07:49 PM, 18 Oct 2019 (AUS EDT)   The market is currently closed       

Benjamin Graham: Father of value investing


Benjamin Graham is another one of those founding fathers to the fundamental analysis practice we have today. In fact, you could hardly mention "security analysis" and "value investing" without using the name of Benjamin Graham. Warren Buffet himself, the richest man in the world in 2008 with a net worth of over 62 billion dollars, described himself as "85 percent Graham".

Disseminating his knowledge through books in the 1930's and 40's, these quickly became a staple item for investors to read and remain so down to this day. His unparalleled work as an investment manager and financial educator are worthy of a second look

Quick Facts

  • Life: May 8, 1894 - September 21, 1976
  • Wrote Security Analysis in 1934 with David Dodd, and The Intelligent Investor in 1949
  • Was a mentor and inspiration for Warren Buffett
  • He breathed life into the caricature Mr. Market
  • Known fondly as "father of value investing" and "Dean of Wall Street"
  • According to Warren Buffett, Graham said that he wished every day to do something foolish, something creative, and something generous.

Personal and Business Life

Benjamin Graham did not have an easy life. At the tender age of one he emigrated to the United States of America from England. Having his father die at age 9 was particularly trying and left the family in sore straights. But sometimes a harsh circumstance can create a burning hunger to succeed as it did with Benjamin Graham.

He quickly climbed the business ranks with his desire for success and financial security. In 1914, after graduating from the Columbia University, he joined Newburger, Henderson & Loeb, a Wall Street Firm and moved up to partner over the next six years. After working roughly an additional six years for the firm as partner he started up his own firm with colleague Jerome Newman while at the same time starting his other passion of teaching finance.

Though there were tough times still, particularly during the Wall Street crash of 1929, Benjamin Graham prospered and taught many others to do so too. His Graham-Newman firm reportedly experienced a 17 percent annual return on investments up until Graham's retirement in 1956.

His personal life embodies much sadness. His first son died of meningitis. His second son when drafted into the Korean War became mentally ill and committed suicide. Benjamin Graham was married three times in his quest for love. While he could accurately analyze the logical financial world that had clear numbers and statistics, his ability to maneuver in the irrational and emotional world was less successful.

One of his most lucrative investments was with GEICO. The Government Employee Insurance Company founded in 1936 caught Graham's eye and he bought half of the company in 1948. By 1996 when the company was bought out by investment tycoon Warren Buffett, the share price had risen some 3,000 times. This trade could well be the epitome of value investing. The mentality of Graham was to purchase a stock with a wide margin of safety that would prevent capital loss. Any profit could then be seen as a bonus.

The Investment Legacy

One of the most well known explanations of the stock market comes from Ben Graham's character Mr. Market. This fictional man shows up on your doorstep every morning offering you an investment. Mr. Market has a different price every day â€" sometimes good and sometimes completely irrational. The choice is yours whether you feel the price is good and you buy, or whether you decline and see what tomorrow brings.

Mr. Market has helped many see the principle of value investing. If you know the worth of a stock, you can wait for an irrational bargain from Mr. Market. The market will eventually swing back to some rationale state in the future and "fair value" will once again be assumed. The difference between fair value and the price you pay is your margin of safety.

Benjamin Graham had two basic concepts about investing:

  • Invest based on fundamental analysis of the numbers
  • Use market psychology to your advantage

Although most would not consider him a technical analyst, the idea of timing trades with the market is the guiding principle behind charting and other technical analysis tools. Since Graham did buy when the market was low, this could be viewed as a crude form of technical analysis.

Benjamin Graham's style could be summed up this way: find an investment worth 100 dollars. Wait until the market is irrational enough to lower the price to 50 dollars. Buy and wait for the market to correct and put the fair value back up to 100 dollars.

Benjamin Graham did not follow the crowd. He truly believed that if you did your homework, and performed due diligence in analysis, going against common trends was the right thing to do. Warren Buffett said that Benjamin Graham excelled most at the last.

Books Authored by Benjamin Graham

  • Security Analysis 1934
  • The Intelligent Investor
  • Storage and Stability: A Modern Ever-normal Granary 1937
  • The Interpretation of Financial Statements
  • World Commodities and World Currency 1944
  • Benjamin Graham, the memoirs of the dean of Wall Street

Famous Benjamin Graham Quotes

  • Wall Street people learn nothing and forget everything.
  • Most of the time common 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.
  • The individual investor should act consistently as an investor and not as a speculator. This means… that he should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that satisfies him that he is getting more than his money's worth for his purchase.
  • I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities.