Personal Profile
Benjamin Graham came to the United States as a one-year-old immigrant from England in 1895. He grew up in Manhattan and Brooklyn, New York. His father died when he was nine years old and the family's hard times, economically speaking, left Graham with a lifetime preoccupation with achieving financial security.
He graduated from Columbia University in 1914 and went to work immediately for a Wall Street firm, Newburger, Henderson & Loeb, as a messenger. By 1920, he was a partner in the firm.
In 1926, Graham formed an investment partnership with Jerome Newman and started lecturing at Columbia on finance, an endeavor which lasted until his retirement in 1956. It is reported that Graham was wiped out personally in the stock market crash of 1929, but the investment partnership survived and gradually recouped its position. (For more insight, see
The Greatest Market Crashes.)
Ben Graham learned some valuable lessons from this experience and, in 1934, co-authored a hefty textbook titled "Security Analysis", which is widely considered an investment classic. The Graham-Newman partnership prospered, boasting an average annual return of 17% until its termination in 1956.
Investment Style
Morningstar's online Interactive Classroom carries this anecdote about the results of Ben Graham's investing style:
"In 1984, [Warren] Buffet returned to Columbia to give a speech commemorating the fiftieth anniversary of the publication of "Security Analysis". During that speech, he presented his own investment record as well as those of Ruane, Knapp, and Schloss [other successful investment managers who were students of Graham at Columbia]. In short, each of these men posted investment results that blew away the returns of the overall market. Buffett noted that each of the portfolios varied greatly in the number and type of stocks, but what did not vary was the managers' adherence to Graham's investment principles."
It is difficult to encapsulate Benjamin Graham's investing style in a few sentences or paragraphs. Readers are strongly urged to refer to his "The Intelligent Investor" to obtain a more thorough understanding of his investment principles.
In brief, the essence of Graham's value investing is that any investment should be worth substantially more than an investor has to pay for it. He believed in thorough analysis, which we would call
fundamental analysis. He sought out companies with strong
balance sheets, or those with little debt, above-average profit margins, and ample cash flow. (For more insight, see
Introduction To Fundamental Analysis and
Testing Balance Sheet Strength.)
He coined the phrase "
margin of safety" to explain his common-sense formula that seeks out undervalued companies whose stock prices are temporarily down, but whose fundamentals, for the long run, are sound. The margin of safety on any investment is the difference between its purchase price and its
intrinsic value. The larger this difference is (purchase price below intrinsic), the more attractive the investment - both from a safety and return perspective - becomes. The investment community commonly refers to these circumstances as low value multiple stocks (P/E, P/B, P/S).
Graham also believed that market valuations (stock prices) are often wrong. He used his famous "Mr. Market" parable to highlight a simple truth: stock prices will fluctuate substantially in value. His philosophy was that this feature of the market offers smart investors "an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal."
Publications
- "Security Analysis" (1934) by Benjamin Graham and David Dodd
- "The Intelligent Investor" by Benjamin Graham (1949)
- "Benjamin Graham: The Memoirs Of The Dean Of Wall Street" by Benjamin Graham and Seymour Chatman (editor) (1996)
- "Benjamin Graham On Value Investing: Lessons From The Dean Of Wall Street" by Janet Lowe (1999)
Quotes"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks."" Most of the time stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble … to give way to hope, fear and greed."
