stocks for the first time. It would seem that if history counts for anything, that the stock market is much more likely than not, to advance to a point [of] real danger.

Dean Brown on Inefficient Markets

Student: You said that stock prices now are not too high, that you fear they will go higher. Well, then are you recommending they decline?

Dean Courtney Brown: Well, may I defend you on that? [Yeah.] Those who have watched the security market's behavior over the years have become more and more impressed with the fact that stocks always go too high on the upside and tend to go too low on the downside. The swings, in other words, are always more dramatic and more the amplitude of change is greater, than might normally be justified by an analytical appraisal of the values that are represented there. I think what Professor Graham had to say was that his analysis of a series of underlying values would indicate that the stock prices are just about in line with where they might properly be. However, from experience that would be the least likely thing to happen; that stocks would just stabilize right here. If it's the least likely thing to happen and you have to select a probability between going up further or down further, because of the strong momentum that they have had, I think I would be inclined to agree with him that the more probable direction would be towards a somewhat higher level. Yes sir.

Dean Brown on Bond Yields

Student: Normally, when stockholders believed the market was too high, they switched from stocks to cash. Now many people feel that due to capital gains tax, they are not free to act. They are what you might say locked in. What effect does this have on the stock market in general?

Dean Courtney Brown: Yes, no question about the fact that it does discourage some sales that might otherwise be made; because one selling stocks and trying to replace them would have to replace them at substantially lower prices to come out even; after paying the capital gains tax. However, that's not the only reason people are reluctant to sell stocks and buy bonds. Stocks are still yielding about 4.5% on the basis of current dividend payments, whereas bonds of prime quality are closer to 3%. Here again, we find the contrast with the situation in 1929; when stocks were yielding about 3.5% and prime bonds closer to 5%.

Professor Graham on Investing on Margin

Student: In addition to raising margin requirements, should the federal government take other measures to check a speculative boom in the stock market; and which method is the better?

Professor Benjamin Graham: My own opinion would be that the Federal Reserve should first exhaust the possibilities of raising the margin requirements to 100%, and then consider very seriously before they imposed other sanctions. If needed.

Dean Brown on Broadening Participation

Student: What is the significance of the broadening public participation in stock purchasing and ownership?

Dean Courtney Brown: There are probably two elements there that are important. One, the broadening participation of the public in stock purchases is one measure of the degree of speculative fever that we were talking about before. However, subject to that being controlled, and I believe that it can be controlled as Professor Graham has indicated. But over and above that, there is a broad social significance to that it seems to me. What it in essential terms means, is that the ownership of American industry is being more widely dispersed among more and more people. This has very favorable repercussions in terms of our political and social life.

Professor Graham on Forecasts and Projections

Student: This question concerns the so-called Wall Street professional. Are Wall Street professionals usually more accurate in their near or long-term market trends? Forecasts of stock market trends? If not, why not?

Professor Benjamin Graham: I said, you say, that they are more often wrong than right on their forecasts?

Student: What I mean is, are they more accurate in the shorter term than the long-term forecasts?

Professor Benjamin Graham: Well, we've been following that interesting question for a generation or more; and I must say frankly that our studies indicate that, you have your choice between tossing coins and taking the consensus of expert opinion, and the results are just about the same in each case. Your question as to why they are not more dependable is a very good one and an interesting one; and my own explanation for that is this. That everybody in Wall Street is so smart, that their brilliance offsets each other; and that whatever they know is already reflected in the level of stock prices pretty much; and consequently, what happens in the future represents what they don't know.

Margin Trading vs Investing Volumes

Student: Would you kindly comment on an item appearing in the newspapers to the effect that, while 45% of buying today is on margin, the money borrowed is equal to only 1% of the value of listed stock.

Dean Courtney Brown: The amount of trading on the stock exchange is a very small part of the total value of all the securities that are listed there on; and when you say that the total amount of borrowing on margins financed by brokerage loans is only 1% of the value, it still is a reconcilable figure. You can't reconcile it unless you have the detailed data with you, but it isn't incompatible in any way.

Professor Benjamin Graham: I might add a point on that Dean Brown, and that is that the slow increase in brokers' loans as compared with 45% marginal trade would indicate that a good deal of the marginal trading is between people who were taking in each other's washing; that is the marginal buyers are buying from sellers who were previously on margin; and that's why the rate of growth of brokers' loans is so much smaller now than it had been in the 1920s, when I think a good deal of the selling had come from long-time owners and really smart people, who were selling out to the suckers!

Professor Graham and Dean Brown on Inflation

Student: I want to raise a point of argument here on this question of inflation. Seems to me that you're correct in stating that there's been no inflation in '54, but there also appears to be several long-term inflationary points in the economy today. These, I think, are the deficit spending that's supposed to be continued by the government. The easy money policy which is expected to continue. The question of increased union wages. The talk about increased minimum wage, and the talk about a guaranteed wage. All these and on top of this the road program of 101 billion dollars, which the government has just announced. These seem to me to be long-term inflationary things in the U.S economy, and I wish you'd talk about these.

Dean Courtney Brown: That's a question that has a good many angles on it. Perhaps we both better try it. Professor Graham, why don't you take the first try?

Professor Benjamin Graham: Well, I think there are two answers to that in my mind. The first is that acknowledging that there are inflationary elements in governmental policy as it's now being carried out. It may be argued that those are just necessary to keep things on an even keel, because without them we might have some inbuilt deflationary factors in the way business operates through increased productivity, capacity and so forth.

Dean Courtney Brown: I've been impressed with the possibility of labor costs as an inflationary factor. But a rise in wages does not necessarily mean a rise in labor costs. It depends upon the relationship of the rate of change in wages, and the rate of change in output per man hour or productivity. Now if wages are related to productivity, as you know they were in the General Motors contract, there is no necessary inflationary consequence to be anticipated. However, apart from that, it's entirely possible that if wages go ahead faster than changes in productivity, there could be a seriously inflationary factor.

Professor Graham on Dollar Cost Averaging (DCA)

Student: On the basis of your recent answer with regard to the psychological impact of the present condition of the market on the small investor, do you discount the entire theory of dollar averaging?

Professor Benjamin Graham: I think there's no doubt for this, accepting your premise that the man [who] will put the same amount of money in the market year after year for the next 20 years, let's say, has a great chance of coming out ahead regardless of when he begins, and particularly regardless if he should begin now. You have to allow for the human nature factor, that no man can really say definitely just how he's going to behave over the next 10 to 20 years; and there is danger that people start with the idea of being systematic investors over the next 10 to 20 years, and may change their attitude as the market fluctuates; in the first instance, put more money into the market because they become speculators; and secondly get disgusted and scared and don't buy at all later on when prices get low. It's a psychological danger. The fault is not in the stars or in the system, but in ourselves; I think.

Video