I admit, the first time I read chapter 18 I wasn’t a huge fan. It is a chapter which Graham selects 8 pairs of companies that appear next to each other on the stock-exchange list in an effort to display “the many varieties of character, financial structure, policies, performance, and vicissitudes of corporate enterprises, and of the investment and speculative attitude found on the financial scene.” It’s not that the aim of the chapter is not worthwhile, it’s just that for the modern reader sometimes it can be hard to “care” about 16 companies of which only 4 of the original tickers still are around today.
However, if you follow the stories of these companies over the years subsequent to Graham’s writings you can find many corporate twists of fates and perhaps it is a reminder that a company no longer trading under its own symbol does not mean the company went out of business.
If you want to, you can use these 8 paired companies as a way to evaluate Graham’s investment philosophy. If you, or your favorite AI, follow the 55 years since Graham reviewed these companies, you will find that:
Graham’s “margin of safety” proved wise
Paying a premium for a superior growth company can be dangerous, though if that company truly was superior and your long-term is long enough, it can still be a winner (contrary to Graham’s philosophy).
And in general it is complicated to evaluate the Graham’s investing scorecard in hindsight
Rather than me trying to explain the points here, we’ll turn to Zweig, as he is masterful in distilling the lesson embedded in the chapter.
Commenting on Commentary on Chapter 18
The core message that Zweig distills is that there are good companies and bad companies, but there is no such thing as a permanently "good stock." Stock prices fluctuate, there are times stocks are a bargain and times they are expensive. Ultimately the relationship between a stock’s price and its underlying business value matters.
“As Graham liked to say, in the short run the market is a voting machine, but in the long run it is a weighing machine.”
The lesson is that you should know whether you are buying the business or buying a story about the business. It is the difference between investing and speculating, it is the difference in trying to identify businesses whose value is increasing versus those whose price or social velocity is going up.
What is also interesting here is that while Graham displays that he is a master at identifying and limiting downside risks, his “margin of safety”, there may be a cost to that approach and that comes in the form of occasionally missing out on some companies that are truly great compounders.
Again it is a reminder that while the price you pay for a business definitely matters, the answer is not necessarily that you should buy “cheap companies”. It is the evolution of Buffett’s cigar butt investing to buying wonderful businesses at reasonable prices.
When you look back at companies over horizons like 25 years or 50 years, you see that a lot can happen, both to the company’s actual business and to its share price. From that lens you can see that a defining characteristic of Graham’s investing is one that you see in various forms from other great investors and that characteristic is survival. No one is going to be right about every investment and sometimes “right” might not show up in the share price for a long time, but one thing will likely always be true and that is to be wrong in the ways that you can survive.
“The thing that hath been, it is that which shall be; and that which is done is that which shall be done; and there is no new thing under the sun. Is there any thing whereof it may be said, See, this is new? It hath been already of old time, which was before us.”
Ecclesiastes, I: 9-10
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