Comments on an article of Malkiel's

I comment here on Malkiel's article, ``Reflections on the Efficient 
Market Hypothesis: 30 Years Later,'' The Financial Review 
40 (2005) 1--9.

On page 8 of his article, Malkiel describes "active equity management'' 
as a "loser’s game" and states that "individual and institutional 
investors will be well served to employ indexing for, at the very least, 
the core of their equity portfolio."  In support of his argument, 
Malkiel continues, 

"Even the legendary Benjamin Graham, in an interview given shortly 
before he died, was quoted as saying: `I am no longer an advocate of 
elaborate techniques of security analysis in order to find superior 
value opportunities. This was a rewarding activity, say, 40 years 
ago, when Graham and Dodd was first published; but the situation has 
changed .... [Today] I doubt whether such extensive efforts will 
generate sufficiently superior selections to justify their cost .... 
I’m on the side of the ‘efficient market’ school of thought.' "

When I read this purported quotation of Graham, I 
almost choked on my late-night decaffeinated Darjeeling tea.  I 
was shocked that The High Priest of the Congregation of Value 
Investors may have abandoned his flock through a late-in-life 
conversion-to-indexing.  

And yet, I was dubious that Graham could have undergone such a 
conversion.  Indeed, such a conversion seemed completely out of 
character given Graham's high aversion to risk.  As I saw it, a 
correct late-in-life conversion would likely be greeted by The 
Great Value Creator In The Sky with a tepid "And what took you 
so long to find the straight and narror path?"  However, an 
incorrect late-in-life conversion was likely to engender a 
wrathful response from The Great Creator.  Given Graham's 
deeply-ingrained risk-averse character, I am confident that he 
would have calculated the expected benefit of such a conversion 
was negative and hence was unlikely to have changed his attitude 
to the efficient market hypothesis.

After a sleepless night, I rushed to the library the next morning 
to procure the Financial Analysts Journal, 1976 volume, from which 
Malkiel quoted Graham.  I found, to my great relief, an interview 
that reads markedly different from the alleged quotation provided 
by Graham.  In response to the question, 

``In selecting the common stock portfolio, do you advise careful 
study of and selectivity among different issues?'', 

Graham responded:

``In general, no. I am no longer an advocate of elaborate techniques 
of security analysis in order to find superior value opportunities.  
This was a rewarding activity, say, 40 years ago, when our textbook 
"Graham and Dodd" was first published; but the situation has changed 
a great deal since then. In the old days any well-trained security 
analyst could do a good professional job of selecting undervalued 
issues through detailed studies; but in the light of the enormous 
amount of research now being carried on, I doubt whether in most 
cases such extensive efforts will generate sufficiently superior 
selections to justify their cost. To that very limited extent I'm 
on the side of the "efficient market" school of thought now generally 
accepted by the professors.''

It is important to note the qualifying phrase, ``To that very limited 
extent'' preceding ``I'm on the side of ...'' !  To omit the 
qualifying phrase is to change the context in which Graham's response 
was framed and hence to make the purported quotation inaccurate.

Further discussions of this point may be found at 
http://travismorien.com/invest_FAQ/content/view/353/35/

A transcript of Graham's interview may be found at 
http://www.bylo.org/bgraham76.html