DEFINITION of 'Benjamin Graham'

A pioneer in the investments field who is regarded as the father of value investing. Benjamin Graham was an influential investor whose research in securities laid the groundwork for in-depth fundamental valuation used in stock analysis today by all market participants. His famous book, The Intelligent Investor, has gained recognition as one of the best and most important investment content written that illustrates the workings of a value investing strategy.

'Benjamin Graham'

Benjamin Graham was born in 1894 in London, UK. When he was still little, his family moved to America, where they lost their savings during the Bank Panic of 1907. Graham attended Columbia University on a scholarship and accepted a job offer after graduation on Wall Street with Newburger, Henderson and Loeb. By the age of 25, he was already earning about $500,000 annually. The Stock Market Crash of 1929  lost Graham almost all his investments and taught him some valuable lessons about the investming world. His observations after the crash inspired him to write a research book with David Dodd, called Security Analysis. Irving Kahn, one of the greatest American investors, also contributed to the research content of the book.

Security Analysis was first published in 1934 at the start of the Great Depression and while Graham was a lecturer at Columbia Business School. The book laid out the fundamental groundwork of value investing, which involves buying undervalued stocks with the potential to grow over time. At a time where the stock market was known to be a speculative vehicle, the notion of intrinsic value and margin of safety, which were first introduced in Security Analysis, paved the way for a fundamental analysis of stocks void of speculation.

According to Graham and Dodd, value investing is deriving the intrinsic value of a common stock independent of its market price. By using a company’s factors such as its assets, earnings, and dividend payouts, the intrinsic value of a stock can be found and compared to its market value. If the intrinsic value is more than the current price, the investor should buy and hold until a mean reversion occurs. A mean reversion is the theory that over time, the market price and intrinsic price will converge towards each other until the stock price reflects its true value. By buying an undervalued stock, the investor is in effect, paying less for it and should sell when the price is trading at its intrinsic worth. This effect of price convergence is only bound to happen in an efficient market.

Graham was a strong proponent of efficient markets. If markets were not efficient, then the point of value investing will be pointless as the fundamental principle of value investments lies in the ability of the markets to eventually correct to their intrinsic values. Common stocks are not going to remain inflated or bottomed-out forever despite the irrationality of investors in the market.

Benjamin Graham noted that due to the irrationality of investors including other factors such as the inability to predict the future and the fluctuations of the stock market, buying undervalued or out-of-favor stocks is sure to provide a margin of safety i.e. room for human error, for the investor. Also, investors can also achieve a margin of safety by purchasing stocks in companies with high dividend yields and low debt-to-equity ratios, and diversifying their portfolios. In the event that a company goes bankrupt, the margin of safety would mitigate the losses that the investor would have. Graham normally bought stocks trading at two-thirds their net-net value as his margin of safety cushion.

The original Benjamin Graham Formula for finding the intrinsic value of a stock was:

V = EPS x (8.5 + 2g)

Where V = intrinsic value

EPS = trailing 12-mth EPS of the company

8.5 = P/E ratio of a zero-growth stock

g = long-term growth rate of the company

In 1974, the formula was revised to include both a risk-free rate of 4.4% which was the average yield of high grade corporate bonds in 1962 and the current yield on AAA corporate bonds represented by the letter Y:

In 1949, Graham wrote the acclaimed book Intelligent Investor: The Definitive Book on Value Investing. The Intelligent Investor is widely considered the bible of value investing and features a character known as Mr. Market, Graham’s metaphor for the mechanics of market prices. Mr. Market is an investor’s imaginary business partner who daily tries to either sell his shares to the investor or buy the shares from the investor. Mr. Market is often irrational and shows up at the investor’s door with different prices on different days depending on how optimistic or pessimistic his mood is. Of course, the investor is not obligated to accept any buy or sell offers. Benjamin Graham points out that instead of relying on daily market sentiments which are run by investor’s emotions of greed and fear, the investor should run his own analysis of a stock’s worth based on company’s reports of its operations and financial position. This analysis should strengthen the judgment of the investor when s/he’s made an offer by Mr. Market. According to Graham, the intelligent investor is one who sells to optimists and buys from pessimists. The investor should look out for opportunities to buy low and sell high due to price-value discrepancies that arise from economic depressions, market crashes, one-time events, temporary negative publicity, and human errors. If no such opportunity is present, the investor should ignore the market noise.

While echoing the fundamentals introduced in Security Analysis, The Intelligent Investor also provides key lessons to readers and investors by advising investors to not follow the herd or crowd, to hold a portfolio of 50% stocks and 50% bonds or cash, to be wary of day trading, to take advantage of market fluctuations, to not buy stocks simply because it is liked, to understand that market volatility is a given and can be used to an investor’s advantage, and to look out for creative accounting techniques that companies use to make their EPS value more attractive.

One notable disciple of Benjamin Graham is Warren Buffett, who was one of his students at Columbia University. After graduation, Buffett worked for Graham’s company, Graham-Newman Corporation, until Graham retired. Buffett, under the mentorship of Graham and value investing principles, went on to become one of the most successful investors of all time and as of 2017, the second wealthiest man in the world valued at almost $74 billion. Other notable investors who studied and worked under the tutelage of Graham include Irving Kahn, Christopher Browne, and Walter Schloss.

In addition to teaching at Columbia Business School, Graham also taught at UCLA Graduate School of Business and the New York Institute of Finance.

Although Benjamin Graham died in 1976, his work lives on and is still widely used in the twenty-first century by value investors and financial analysts running fundamentals on a company’s prospect for value and growth.


  1. Graham Number

    A figure that measures a stock's fundamental value by taking ...
  2. Benjamin Method

    The investment approach that aims to follow the strategies implemented ...
  3. Net Current Asset Value Per Share ...

    A value created by professor Benjamin Graham in the mid-twentieth ...
  4. Margin Of Safety

    A principle of investing in which an investor only purchases ...
  5. Large-Value Stock

    A type of large-cap stock investment where the intrinsic value ...
  6. Intrinsic Value

    Intrinsic value is the actual value of a company or an asset ...
Related Articles
  1. Investing

    3 Differences Between Benjamin Graham and Warren Buffett

    Analyze three key differences between Warren Buffett and Benjamin Graham. Learn how value investing principles were applied differently by each investor.
  2. Investing

    Ben Graham's Advice on Reading Financial Statements

    Seven pieces of advice from Benjamin Graham on understanding financial statements.
  3. Investing

    Take On Risk With A Margin of Safety

    More common risk theories can lead to missed opportunities. Find out how margin of safety can propel your portfolio.
  4. Investing

    5 Great Investors Who Aren't Warren Buffett

    Here are five other investors, not named Warren Buffett, that are also considered to be the best of the best in the industry.
  5. Investing

    Value Investing: Why You're Doing It Wrong

    Benjamin Graham, the original value investor, would be 123 today. He might not like what he sees.
  6. Investing

    Top 5 All-Time Best Mutual Fund Managers

    The best managers produced long-term, market-beating returns and helped investors build big nest eggs. Find out who made the cut.
  7. Investing

    Calculating the Margin of Safety

    Buying below the margin of safety minimizes the risk to the investor.
  8. Insights

    4 Reasons Buffett's Portfolio Is Irrelevant to Today's Investors (AXP, KO)

    Find out why investors should not try to emulate Warren Buffett's stock portfolio and why they could not achieve his same level of success.
  1. Why would a value investor consider the Internet sector?

    Learn how traditional value investors are looking for opportunities in the Internet and technology sectors, and understand ... Read Answer >>
  2. How did Warren Buffett get started in business?

    Warren Buffett may have been born with business in his blood. He started saving while other children were at the playground, ... Read Answer >>
  3. Do you always have to consider intrinsic value when purchasing a stock? Why or why ...

    Take a deeper look at why value investors consider a stock's intrinsic value an important consideration before picking a ... Read Answer >>
  4. What is the difference between a company's book value per share and its intrinsic ...

    Book value and intrinsic value are two ways to measure the value of a company.In simple terms, book value is based on the ... Read Answer >>
Hot Definitions
  1. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  2. Backward Integration

    A form of vertical integration that involves the purchase of suppliers. Companies will pursue backward integration when it ...
  3. Pari-passu

    A Latin phrase meaning "equal footing" that describes situations where two or more assets, securities, creditors or obligations ...
  4. Interest Rate Swap

    An agreement between two parties (known as counterparties) where one stream of future interest payments is exchanged for ...
  5. Custodian

    A financial institution that holds customers' securities for safekeeping so as to minimize the risk of their theft or loss. ...
  6. Supply Chain

    The network created amongst different companies producing, handling and/or distributing a specific product. Specifically, ...
Trading Center