Benjamin Graham on the Average Anvestor vs Large Funds
In 1974, Benjamin Graham said the following in an article entitled "Renaissance of Value", on the topic of competing with large, institutional funds which bid up the prices on common, speculative stocks. Towards the end of the quote he mentions selling stocks to put into treasury bonds when the analyst thinks the market is too high. This idea sounds like timing the market which would go against the main message given to investors today because the average investor has been told that they would do well not to time the market. The saying goes that "time in the market is better than timing the market". In his book "The Intelligent Investor" Benjamin Graham makes a subtle distinction between timing the market and pricing the market. He said the latter was slightly more intelligent than the former. The basic tenant of investing, accoring to him, was that return of capital comes before return on capital. I am also skeptical of most messages coming from institutional funds themselves that promote not selling their funds.
First, what should a conservative analyst have done in the heady area and era of high-growth, high-multiplier companies? I must say mournfully that he would have to do the near-impossible-namely, turn his back on them and let them alone. The institutions themselves had gradually transformed these investment-type companies into speculative stocks. I repeat that the ordinary analyst cannot expect long-term satisfactory results in the field of speculative issues, whether they are speculative by the company's circumstances or by the high price levels at which they habitually sell.
My second implication is a positive one for the investing public and for the analyst who may advise a non-institutional clientele. We have many complaints that institutional dominance of the stock market has put the small investor at a disadvantage because he can't compete with the trust companies' huge resources, etc. The facts are quite the opposite. It may be that the institutions are better equipped than the individual to speculate in the market; I'm not competent to pass judgment on that. But I am convinced that an individual investor with sound principles, and soundly advised, can do distinctly better over the long pull than a large institution. Where the trust company may have to confine its operations to 300 concerns or less, the individual has up to 3,000 issues for his investigations and choice. Most true bargains are not available in large blocks; by this very fact the institutions are well-nigh eliminated as competitors of the bargain hunter. Assuming all this is true, we must revert to the question we raised at the outset. How many financial analysts can earn a good living by locating undervalued issues and recommending them to individual investors? In all honesty I cannot say that there is room for 13,000 analysts, or a large proportion thereof, in this area of activity. But I can assert that the influx of analysts into the undervalued sphere in the past has never been so great as to cut down its profit possibilities through that kind of over cultivation and over-competition. (The value analyst was more likely to suffer from loneliness.) True, bargain issues have repeatedly become scarce in bull markets, but that was not because all the analysts became value-conscious but because of the general upswing in prices. (Perhaps one could even have determined whether the market level was getting too high or too low by counting the number of issues selling below working-capital value. When such opportunities have virtually disappeared, past experience indicates that investors should have taken themselves out of the stock market and plunged up to their necks in U.S. Treasury bills.)