I recently read the cover story on seekingalpha.com (one of my favorite sites for more sophisticated analysis). In sum the story analyzes Jason Zweig's contention that Benjamin Graham (the author of value investing Bibles "The Intelligent Investor" and "Security Analysis") would not buy financial stocks. The article may be found here:
http://seekingalpha.com/article/87473-yes-financial-companies-can-
be-analyzed
The author, Tom Brown, argues (in my opinion, ineffectively) that Mr. Graham would invest in financials at the current levels. I posted a response to this article which I feel part of is worth sharing:
"I have a few points...
Second, I am currently reading "The Intelligent Investor" by Benjamin Graham with updated commentary by Jason Zweig and I have to say that thus far I have found Mr. Zweig to be very self-important (putting his contributions in capitals in the index of the book) and his contributions to be exhibiting an incomplete understanding of Mr. Graham's techniques and arguments (for a prime example, see his embarrassingly incomplete Michael Jordan analogy at the end of the third chapter).
I must admit that I have not had a lot of exposure to Mr. Zweig's work, and his resume is very impressive, so he must be worth his salt, but based on what I have seen I really do not feel that his analysis carries much weight.
Additionally I would tend to agree with the author of this article, to a limited extent. There are a very few financial institutions that I would be interested in investing in if I had a longer investment horizon (Goldman Sachs is the only one I would definitely invest in and sleep soundly holding), but also agree with Zweig. I feel that it really isn't possible to analyze how far the housing market is going to fall and how many credit-worthy people are going to be affected by this slump. As a result, it is very hard to tell how low various grades of investment securities will fall before they recover. With mark to market accounting, even if they will ultimately be written back up, a precipitous decline may force a financial institution to raise capital where it would not be necessary without such accounting practices. I was surprised by Amex saying that the current crisis was even affecting some of their "super-prime"... customers. To be perfectly honest, I don't feel that even sophisticated investors have the time nor the ability to value financial institutions. I feel that only the very best analysts can get a rough estimation of the true value of financial stocks, and oftentimes their compensation structure is such that we may not even get the true result of their analysis..."
Subscribe to:
Post Comments (Atom)
First, let me say, I appreciated your comments to my post on Seeking Alpha (also regarding Zweig).
I wrote two posts on Zweig’s column and found my way to your excellent blog through those comments.
Here are the posts:
http://www.gannononinvesting.com/2008/07/on_ben_graham_bank_stocks_and.html
http://www.gannononinvesting.com/2008/07/on_ben_graham_and_bank_stocks.html
I happen to agree with you on Zweig’s edition of the Intelligent Investor (Personally, I find his commentary entirely unhelpful; however, I know many people who liked it – to each his own). On the issue of evaluating financials, we’re probably closer than we appear. I think individual investors should generally eschew financials – or at least any attempts to analyze them. However, if they were to analyze financials, I think the Buffett or Brown approach makes more sense than the Graham approach (which isn’t surprising, consider Buffett and Brown like financials and Graham didn’t). Management matters in financial companies. Culture matters. A lot of “intangibles” matter.
However, I think saying that isn’t quite the same thing as saying (as Zweig does) that you can’t have a margin of safety in banks, because you just don’t know what the real estate is worth, you can’t evaluate the balance sheets, etc. Ignorance is what Graham’s entire method was based on.
Diversification is based on ignorance as well. If you could, for instance, find 20 fine-looking banks trading at 2/3 of book, you would have a margin of safety in that investment operation (even if not in any one individual position). That’s the kind of approach that would be true to Graham’s principles. The idea that to be true to Graham’s principles you have to steer clear of financials during the current “perfect storm” is absurd.
Graham invested in troubled times. He invested in very uncertain times. He didn’t, however, feel for example that if you couldn’t know where interest rates and the dollar were going, you couldn’t own bonds. He felt the prudent course would still be to own some bonds and to apply rigorous methods of selection to the securities selected – even though you might suffer from a declining dollar. He tended to think that consistently looking for your margin of safety at the micro (individual security issue) at all times in everything you did would protect you from major macro mistakes you might make (like, perhaps, being unprepared for further declines in real estate prices).
Again, thanks for your comments on Seeking Alpha.