Ben Graham’s 1920’s Hedging Strategy

Out of curiosity, I went digging for more info on the strategy Ben Graham used in his early fund back in the 1920s.

As was pointed out in the last post, he was buying undervalued stocks (the long-only portion) found through his own fundamental analysis, along with a separate hedging strategy, and some margin debt thrown in for good measure.

There’s was nothing really funky going on beyond that. Graham was very much focused on risk — minimizing losses — but, unlike his post ’29 strategies, he clearly was trying to maximize gains too.

In an article written in 1920, Graham outlined his hedging strategy.

What we have in mind is the simultaneous purchase of one security and sale of another, because the first is relatively cheaper than the second. Where the security bought sells lower than the one sold, there must be good reason for believing that the price of the two will come closer together — and conversely for the opposite cirumstance.