Benjamin Graham is known as the father of value investing and the author of classic investing books Security Analysis and The Intelligent Investor, in which he introduced the idea of Mr. Market. Graham was an adjunct professor at Columbia Business School for years and taught a class on investing that changed many of his students' lives. His most famous student, Warren Buffett, has made billions of dollars following Graham's ideas at his company Berkshire Hathaway.
Last Friday at the Columbia Student Investment Management Association conference, Columbia business school released a 15-minute video called "The Legacy of Ben Graham," which shows rare footage of Graham teaching, as well as interviews with some of his former students who went on to become great investors. It's well worth watching
Ben Graham starts the video off talking about volatility in the markets:
The explanation cannot be found in any mathematics, but it has to be found in investor psychology. You can have an extraordinary difference in the price level merely because not only speculators, but investors themselves, are looking at the situation through rose-colored glasses, rather than dark-blue glasses. It may well be true that the underlying psychology of the American people has not changed so much, and that what the American people have been waiting for for many years has been an excuse for going back to the speculative attitudes which used to characterize them from time to time. If history counts for anything, that the stock market is much more likely than not to advance to a point where a real danger exists.
With his point that volatility is explained by investor psychology and not by the math of actual business value, Graham could just as easily have been talking about today's markets. Just this past week, we have seen three moves up or down of roughly 1%. You can't argue that the value of Dow companies moved that much; it comes down to the price people are willing to pay for said companies on a given day. Lately the Dow Jones Industrial Average (DJINDICES:^DJI) is hitting five-year highs after being down 7,500 points to 6,500 just four years ago. It's not that businesses were worth half as much in March 2009 as they are today; it's just that investors were panicked about the market.
Graham understood that to be a successful investor, you need to ignore the volatility of the market and focus on the long-term trends in businesses' real value.