What Would Ben Graham Do?
How would the "father of value" have viewed the global investment landscape of the 21st century?
What would Ben Graham—the father of value investing, author of the classic text The Intelligent Investor, and coauthor with David Dodd of Security Analysis—have thought of the 21st century? Could he have imagined the rapid rise of China, India, Brazil, and Russia? What would he have thought of an investment world that included autocratic governments, limited (or absent) legal and regulatory structures, and odd kinds of company ownership (public, private, government, quasi-government)? What would Graham have thought about investing in a state capitalist system like Russia?
At the start of the 21st century, it is startling to see how far the world has moved from the investment landscape in which Graham invested and taught. The increasing collision of developed and developing markets has created a very new and different terrain.
On one side, half of the human population is rapidly rising, creating new markets for both business and investment. We see thousands of companies emerging in non-Western markets, offering investment opportunities and changing the competitive dynamic for Western companies. These markets, socioeconomic systems, and companies are clearly different from their developed counterparts. Yes, China and India have billions of new customers for products and services, but the average gross domestic product (GDP) per capita is around $2,000. Yes, China has the world's largest mobile company, but it is state-controlled. Yes, there are thousands of new small family businesses to invest in, but there is no consistent rule of law to protect the investor.
On the other side, developed markets and companies are changing in response. Traditional value investing targets such as Coca-Cola and Sees Candies now have both customers and competitors in Asia and Eastern Europe. Is Coke's competitive advantage sustainable in Russia?
Could Graham have imagined the collision of these worlds? Brazilian capital is starting to enter the U.S. at the same time that all foreign capital is trying to exit Dubai. Filipino labor is entering the Middle East while American companies are opening call centers in Manila. American-owned casinos are opening in Macau to serve a flood of Chinese gamblers (often using black-market consumer loans) while reporting to the Nevada gaming authorities but being indirectly controlled by Beijing. Such investment situations would have been unimaginable just 20 years ago. Could Graham have imagined that the world's richest person would make his fortune in Mexico? Or that one day Warren Buffett, his greatest student, would buy PetroChina, a state-owned oil giant under the direction of the Chinese politburo?
More important, how would he have thought about "value" in a global age?
It has been 76 years since Graham published Security Analysis, laying the foundation for an investment methodology and mindset based on fundamental value. But Graham and most of his disciples' approach cannot be separated from the economic and historical circumstances under which it was developed and used. Even the best of thinkers are captives to their experiences and environments. What would value investing have become if Graham had invented it not in America in the 1930s but in China in 2010? What if his investing experience was not in moderately regulated free markets but in state capitalist systems with gray regulations, shifting laws, and active government involvement? Would he have spoken of Mr. Market or Mr. Government? Are we sure Mr. Market still returns to intrinsic value in Russia?
What would value investing have become if Graham had invented it in Singapore or Dubai? In these environments, skilled investors operate agnostically between these small city-state economies, the nearby autocratic systems of China and Russia, the chaotic developing markets of India and Latin America, and the developed markets of the U.S. and Europe. Would U.S. equities still have constituted most of his portfolio?
How much of what we refer to as value investing has been shaped by the American experience and not by the value principles themselves? And what is the best value-based methodology going forward into the first global century? Are we really targeting the best value opportunities in a rapidly changing environment? Or are we simply holding on to what we know as the ground moves beneath our feet?