What is the 'Benjamin Method'

The Benjamin Method is a term used to describe the investment philosophy of Benjamin Graham, who is credited with inventing the strategy of value investing or fundamental analysis, whereby investors analyze stock data to find assets that have been systematically undervalued. 

BREAKING DOWN 'Benjamin Method'

The Benjamin Method of investing is the brainchild of Benjamin Graham, a British-American investor, economist and author. He came to prominence in 1934, with the publication of his textbook Security Analysis, which he co-wrote with David Dodd. Security Analysis is a foundational book for the investment industry today, and the teachings of Benjamin Graham heavily influenced famous investors like Warren Buffett. Benjamin Graham taught Warren Buffett while Buffett was studying at Columbia University, and Buffett has written that Graham’s books and teachings “became the bedrock upon which all of my investment and business decisions have been built.”

Benjamin Graham’s method of value investing stresses that there are two types of investors: long-term and short-term investors. Short term investors are speculators, who bet on fluctuations in the price of an asset, while long-term, value investors should think of themselves as the owner of a company. If you are the owner of a company, you shouldn’t care what the market thinks about its worth, as long as you have solid evidence that the business is or will be sufficiently profitable. 

Example of the Benjamin Method

Let’s say that you are an investor who is considering purchasing shares in the Philadelphia Widget Company. The company is well known, and is the leading purveyor of widgets in America. Its stock is trading at $100 per share, while it earns $10 per year in profits. A competitor to the Philadelphia Widget Company is the Cleveland Widget Company, a younger upstart that is not well known, but has gained market share in recent years. It earns far less money, just $2 per year, but the stock is also a lot cheaper at $15 per share

An investor following the Benjamin Method of investing would use these figures and other data to perform a fundamental analysis of the company. For instance, we can see that The Cleveland Widget Company is cheaper for every dollar of earnings to buy than the Philadelphia company. The price-to-earnings ratio of the Philadelphia Widget company is 10, whereas it is 7.5 for the Cleveland Widget Company. A follower of the Benjamin Method of investing would conclude that the Philadelphia company is overpriced simply because it is well known. This investor would choose the Cleveland company instead.

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