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"Benjamin Graham’s teachings have stood the test of time. Joe Carlen is wise to recognize this and direct his attention and ours to my mentor’s teachings and life story."
-IRVING KAHN, CFA, chairman of Kahn Brothers Group, Inc.
"This well-researched book has some wonderful additional personal items about the father of value investing. It also includes a good discussion of the important basic principles of investing as put forth by Benjamin Graham."
-CHARLES H. BRANDES, chairman, Brandes Investment Partners, LP
"I am heartened by Joe Carlen’s book about my namesake, Benjamin Graham. It reminds me that one cannot be an ‘intelligent investor’ without understanding Graham’s work."
-THOMAS GRAHAM KAHN, CFA, president of Kahn Brothers Group, Inc.
Benjamin Grossbaum was born in London, England, in 1894, toward the end of the reign of Queen Victoria. Grossbaum was his legal surname until his family "Americanized" it to Graham roughly twenty-three years later (for the sake of clarity and consistency, our subject will generally be referred to as Graham throughout the book). His father, Isaac, was born in Britain and was proud of his British upbringing (a pride that, apparently, was never diminished by the family's subsequent emigration to the United States) while his mother, Dora, originated from Poland. Isaac Grossbaum, along with his five brothers and his father, Bernard, owned and operated a business that imported china, bric-a-brac, and related merchandise from Austria and Germany to the United Kingdom. The Grossbaums were able and industrious merchants, Isaac being especially gifted in this regard. The Grossbaum family was also strictly orthodox in its practice of the Jewish faith.
Isaac was one of eleven children. Among the devoutly religious (Jewish or otherwise), such large families were (and are) not unusual. What was somewhat unusual, even in an orthodox context, was the extent of discipline that Isaac's father imposed upon his children. Because he was so fearful of any "ungodly" influence, he enforced a draconian code of conduct upon his household so severe as to prohibit such "sinful debauchery" as whistling! According to his memoirs, Graham recalls his paternal grandfather, nicknamed "Old Grossbaum," in fairly stark terms: "A man with a square, expansive, grey-black beard, a skull cap, a severe expression, and a fanatical gleam in his eyes." However, considering that Benjamin grew up in a home where he was exposed to French lessons and other secular/ non-Jewish activities, it seems that, while officially orthodox (at least while Isaac was still alive), the family Graham was born into was somewhat less pious than that of Bernard Grossbaum.
Moreover, despite being a young and presumably fertile couple, Isaac and Dora had quite a number of childless years between Benjamin's birth and Isaac's death. Such a gap is rare among the most pious practitioners of Orthodox Judaism. As Graham writes in his memoirs, "Out of delicacy or a lack of the inquisitive sense, I never asked mother how it came about that there were none after me." Regarding Benjamin's mother, Dora, her family was also comprised of highly devout Orthodox Jews. This family was known as the Gesundheits. Graham recalls his maternal grandfather as a "stout, jovial man with a white beard," and Grandmother Gesundheit as a "stout, emotional, and domineering lady." Of course, the hilarity of the Gesundheit name did not go unnoticed, and there were many who couldn't quite hold in their laughter after verifying that the Gesundheits were not kidding and it really was their family name. As Graham recounted several decades later in his memoirs, Gesundheit "was a name which was the cause of much amusement for others and embarrassment to us." Not surprisingly, circumstance and common sense intervened to ensure that the name would not last long in the New World. Graham's cousins, who immigrated to America, would eventually change their surname from Gesundheit to Gerard ("for the children's sake," as one of the surviving Gerards recounted to me). However, behind the amusing name was an intellectual lineage that was anything but laughable.
Graham's maternal great-grandfather was a celebrated religious scholar in nineteenth-century Poland and even served as chief rabbi of Warsaw for several years. At the time, that was among the most prestigious positions anywhere for an observant Jew. One had to be extremely learned in many different areas to become a chief rabbi of any Jewish community, let alone what was, by a significant margin, the largest Jewish community in the world at that time (comprising somewhere between 30 and 40 percent of the Polish capital's total population). Indeed, from a nineteenth-century Jewish perspective, such a position was almost comparable to the papacy for Polish (and other) Catholics of that era. So it would be difficult to understate the stature of such an honored post and the level of both respect and trust that the world's largest Jewish community must have had for Graham's great-grandfather.
Not surprisingly, there is an entry for Graham's maternal grandfather, Jacob Ben Isaac Gesundheit (1815–1878) in the Jewish Encyclopedia. Despite the fact that he died long before Graham was born, the entry for Mr. Gesundheit reveals three remarkable parallels between the two men: Jacob was a noted scholar in his field (Jewish law and religion) and wrote a number of works that were "very highly esteemed by Talmudical scholars of eastern Europe." Apparently, he was also an enthusiastic teacher, having led a yeshiva (a Jewish seminary) in Warsaw for forty-two years. Last, although he was a devoted religious scholar (and, one presumes, an observant Jew), as chief rabbi, he apparently held views on some religious matters that were considered to be excessively liberal by some of the more pious members of his community. This created a stir that ultimately led to his loss of that prestigious post.
Revealing another, almost eerie, similarity to his great-grandson Benjamin, whose memoirs remained both unpublished and incomplete when he died, the Jewish Encyclopedia entry notes that Jacob "left several works in manuscript." As will be elaborated in subsequent chapters, Graham, like Jacob Gesundheit, also became known for highly esteemed scholarly written works and many years of teaching in his field of investment finance (thirty-seven years, to be precise). And, of course, he used both the typewriter and the classroom lectern to communicate an investment philosophy that, relative to the accepted "wisdom" of Wall Street at the time, was entirely unconventional. So it seems that thinking outside of the mainstream and being willing to espouse unorthodox views had some relatively recent precedent in the Gesundheit branch of Graham's family tree.
Rhoda Sarnat, the daughter of Maurice Gesundheit/Gerard (Rhoda Gesundheit's brother), had extensive contact with Graham throughout much of his life. I interviewed her and her late husband, Dr. Bernard Sarnat (who, prior to his retirement, was a plastic surgeon of some renown), just a few months prior to the latter's passing. Having studied the family tree in some detail, both of them expressed to me that they saw a link between the Gesundheits' intellectualism and Graham's exemplary success in a highly analytical field. In a recent biography of Dr. Sarnat, the illustrious genealogy of the doctor's wife is highlighted to a considerable extent. While the author concludes that, of the Gesundheit progeny, "the most famous of all was Benjamin Graham," he certainly is not the only great intellect in that gene pool.
In fact, Rhoda's own father (and Dora Grossbaum/Graham's brother), Maurice Gesundheit, was a respected intellectual in his own right. Curiously, after several years of rabbinical studies convinced him that he was actually an agnostic, Maurice abandoned religious studies for mathematics. In turn, he became a professor in this field at the University of Manchester. Later, upon leaving the United Kingdom for America, Maurice became, as Graham recalled in his memoirs, "quite a success as one of the earliest of the 'systematizers' or 'efficiency engineers.'" To one degree or another, this intellectualism is evident in many of Maurice Gesundheit/Gerard's children, most of whom have excelled in medicine and various other academic disciplines. Perhaps the most significant among these is Ralph Waldo Gerard. A son from Maurice's first marriage (and Rhoda Sarnat's half-bother), Ralph earned his doctorate in neurophysiology, and his research won him two Nobel Prize nominations (but no awards).
During Ralph's lifetime, the late scholar wrote or cowrote over five hundred scientific papers and nine books that pertained to heady topics and carried such titles as "Biological and Cultural Evolution: Some Analogies and Explorations" (a paper published in Behavioral Science) and "The Effect of Frequency of Simulations on the Heat Production of the Nerve" (a paper published in the Journal of Physiology). Of the descendants of the great chief rabbi of Warsaw, Ralph Gerard was a close runner-up to his first cousin Benjamin Graham. Aside from sheer volume and complexity, Gerard's output is comparable to Graham's in its originality and its tendency to draw enlightening parallels between seemingly distinct disciplines. (Despite—or, perhaps, due to—their similarly impressive intellects, the two cousins never got along very well). Another notable Gesundheit was Rita Auerbach, Dora's first cousin and, according to the Sarnats, one of the first women elected to the British parliament. While it's unclear that this political accomplishment is an indication of great intellect, it certainly reflects a willingness to flout convention.
The extent to which heredity shapes the course of one's life lies at the heart of the "nature versus nurture" conundrum, a still-unresolved (and potentially unresolvable) controversy that is outside the scope of our discussion. However, the pronounced expression of intellectualism and original thought among numerous members of the Gesundheit family line is certainly worthy of exploration in a work highlighting Graham's intellect. Such a lineage is clearly a plausible explanatory factor behind the uncanny brilliance that has become the defining characteristic of Graham's life and legacy. As for the Grossbaums, while considerably less intellectual, the business acumen of Bernard and Isaac also found some expression in "Benny," as his parents would call him. Considering that he established the first of three successful investment enterprises of his own before turning thirty, Graham had some talent in this regard as well. Moreover, his career as a manager and comanager of these enterprises proved that Graham was able to interact both profitably and fairly with clients, employees, and partners alike.
Grossbaum & Sons, as the family's kitchenware/ornament import business was known, saw great opportunity for expansion in America. So, only one year after the birth of Isaac and Dora's third (and final) child, Benjamin, it was decided that Isaac's family would take that fabled nautical journey from Europe to Ellis Island. However, unlike many of the European immigrants of that period (particularly Jewish immigrants, almost all of whom were emigrating from eastern and, to a lesser extent, central Europe, as opposed to the generally more tolerant and prosperous United Kingdom), it seems that the Grossbaums probably intended to return to their point of origin. After all, Isaac held both a deep affection for Britain and an almost umbilical attachment to his family in London, particularly his father, Bernard. As such, the prospect of relocating permanently in a distant (albeit English-speaking) foreign land and leaving his father and brothers behind in Britain did not appeal to him.
Little is known of Dora's feelings about leaving London. Considering that she had already relocated once before (from her native Poland) and that her family roots were elsewhere, it is probable that the move was less wrenching for her. As for their three children, the eldest, Victor, was only three years of age; Leon was two; and "little Benny" was only one. At such a young age, it is unlikely that any of them carried any strong feelings (let alone influence) regarding such a transition. So, despite Isaac's attachments, with the booming turn-of-the-century US economy making headlines across the pond, it was deemed essential for Grossbaum & Sons to establish some sort of presence in America. It is likely that the Grossbaums intended to return to London once that was in place. It is telling that, for the first four years in which Isaac governed his household (as was the norm during that era) in the United States, the Grossbaums rented part of a private home. Despite possessing ample means to rent or purchase a home of his own, it took several years of living in the United States before Isaac relented and established an independent home for his family.
In 1895, with both hope and a measure of sadness, Isaac and his family boarded a ship from London for New York City. Aside from their somewhat unusual point of origin (for that particular epoch of US immigration), the Grossbaums differed from the masses of mainly southern European and eastern European immigrants of the Ellis Island era in two other important respects: they brought a significant sum of money with them to establish the American branch of Grossbaum & Sons and, unlike the great majority of immigrants from the Ellis Island era, they already spoke English. Their relative wealth, coupled with a mastery of the native language, endowed the Grossbaums with a considerable dual advantage in adapting to American life as first-generation immigrants. To illustrate, unlike the fourth-class passengers on the ship (who, most likely, originated from points east and/or south of Britain), the Grossbaums, as second-class passengers and British-accented English speakers, were not even asked for papers by Ellis Island immigration officials! Indeed, for several years, it seemed that the Grossbaums' cultural and monetary advantages (along with Isaac's tireless work ethic) would ensure a smooth ascent up the golden ladder of the New World.
Instead of the neglected tenement slums endured by most Jewish immigrants of the Ellis Island heyday, the Grossbaums' first (rented) home in New York was just off Park Avenue! While the house was shared with their landlord, it's safe to presume that such an address carried both prestige and considerable expense. Aside from the Park Avenue home, Graham's recollections of his early childhood make reference to all manifestations of ragtime-era affluence: vacations in trendy summer resorts; trips to Hot Springs, Virginia; at least one extended stay in Europe; governesses; regular trips to fashionable boutiques and fine food stores; gold watches; the latest phonographs and recordings; cooks, maids, and even "servants' quarters." Moreover, from both a personal and a familial perspective, it was an idyllic time. Graham recalls children's locomotive trains in Central Park, typical troublemaking from the growing Grossbaum boys (of which Graham, being the youngest and least mischievous, was the most reluctant participant), and what seems to have been a fairly harmonious union between Isaac and Dora.
So, while many immigrants of the era were suffering from the dangerous and unsanitary conditions observed in the 1890 classic How the Other Half Lives, it seems that the Grossbaums were living in a parallel universe of luxury, prestige, and even glamour. Moreover, despite being Jewish at a time when open anti-Semitism was fairly common, the Grossbaums not only succeeded financially, but they even gained some exposure to American "high society." Perhaps the most notable illustration of such exposure in Graham's own life is the friendship that he, as a five-year-old, developed with a young child of the Swift family (meat-industry moguls) during his family's stay in Hot Springs. Within a year of that trip, the Grossbaums took up residence in a private brownstone house on Fifth Avenue. This move was a definitive indication that not only had Isaac made the American branch of Grossbaum & Sons a great success but also that he did not anticipate a permanent return to Britain for the foreseeable future.
Perhaps that is why Isaac, now reconciled to staying in America, took the family to England the following summer to spend the whole season with his family and those members of Dora's who lived in England as well. So, Isaac, Dora, Leon, and seven-year-old Benjamin set sail for London. (Graham's eldest brother, Victor, had become such a prankster and rebel by then that, instead of traveling to Europe, he was sent to a disciplinary summer camp in Pennsylvania!) The family enjoyed a pleasant extended vacation in London and Brighton (where Dora's parents lived). According to Graham, the British operations of Grossbaum & Sons had been suffering badly just as Isaac's American branch had been thriving. Consequently, Isaac had become the primary breadwinner for his father, his ten siblings, some of Dora's family, and, undoubtedly, a much larger contingent of nephews and nieces. So it is probable that there was a heightened element of reverence and gratitude for the family among their British hosts.
Excerpted from THE EINSTEIN OF MONEY by Joe Carlen Copyright © 2012 by Joe Carlen. Excerpted by permission of Prometheus Books. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Chapter 1 Losing It All 17
Chapter 2 The Margin of Safety 35
Chapter 3 Top of the Glass 57
Chapter 4 Numbers Don't (Usually) Lie 79
Chapter 5 The Original Security Analyst 99
Chapter 6 All or Nothing-Investors as Business Owners 121
Chapter 7 Dizzying Heights and Shuddering Depths 141
Chapter 8 The Folly of "Mr. Market" 163
Chapter 9 New Beginnings 181
Chapter 10 Keynes, Hayek, and Graham? 199
Chapter 11 An Eager Young Student from Omaha 221
Chapter 12 Disciples of Value 241
Chapter 13 Stranger Than Fiction 261
Chapter 14 The Ethics of Money 281
Chapter 15 Of Perpetual Value 301