Benjamin Graham is known as “the father of value investing” and was arguably the greatest investment adviser of the 20th century.
Throughout the period of 1936-1956 while Graham ran his company, Graham-Newman Corp; He gained at least 14.7% annually for his clients, versus 12.2% for the overall stock market. This became known as one of the best long-term track records in history.
Benjamin Graham was born on May 9th, 1894 in London, England to Jewish parents. His family migrated to the USA when he was a year old, eventually settling in New York.
Graham attended Columbia Business School on a scholarship. He graduated in 1914 at age 20, as the salutatorian of the class.
After his graduation, Graham decided to have a shot on Wall Street. Here he started out as a clerk at a bond trading firm before becoming an analyst, then a partner, and soon after that, Graham was running his first investment partnership.
Benjamin Graham Security Analysis (1934)
Security Analysis was written by David L. Dodd and Benjamin Graham. And since 1934, over 1,000,000 copies have been sold, and 6th editions have been released.
The 1940 revision is considered “the bible of value investing”. Security Analysis is a comprehensive value investing resource, and its contents, despite being over 80 years old, remain relevant today.
Security Analysis laid out the intellectual framework for the value investing strategy. At the outset, Graham made a precise formulation of the difference between investment and speculation.
As follows: “An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.” Benjamin Graham “clung tenaciously to this definition” throughout his investment career. Graham soon released another bestseller, seen below.
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Benjamin Graham The Intelligent Investor (1949)
Benjamin Graham is widely known as the author of “The Intelligent Investor: The Classic Text on Value Investing”. It is widely regarded as one of the best investing books of all time. Despite its original 1949 publish date, the information contained is still relevant today.
The Intelligent Investor has had many revisions; however, the last time Graham personally revised the book was in 1973. Shortly before his death in 1976. The revised edition is available for purchase today and includes commentary by Jason Zweig (2003).
This book covers areas of investing including The past century of stock market history, general portfolio policies to follow, how you should interpret market fluctuations and much more. It will provide you with the knowledge needed to independently select stocks with confidence.
Reading this book will provide you with the knowledge that will guide your investment methodology for a lifetime. And I recommend it to any looking to increase their financial acumen.
To quote Warren Buffett, it is “By far the best book on investing ever written.”
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Enterprising Vs Defensive Investor
Graham separated investors following his strategy into two categories. The enterprising investor and the defensive investor.
The defensive investor hopes to attain average returns, with minimal effort. Graham has included a strict list of investment criteria to follow when employing this strategy.
Some of the criteria include a stable history of earnings, uninterrupted dividends payments over a long period and a sufficiently strong financial position. Graham goes into great depth in his book and I would highly recommend it if you would like to learn more about defensive investing.
The enterprising investor hopes to outperform the defensive investor. Their portfolio is not necessarily riskier, they are simply able to make more informed stock picks as they have dedicated more time and effort to research.
Without revealing too much about the book, I will explore some of the criteria for the enterprising investor below.
Graham's criteria included: a low price/earnings ratio, a specific financial condition, and earnings stability, among other metrics. You will find this strategy enticing if you are looking to attain the highest returns possible and are willing to put in the work.
Graham has dedicated separate chapters to discuss these investment methodologies. This prevents confusion and enables you to better understand each strategy and decide which best suits your needs.
Graham’s Investment Philosophy
Graham employed a value investing approach. He pursued stocks which he believed were worth more than their current market quotation would suggest. Essentially, he would buy stocks trading at $0.50 that he believed had an intrinsic value of $1.00. This strategy awarded him with above-average returns over his career while providing safety of principle for himself and his clients.
Graham believed that, at the outset, you should decide whether you are going to be an investor or a speculator. This decision will guide your investment methodology and prevent you from mistaking a sound/robust purchase, for a speculative purchase, and vice versa.
Margin of Safety
Benjamin Graham also popularized the “Margin of Safety” principle. When employing a margin of safety, you will only purchase securities when their market price is greatly below their intrinsic value (what you believe the stock is actually worth). Buying a stock below the perceived intrinsic value provides you with a margin of safety.
As mentioned above, Graham would buy stocks trading at $0.50 that he believed had an intrinsic value of $1.00. This provided him with a cushion against market dips. Buying within the margin of safety does not guarantee the stock price will go up; however, it will limit your losses substantially should the stock price fall.
Warren Buffett Testimonial
I will now cite Warren Buffett, in “The Intelligent Investor: The Classic Text on Value Investing”. Located in the preface to the fourth edition of the book. As follows: “If you follow the behavioral and business principles that Graham advocates—and if you pay special attention to the invaluable advice in Chapters 8 and 20—you will not get a poor result from your investments.”
Warren E. Buffett was one of the most successful investors of all time. Achieving compounded annual returns of 20.9% from 1965-2017. For more info on Warren Buffett, visit the link provided.