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History of Value Investing
“Value Investing” was developed in the 1920s at Columbia Business School by finance adjunct Benjamin Graham (1894-1976) and finance professor David Dodd MS ’21 (1885-1988). The professors were co-authors of the classic text, Security Analysis (1934) and are regarded as the field’s pioneers.
Graham believed that the true value of a stock could be determined through research. He worked with Dodd to develop value investing - a methodology to identify and buy securities priced well below their true value. Graham and Dodd’s security analysis principles provided a rational basis for investment decisions.
According to a financial observer, Gisli Eyland, who has written about the value investing philosophy, Graham and Dodd “described a fundamentally different approach to stock picking and investing in corporate securities by proposing that the investor should refrain from trying to anticipate price movements entirely. Instead, the investor should try to estimate the true Intrinsic Value of the underlying asset. Given time, the Intrinsic Value and market value would converge.”
The techniques described in Security Analysis (and Intelligent Investor) are from the point of view of an outside minority shareholder in public stocks. So, although individuals such as Warren Buffett MS ’51 and Mario Gabelli ’67, are more concentrated, controlled and/or activist than Graham and Dodd, they are still considered “value investors.”
Value investing in Graham and Dodd’s time emphasized four ideas, summarized by Eyeland.
Intrinsic Value - any corporate security has an Intrinsic Value or value which is justified by facts (assets, earnings, dividends and prospects).
Margin of Safety - the lower the price of the security relative to its intrinsic value, the higher the Margin of Safety is.
Mr. Market - you should view market prices as if being in business with a manic-depressive partner. Repeatedly your partner offers to either sell or buy shares at prices strongly linked with his mental state at each time, ranging everywhere from highly pessimistic to wildly optimistic.
Diversification - for risk management purposes you should carry at least 40 different stocks at each time.
Graham and Dodd began teaching a reason-based approach at Columbia Business School in 1928. For many years, they continually revised their methodology and their courses. Graham taught to both Columbia and UCLA students and to Wall Street professionals as well. Dodd retired in 1961 and Graham in 1965.
Warren Buffett ’51
“Superinvestor” Warren E. Buffett, who got an A+ from Ben Graham at Columbia in 1951, never stopped making the grade. He made his fortune using the principles of Graham and Dodd's Security Analysis. He has been CEO of Berkshire Hathaway Inc. a U.S. multinational conglomerate holding company, with a market capitalization of more than $323 Billion (July 2019.) It is headquartered in Omaha, Nebraska. He owns 30.71% of the aggregate voting power and 16.45% of the economic interest (July 2019.)
In 2017, when asked by Former Dean and Finance professor Glenn Hubbard about the “biggest lessons” he has learned about investing, Warren Buffett said “The best lessons are the ones I learned at Columbia. I went there because Ben Graham taught there and I think his advice was timeless…. The lessons are simple, but powerful….What I learned at 19 or 20 from him, I applied ever since.”
The 1960s, 1970s and 1980s
The course was subsequently taught by Graham and Dodd’s successor Roger F. Murray (1911-1998), who edited several editions of Security Analysis. He had been a vice president of the Bankers Trust Company before coming to Columbia Business School; according to the New York Times, “Mr. Murray helped untangle some of America's most frustrating problems. In 1962, Mr. Murray, an originator of the individual retirement account concept, worked for passage of the Keogh Act, which enabled self-employed people to have tax-deferred pension accounts.”
Although the class was temporarily suspended when Murray retired in 1978, value investing was vigorously practiced by generations of investors who had studied with Dodd, Graham or Murray throughout several decades. Some became legends in investment management, including Warren Buffett MS ’51, Mario Gabelli ’67, Glenn Greenberg ’73, Charles Royce ’63, Walter Schloss, and John Shapiro ’78.
Despite the vast and volatile changes in the economy and securities markets during the last several decades, value investing has proven to be the most successful money management strategy ever developed. Value investors’ success over the second half of the twentieth century proved not only the validity of the value approach, but its preeminence over even the most widely taught and practiced modern investment theory, which was developed in the 1950s and ’60s and remains dominant even today.
Reinvigorating value investing starting in the 1990s
In the early ’90s, Columbia Business School reinvigorated the investment management curriculum. At the request of Mario Gabelli, Roger Murray gave a highly successful series of guest lectures, and the Columbia Business School subsequently reintroduced value investing into the finance curriculum. The Robert Heilbrunn Professor of Finance and Asset Management was established, and Bruce C. Greenwald, was appointed to the position in 1991. He became an Emeritus Professor in July, 2019.
The Heilbrunn Center for Graham & Dodd Investing was established in 2001, ensuring a permanent home for value investing at Columbia Business School.
The young Robert Heilbrunn enrolled in Graham’s course as a nondegree student and became a practitioner of the value approach. During the Great Depression, Heilbrunn said that Graham’s wisdom allowed him to manage the family’s assets, and he was thereafter a lifelong disciple. When Robert and Harriet Heilbrunn established the Robert Heilbrunn Professorship of Finance and Asset Management, the professorship heralded a renaissance of the value tradition at Columbia Business School. In 2001, the Heilbrunn Center for Graham & Dodd Investing was established by the Heilbrunn family, among the foremost advocates of the value investing program at Columbia Business School, ensuring the permanency of the investing franchise at the School.
With unmatched access to Wall Street, renowned finance and accounting divisions, and the resources of the Heilbrunn Center, Columbia Business School offers an unparalleled program in investing for MBA students and through Executive Education.