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Benjamin Graham

Benjamin Graham was born in London in 1894 and died in 1976. His family immigrated to the United States when he was only 1 year old and lived in Manhattan and Brooklyn, New York. Graham’s father died eight years later and the family experienced difficult financial times. This left Graham with a preoccupation for economic security that would continue for his entire life.

Graham studied at Columbia University and after graduating in 1914 he got a job as a messenger at Newburger, Henderson & Loeb on Wall Street. By 1920 he had worked his way up to being a Partner of this firm. In 1926 Graham left the firm and joined with Jerome Newman to create an investment partnership. He also began lecturing on finance at Columbia University and continued until he retired in 1956.

Graham was reportedly personally wiped out by the 1929 stock market crash, however his partnership with Newman survived and its position gradually improved. This experience taught Graham several valuable lessons and he used this information to co-author a textbook in 1934. This book is titled “Security Analysis” and it is considered to be a classic on the subject of investment. His investment partnership with Newman continued to prosper and had a 17% average annual return until it was dissolved in 1956.

The following anecdote about Graham’s investment style is recorded on the online Interactive Classroom of Investment Style Morningstar: "In 1984, [Warren] Buffett 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."

Graham’s investment style is very difficult to summarize adequately and it is advisable to read his book titled "The Intelligent Investor" in order to understand his philosophies regarding investment. Basically, Graham believed that the value of an investment should always be significantly more than the amount that the investor pays for it. He conducted thorough analysis (now known as “fundamental analysis”) before investing and looked for companies that had healthy balance sheets, little debt, successful cash flow and high profit margins. He often mentioned to the “margin of safety”, a phrase that he coined to refer to investing in companies with sound long-term fundamentals at times when their stocks are undervalued. The margin of safety is the difference between the intrinsic value of an investment and the price paid to purchase it. When this difference is very large (with the purchase price being less than the intrinsic value) it is an attractive investment in terms of its safety and returns. These circumstances are now commonly referred to as low value multiple stocks or P/E, P/B, P/S.

Graham also developed a parable known as “Mr. Market” to illustrate his view that stock prices based on market valuations are frequently wrong and that their value will fluctuate significantly. To illustrated this point he once said "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." He believed that market fluctuations could benefit smart investors as they have "an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal." He is also quoted as saying that "It is absurd to think that the general public can ever make money out of market forecasts."

Graham recognized the difficulty of investing and is quoted as saying "To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." He also elucidated the danger of the crowd mentality in investing by saying that "Even the intelligent investor is likely to need considerable willpower to keep from following the crowd."

Graham is widely regarded as being one of the greatest financial educators and investment managers. Several of his publications are considered investment classics. He is credited with developing the investment disciples that are known as value investing and security analysis. His two best known books (“Security Analysis” which he co-authored with David Dodd and “The Intelligent Investor”) are still used in university level investment courses and are viewed as two of the best books to ever be written on the subject of stock investment. Graham is also well-known as being a mentor for the very successful Warren Buffett and many other prominent investors. Buffett’s respect for Graham is demonstrated in the following quote: "It is rare that the founder of a discipline does not find his work eclipsed in rather short order by successors. But for over forty years after publication of the book ["Security Analysis"] that brought structure and logic to a disorderly and confused activity, it is difficult to think of possible candidates for even the runner-up position in the field of security analysis." (Warren Buffett, Financial Analyst Journal, November/December 1976)

In his book “The Money Masters” (1980), John Train has this to say about Graham: "Benjamin Graham ranks as this century's (and perhaps history's) most important thinker on applied portfolio investment, taking it from an art, based on impressions, inside information, flair, to a proto-science, an orderly discipline. He applied great astuteness, hard experience, and infinitely detailed labors to a field full of superstition, tips and guesswork, one in which most people who have something to say also have an incentive to deceive the listener."

Benjamin Graham’s publications include:

Security Analysis: Sixth Edition, Foreword by Warren Buffett (Security Analysis Prior Editions)

The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition)

Benjamin Graham: The Memoirs of the Dean of Wall Street

Publications about Benjamin Graham include:

Benjamin Graham on Value Investing: Lessons from the Dean of Wall Street

About the author

Mark McCracken

Author: Mark McCracken is a corporate trainer and author living in Higashi Osaka, Japan. He is the author of thousands of online articles as well as the Business English textbook, "25 Business Skills in English".

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Mark McCracken , All Rights Reserved