Bell, Buffett, Graham and the markets
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The Deal’s Dealscape blog (http://thedeal.com/dealscape) delivers commentary and analysis for the dealmaking community. Some of Dealscape’s topic centers include
* Crisis on Wall Street, which examines the financial meltdown plaguing Wall Street and the world economy * Washington Ways & Means, which analyzes the politics of bailouts and regulations * Technology Deals & Dealmakers, which chronicles startup companies from launch to exit.
May 5, 2011 
In wandering the wilds of the Web recently, I stumbled across an interview on Utopian.org with the late Harvard sociologist Daniel Bell, who died in January at 92. Bell, of course, was the author of a number of important books, all with titles that have lasted longer than the arguments that shaped them: "The End of Ideology," "The Cultural Contradictions of Capitalism" and "The Coming of Post-Industrial Society." Bell was always a lively, even combative, raconteur, and this interview, a few months before he died, is worth reading in its entirety. But several answers by Bell sent me wandering down obscure biographical byways and odd intellectual confluences. It began when Bell offered a personal aside in a discussion of the financial crisis, including a few thoughts on Goldman, Sachs & Co. (very smart people who, he argues, failed to get the timing right and "got trapped"), when he suddenly veered to reminiscence: "I have a former father-in-law, through a previous marriage, who wanted me to come into the family business. His name is Benjamin Graham. Benjamin Graham, you probably know, was the founder of value analysis. He said: 'I have a bright young man here, named Warren Buffett. I'll pair you with Warren Buffett!' And I said, Ben, the problem is, I have no stomach for the 'timing,' and that's crucial in this business. Well, anyhow, I worked for Ben, and I made some money with it. I do understand the markets."
Bell, Graham, Buffett? You sense worlds colliding. Bell has a fascinating background, evocative of a particularly fertile time and place in American intellectual history. He was born and raised to Jewish immigrant parents on New York's Lower East Side -- his description of the tenement life is pungent, sad and funny. His father died when he was young, but he ended up like many of his peers at City College in the '30s arguing schismatic left politics in the famous cafeteria. He became a sociologist, an editor of intellectual journals (The New Leader and later, with Irving Kristol, The Public Interest), and he even he spent a decade -- 1948 to 1958 -- as the labor editor at, of all things, Henry Luce's Fortune magazine, which captures his reach as a public intellectual. (Fortune in those decades had employed a number of intellectuals: John Kenneth Galbraith, Peter Drucker, William Whyte and Bell. The times, not to say Time Inc. and the magazine business, were very different. )
How did Bell come into contact with Graham? Probably through his daughter, although given the varied circles of both men, it could be the other way around. Graham had long connections with Columbia University's Business School. He taught his famous advanced securities analysis course from 1928 to 1954. Bell had attended a year of post-graduate studies at Columbia in 1939, then taught there from 1959 to 1969. The much-married and peripatetic Graham wrote an eccentric and entertaining partial memoir, "The Memoirs of the Dean of Wall Street," that never mentions Bell, though it does make reference to "my second daughter [who] was to become Elaine Graham Bell, PhD, and later the wife of Cyril Sofer." Graham then wanders off to other subjects. Indeed, the memoir never reaches the '50s, when Buffett shows up at Columbia and becomes Graham's greatest student, then, in 1954, his employee at his investment firm Graham-Newman. (There is a chronology at the end that includes everything from "hires Buffett" to "falls in love with Malou" to, in 1959, "gives up tennis.")
A digression (we're wandering a bit like Graham) may suggest how Elaine Graham and Bell met. Both Bell and Elaine Graham were sociologists -- note that proud reference to "PhD." It is interesting that Graham fails to identify Bell, but implies we should all know Cyril Sofer. Who is Sofer? Well, he was a British organizational and management theorist -- that is, like Bell, a sociologist -- and author ("Men in Mid-Career: A Study of British Managers and Technical Specialists" and "Organizations in Theory and Practice") who taught at Cambridge University. Elaine Graham Bell, then Sofer, wrote about many of the ideas of David Riesman, whose "The Lonely Crowd" may have been the most famous sociological text of the '50s. Sofer's first wife, South African-born Rhona Sofer, was a sociologist and psychoanalyst who went on, after divorcing Sofer in the '50s, to marry cultural anthropologist Robert Rapoport. This was a little nest of social scientists operating in a kind of golden age of the discipline. It's likely then that Bell met Graham through his daughter. It's also probable that when Bell talks about Graham and Buffett it's taking place around 1954, when Buffett left Omaha to work for Graham and Bell was at Fortune.
What about Bell, Buffett and Graham? What did Bell do for Graham? More importantly, how would that troika have worked out? All three had, at one point or the other, pretensions to higher thought. Bell came closest: He got his start in radical '30s politics (although he negotiated ideological politics of the day with great skill, abandoning the Marxist left of his youth but avoiding the neoconservatism of Kristol and so many of his old colleagues: He famously claimed to be socialist in economics, liberal in politics and conservative in culture). He was, like so many of the postwar New York Jewish intellectuals, formidably conversant in a variety of fields. Graham viewed himself as a Renaissance figure, mastering not only value investing, but claiming to be the only person asked to teach in three departments, literature, philosophy and mathematics; he was also involved in the theater. As for Buffett, he raised Graham's theories to a kind of folk-philosophy, although he has never displayed the intellectual ambitions, or pretensions, of his mentor. An entire industry has grown up around Buffett to explain and extrapolate his ideas, not unlike that which surrounded the late management thinker Peter Drucker.
However, in the Utopian.org interview, Bell touches on issues that suggest he may have had deeper problems with Graham and Buffett than just "timing" and a career dedicated to making money. After all, Graham's notion of intrinsic value lies beyond the daily mutterings of Mr. Market. Intrinsic suggests that there is a sort of ideal value out there in any given corporate asset. Discover that, through the kind of hard, commonsensical analysis that Graham pioneered, and eventually the market would come around to recognize it. In a Graham world, you didn't need necessarily to time; you simply required rigorous analysis and patience; it's the Protestant work ethic of investing. Although Buffett operates in a far more complex way these days, he still preaches these Grahamian basics.
The Graham approach thus operates as if there's a causal link between the past and the future. Indeed, the future can be predicted by knowledge of the past that is the intrinsic value of the asset in question. (In the Buffett industry, this link between past and future takes on a moral quality: True value will reveal itself in time.) But Bell in the interview raises grave doubts about that link -- echoing ideas that economists have increasingly articulated. Bell was asked about whether he thought of himself, because his books dealt with broad social change, to be a "futurist." He dismissed the idea, laughing about a project he worked on in the late '90s designed to rebut Alvin Toffler of "Future Shock" (or as Bell quips, "Future Schlock") fame. Then he turned more serious:
"There are two problems with futurology. One is that no one can do prediction. Why? Because predictions are point events, and you never know the internal dynamics. I think of my erstwhile colleague Zbigniew Brzezinski, with whom I taught at Columbia. During a debate on television he was asked: 'Professor Brzezinski, are you a Kremlinologist?' And he said: 'Well, if you like, though it is an ugly word.' 'So you are someone who studies the Soviet Union? If so, Professor Brzezinski, how come you failed to predict the ouster of Khrushchev?' And Zbig said: 'Tell me: if Khrushchev couldn't predict his own ouster, how do you expect me to do it?!'
"So you can't predict. What you can do is deal with structural change. If you move from an agricultural to an industrial economy then there are obvious changes you have to make in the educational system, and various other places. That's why I make a distinction between prediction and forecasting. The other problem is that we weren't interested in the future, per se. We were interested in the fact that once you make a decision it becomes binding and lays out the lines for the next time period. If you build a city, and build it on a grid pattern, then it becomes a constraint on how you build in the future. Whether you build in a circular pattern or a grid pattern affects the lives of people in the future. So we're not only interested in forecasting the future, but in saying: let's pay attention to how we make decisions now, because they are going to affect our legacy in the future."
You can make too much of this, of course. Bell was a relatively young man in 1954; he developed his ideas about prediction and forecasting much later. Indeed, it's a parlor game to contemplate the new path Bell might have launched himself upon had he taken up Graham's offer; maybe he could have been Charlie Munger. At the same time, Bell inadvertently puts his finger on one of the underlying weaknesses of the Graham-Buffett approach: That is, to make value investing work effectively, as both men have (joined by relatively few others), you need to do a lot more than calculate intrinsic values; you have to be a forecaster of genius, working through a vast number of factors that will shape and reshape that intrinsic value as time weaves its wayward, perhaps even its random, path. (This is one reason that Buffett stays away from high-tech plays: Innovation may be the hardest phenomenon to predict.)
This takes us to a current debate that's slowly unfolding in economics, one captured in a book on my reading pile by NYU economist Roman Frydman and the University of New Hampshire's Michael D. Goldberg: "Beyond Mechanical Markets: Asset Price Swings, Risk, and the Role of the State." The pair argues that economies are shot through by "nonroutine" events that cannot simply be banished by rational or behavioral models. This is oversimplifying, but a key conclusion they draw is that modern macroeconomics, not just the efficient-market school but the New Keynesians as well, is based on a powerful belief in mechanical causality that, given the inescapable human element of economics, rarely turns out as predicted. Others such as Tufts' Amar Bhidé in "A Call for Judgment" which we reviewed here, have made similar arguments about the mechanization of financial judgment, though coming from very different angles.
This is a long way from a partnership between the three men -- a sociologist and two investing geniuses -- that never came to pass. But it does suggest that Bell was right about one thing. He knew something about the markets. And what he knew may well be worth revisiting. - Robert Teitelman
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
In wandering the wilds of the Web recently, I stumbled across an interview on Utopian.org with the late Harvard sociologist Daniel Bell, who died in January at 92. Bell, of course, was the author of a number of important books, all with titles that have lasted longer than the arguments that shaped them: "The End of Ideology," "The Cultural Contradictions of Capitalism" and "The Coming of Post-Industrial Society." Bell was always a lively, even combative, raconteur, and this interview, a few months before he died, is worth reading in its entirety. But several answers by Bell sent me wandering down obscure biographical byways and odd intellectual confluences. It began when Bell offered a personal aside in a discussion of the financial crisis, including a few thoughts on Goldman, Sachs & Co. (very smart people who, he argues, failed to get the timing right and "got trapped"), when he suddenly veered to reminiscence: "I have a former father-in-law, through a previous marriage, who wanted me to come into the family business. His name is Benjamin Graham. Benjamin Graham, you probably know, was the founder of value analysis. He said: 'I have a bright young man here, named Warren Buffett. I'll pair you with Warren Buffett!' And I said, Ben, the problem is, I have no stomach for the 'timing,' and that's crucial in this business. Well, anyhow, I worked for Ben, and I made some money with it. I do understand the markets."Bell, Graham, Buffett? You sense worlds colliding. Bell has a fascinating background, evocative of a particularly fertile time and place in American intellectual history. He was born and raised to Jewish immigrant parents on New York's Lower East Side -- his description of the tenement life is pungent, sad and funny. His father died when he was young, but he ended up like many of his peers at City College in the '30s arguing schismatic left politics in the famous cafeteria. He became a sociologist, an editor of intellectual journals (The New Leader and later, with Irving Kristol, The Public Interest), and he even he spent a decade -- 1948 to 1958 -- as the labor editor at, of all things, Henry Luce's Fortune magazine, which captures his reach as a public intellectual. (Fortune in those decades had employed a number of intellectuals: John Kenneth Galbraith, Peter Drucker, William Whyte and Bell. The times, not to say Time Inc. and the magazine business, were very different. )
How did Bell come into contact with Graham? Probably through his daughter, although given the varied circles of both men, it could be the other way around. Graham had long connections with Columbia University's Business School. He taught his famous advanced securities analysis course from 1928 to 1954. Bell had attended a year of post-graduate studies at Columbia in 1939, then taught there from 1959 to 1969. The much-married and peripatetic Graham wrote an eccentric and entertaining partial memoir, "The Memoirs of the Dean of Wall Street," that never mentions Bell, though it does make reference to "my second daughter [who] was to become Elaine Graham Bell, PhD, and later the wife of Cyril Sofer." Graham then wanders off to other subjects. Indeed, the memoir never reaches the '50s, when Buffett shows up at Columbia and becomes Graham's greatest student, then, in 1954, his employee at his investment firm Graham-Newman. (There is a chronology at the end that includes everything from "hires Buffett" to "falls in love with Malou" to, in 1959, "gives up tennis.")
A digression (we're wandering a bit like Graham) may suggest how Elaine Graham and Bell met. Both Bell and Elaine Graham were sociologists -- note that proud reference to "PhD." It is interesting that Graham fails to identify Bell, but implies we should all know Cyril Sofer. Who is Sofer? Well, he was a British organizational and management theorist -- that is, like Bell, a sociologist -- and author ("Men in Mid-Career: A Study of British Managers and Technical Specialists" and "Organizations in Theory and Practice") who taught at Cambridge University. Elaine Graham Bell, then Sofer, wrote about many of the ideas of David Riesman, whose "The Lonely Crowd" may have been the most famous sociological text of the '50s. Sofer's first wife, South African-born Rhona Sofer, was a sociologist and psychoanalyst who went on, after divorcing Sofer in the '50s, to marry cultural anthropologist Robert Rapoport. This was a little nest of social scientists operating in a kind of golden age of the discipline. It's likely then that Bell met Graham through his daughter. It's also probable that when Bell talks about Graham and Buffett it's taking place around 1954, when Buffett left Omaha to work for Graham and Bell was at Fortune.
What about Bell, Buffett and Graham? What did Bell do for Graham? More importantly, how would that troika have worked out? All three had, at one point or the other, pretensions to higher thought. Bell came closest: He got his start in radical '30s politics (although he negotiated ideological politics of the day with great skill, abandoning the Marxist left of his youth but avoiding the neoconservatism of Kristol and so many of his old colleagues: He famously claimed to be socialist in economics, liberal in politics and conservative in culture). He was, like so many of the postwar New York Jewish intellectuals, formidably conversant in a variety of fields. Graham viewed himself as a Renaissance figure, mastering not only value investing, but claiming to be the only person asked to teach in three departments, literature, philosophy and mathematics; he was also involved in the theater. As for Buffett, he raised Graham's theories to a kind of folk-philosophy, although he has never displayed the intellectual ambitions, or pretensions, of his mentor. An entire industry has grown up around Buffett to explain and extrapolate his ideas, not unlike that which surrounded the late management thinker Peter Drucker.
However, in the Utopian.org interview, Bell touches on issues that suggest he may have had deeper problems with Graham and Buffett than just "timing" and a career dedicated to making money. After all, Graham's notion of intrinsic value lies beyond the daily mutterings of Mr. Market. Intrinsic suggests that there is a sort of ideal value out there in any given corporate asset. Discover that, through the kind of hard, commonsensical analysis that Graham pioneered, and eventually the market would come around to recognize it. In a Graham world, you didn't need necessarily to time; you simply required rigorous analysis and patience; it's the Protestant work ethic of investing. Although Buffett operates in a far more complex way these days, he still preaches these Grahamian basics.
The Graham approach thus operates as if there's a causal link between the past and the future. Indeed, the future can be predicted by knowledge of the past that is the intrinsic value of the asset in question. (In the Buffett industry, this link between past and future takes on a moral quality: True value will reveal itself in time.) But Bell in the interview raises grave doubts about that link -- echoing ideas that economists have increasingly articulated. Bell was asked about whether he thought of himself, because his books dealt with broad social change, to be a "futurist." He dismissed the idea, laughing about a project he worked on in the late '90s designed to rebut Alvin Toffler of "Future Shock" (or as Bell quips, "Future Schlock") fame. Then he turned more serious:
"There are two problems with futurology. One is that no one can do prediction. Why? Because predictions are point events, and you never know the internal dynamics. I think of my erstwhile colleague Zbigniew Brzezinski, with whom I taught at Columbia. During a debate on television he was asked: 'Professor Brzezinski, are you a Kremlinologist?' And he said: 'Well, if you like, though it is an ugly word.' 'So you are someone who studies the Soviet Union? If so, Professor Brzezinski, how come you failed to predict the ouster of Khrushchev?' And Zbig said: 'Tell me: if Khrushchev couldn't predict his own ouster, how do you expect me to do it?!'
"So you can't predict. What you can do is deal with structural change. If you move from an agricultural to an industrial economy then there are obvious changes you have to make in the educational system, and various other places. That's why I make a distinction between prediction and forecasting. The other problem is that we weren't interested in the future, per se. We were interested in the fact that once you make a decision it becomes binding and lays out the lines for the next time period. If you build a city, and build it on a grid pattern, then it becomes a constraint on how you build in the future. Whether you build in a circular pattern or a grid pattern affects the lives of people in the future. So we're not only interested in forecasting the future, but in saying: let's pay attention to how we make decisions now, because they are going to affect our legacy in the future."
You can make too much of this, of course. Bell was a relatively young man in 1954; he developed his ideas about prediction and forecasting much later. Indeed, it's a parlor game to contemplate the new path Bell might have launched himself upon had he taken up Graham's offer; maybe he could have been Charlie Munger. At the same time, Bell inadvertently puts his finger on one of the underlying weaknesses of the Graham-Buffett approach: That is, to make value investing work effectively, as both men have (joined by relatively few others), you need to do a lot more than calculate intrinsic values; you have to be a forecaster of genius, working through a vast number of factors that will shape and reshape that intrinsic value as time weaves its wayward, perhaps even its random, path. (This is one reason that Buffett stays away from high-tech plays: Innovation may be the hardest phenomenon to predict.)
This takes us to a current debate that's slowly unfolding in economics, one captured in a book on my reading pile by NYU economist Roman Frydman and the University of New Hampshire's Michael D. Goldberg: "Beyond Mechanical Markets: Asset Price Swings, Risk, and the Role of the State." The pair argues that economies are shot through by "nonroutine" events that cannot simply be banished by rational or behavioral models. This is oversimplifying, but a key conclusion they draw is that modern macroeconomics, not just the efficient-market school but the New Keynesians as well, is based on a powerful belief in mechanical causality that, given the inescapable human element of economics, rarely turns out as predicted. Others such as Tufts' Amar Bhidé in "A Call for Judgment" which we reviewed here, have made similar arguments about the mechanization of financial judgment, though coming from very different angles.
This is a long way from a partnership between the three men -- a sociologist and two investing geniuses -- that never came to pass. But it does suggest that Bell was right about one thing. He knew something about the markets. And what he knew may well be worth revisiting. - Robert Teitelman
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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