Benjamin Graham - The Father Of Value Investing
“The intelligent investor is a realist who sells to optimists and buys from pessimists.”
Benjamin Graham was a well-known investor whose securities research established the foundation for the detailed fundamental valuation that is currently employed by all market players in company analysis. His famous book The Intelligent Investor is now acknowledged as the founding text of value investing.
Benjamin Graham was born in 1894 in London, UK. His family immigrated to America when he was a little child, and during the 1907 Bank Panic, they lost all they had saved. Upon graduation from Columbia University, Graham received a position on Wall Street with Newburger, Henderson, and Loeb.
He was already making roughly $500,000 a year by age 25. Graham lost nearly all of his investments in the 1929 stock market crash, but it also gave him insightful knowledge about the world of finance.
He co-wrote the study book Security Analysis with David Dodd, motivated by his post-crash insights. One of the best American investors, Irving Kahn, contributed to the book's study material.
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Benjamin Graham is considered a founder of stock analysis and particularly value investing. 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 exceeds 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 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 would be pointless, as the fundamental principle of value investments lies in the ability of the markets to correct to their intrinsic values eventually. Common stocks will not remain inflated or bottomed out forever despite the irrationality of investors in the market.
Benjamin Graham pointed out that purchasing undervalued or out-of-favour stocks is certain to offer a margin of safety because of the irrationality of investors, among other reasons like the inability to foresee the future and the swings of the stock market.
Graham typically bought stocks trading at two-thirds of their net-net value as his margin of safety cushion.
The original Benjamin Graham Formula for finding the intrinsic value of a stock is:
Benjamin Graham also gave some great quotes that all market participants can benefit from.
1 - “Successful investing is about managing risk, not avoiding it.”
2 - “In the short run, the market is a voting machine, but in the long run it is a weighing machine.”
3 - “Investing isn't about beating others at their game. It's about controlling yourself at your own game.”
4 - “At heart, ‘uncertainty’ and ‘investing’ are synonyms.”
5 - “The intelligent investor is a realist who sells to optimists and buys from pessimists.”
6 - “The intelligent investor gets interested in big growth stocks not when they are at their most popular - but when something goes wrong.”
Many people raise the question: “Are Graham’s investing principles still relevant?”
The answer is yes. The reason is because of how timeless his principles are and the fact that human nature hasn't changed.
People still bid up stock prices to excessive levels (dot com bubble) and sink stocks well below fair value and what is warranted by the facts (the great recession of 2008/9). It is still as hard to assess what will happen in the future as it was in his day, but investors still try to base their investments on what they think will happen in the future. Even more disturbing, investors still pay top dollar for any future that is remotely certain, instead of seeking strong margins of safety and buying stocks below their fair value.
If investors want to make the best possible investment decisions throughout the course of their investing career, then becoming well-versed in the teachings of Benjamin Graham is well worth it.
We’re releasing our own value investing model, with many aspects taken from the great minds of Benjamin Graham and others. You can read more about this below.