Chapter 1

Tarnished Gems: Value Investing

Warren Buffett is the modern-day heir of Benjamin Graham. Buffett knew Graham and his thinking very well: he took Graham’s fabled class at Columbia University. Later, Buffett worked at Graham’s Wall Street firm, Graham-Newman. He has eclipsed his mentor in one respect: Buffett has his own idolatrous sobriquet, the Sage of Omaha (he went back to his native Nebraska after tiring of New York). Graham is not so lucky. Some have called him the Father of Security Analysis, but that one never caught on.

The discipline of value investing has changed since Graham’s time. Buffett learned from the master, then went on to refine his teachings to suit the current, more complex era. And while Buffett, like Graham, was never one to follow fads, he became one of the world’s richest people by keeping an ear to the ground and adjusting his methods. Graham, although well off, never achieved Buffett’s stellar wealth. Since Buffett is still alive and ultra-rich, he has replaced Graham as value investors’ role model.

The financial world Graham worked in, from the end of World War I through the mid-1950s, was a simpler place. The upheaval of the Great Depression aside, capital markets were rather staid during his career, at least in terms of how they operated. Institutions and rich people bought and sold most of the stocks and bonds. Brokerage commissions were fixed. Except during the occasional panic, trading activity was at a genteel pace. Buffett’s long ...

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