Dynamic Asset Allocation Modern Portfolio Theory Updated for the Smart Investor

Chapter 1. In the Beginning ...

At the dawn of the early twentieth century, investing was still more art than science and financial analysis wasn't quite worthy of its label. No one warned young Ben Graham of this sorry state of affairs when he secured a job on Wall Street just before World War I. As he soon learned, the financial industry of 1914 couldn't teach him what it didn't yet know.

Launching his career at Newburger, Henderson & Loeb at the tender age of twenty, the freshly minted Columbia graduate quickly discovered the most important piece of contemporary knowledge in high finance: success in the investment game, as commonly practiced at the time, had more to do with personal connections and inside information than brainpower and a talent for securities research. Determined to break with tradition, Graham intended to excel with his skills as an analyst.

His was an ambitious strategy for its day, which is to say a rarely used strategy in the matter of equity investing in the World War I era. Quantitatively driven illumination was far ahead of its time in the preregulatory age of money management, when the supply of reliable corporate information was scarce if not wholly unavailable. But the absence of relevant data opened doors. As Graham discovered, business as usual on Wall Street fostered opportunity in stock pricing—opportunity that he eventually learned to exploit.

Graham's brand of analysis was one of the first serious attempts at forging investment order out of the ...