Notice the shape of it first, because it is so ordinary that it usually goes past unexamined.
A thing gets more expensive. Your interest in owning it rises. Nothing about the thing has changed — same house, same company, same coin, same object — and yet at the higher price it feels more solid, more obviously worth having, more like something a sensible person would want. Had it fallen by the same amount you would have felt the opposite, and you would have called that judgement too.
Benjamin Graham was wiped out in the crash of 1929 and spent the next forty years working on why sensible people do this. His answer was an allegory, and the useful thing about it is that it changes what a price is.
A partner, not an instrument
Imagine, he said, that you own a business jointly with a partner. Every day this partner turns up and names a price at which he will buy your half or sell you his. He is not unwell exactly, but his moods are extreme: some days he is euphoric and names a very high number, other days despairing and names a very low one. The business itself is unchanged. The number reflects his temperature.
The point of the allegory is what it does to the question. If the daily quote is an instrument reading — a measurement of what your stake is worth — then a rising number is information and you should feel something about it. If it is a partner's mood, it is an offer, and an offer requires only one response: is this a price at which I would like to transact? If it is not, you let it pass and it costs you nothing to do so.
Almost everyone who has never heard this treats the number as the first thing. Graham's method starts by refusing to.
And it reaches well beyond markets. The house you decided was desirable after the street got expensive. The concert you wanted more once resale prices climbed. In each case the number arrived first and the judgement arranged itself behind it, which is exactly the sequence to be suspicious of.
Watch out for
Here is the honest part, and Graham's own file states it more plainly than most of his admirers do.
The allegory assumes you can hold a private view of what something is worth while every screen, headline and person you know disagrees with you. Most people cannot. The instruction to ignore the partner is very easy to state and very hard to live, and someone who has read the idea once and believes themselves immune to it is in a worse position than before, because they now have a framework to defend the same behaviour with. Nothing in the method supplies the temperament the method requires.
Two other things this reasoning will not do. It will not tell you what anything is worth — that is your own arithmetic on your own figures, and where a real decision is involved, someone licensed who knows your circumstances. And the specific numbers Graham used are dated: the particular ratios and thresholds in his books belong to the markets of 1934 to 1973, and the statistical bargains at the centre of his purest method have largely been competed away in developed markets. The temperament survived. The settings did not.
Answer this next
Think of something you wanted more after it got more expensive. What, specifically, did you learn about it in between?
