There’s no need to be embarrassed ever again. You can now bluff it with the best of them, thanks to IFA Magazine’s monthly crib-sheet on all the great theorists.

Benjamin Graham Born 1894 in London, died 1976 in Aix-en-Provence (France)

Big idea? Best known as the inventor of an investment style known as value investing, Graham became famous with his Security Analysis (1934), in which he and his co-author David Dodd declared that the price of a security would always follow its dividends, its earnings and its book value in the long term. And that relying instead on conventional fundamental market analysis was likely to produce disappointment.

Graham believed that any investor could pick up bargains for the long term if he only had the self-discipline to wait until quality high-dividend stocks became irrationally cheap. Using these disarmingly simple principles, Graham became a multi-millionaire during the Great Depression. But even these achievements were later to be eclipsed by his most illustrious pupil, Warren Buffett, whose wildly profitable purchase of Coca-Cola at its unfashionable nadir ‘wrote the book’ on value investing.

Career path? Although born in Britain, Graham emigrated as a child to New York where he stayed for most of his life. Oddly, his first degree at the age of only 20 was in philosophy, Greek and mathematics. (He dropped economics.) But, refusing offers of academic jobs in the arts, Graham started an investment fund with Jerome Newman, which he was to run until the late 1950s. But it was his books, most notably Security Analysis and The Intelligent Investor (1949), which were eventually to bring him fame.

Analysis is for Losers Graham was convinced that clever market analysis was unlikely to bring long-term gain, because it was nearly impossible to beat the market. Instead, he said, an investor should build a long-term portfolio of solid dividend performers. He hated fashionable stocks, preferring branded goods with long pedigrees. You should choose stocks “the way you would buy groceries, not the way you would buy perfume.”

Introducing Mr Market Graham illustrated his point by creating a fictional character called Mr Market, who would knock at his door every day offering stocks at largely random prices. The wise investor, he said, would turn Mr Market away every day until the price was cheap enough. But he would never waste his time wondering how Mr Market arrived at those prices. Mr Market, for his part, would never take a refusal personally, but would just walk away.

This rather silly parable conceals a much harder truth. Graham was fundamentally rejecting the popular idea that markets are efficient. It’s a myth, he said, that the market has always ‘priced in’ every likely factor when weighing up a stock. If you wait long enough, the market’s folly will make you rich.

So who disagrees? The Mr Market principle has recently been challenged by analysts who assert that better technology, shorting and derivatives trading have all combined to reduce the market’s scope for pricing errors. The proponents of so-called ‘Modern Portfolio Theory’ also claim that Graham was more right than he knew when he said the market was nearly impossible to beat. Not even a value investor can beat the maths reliably, they say.

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