Who Was Benjamin Graham?
Let me introduce you to Benjamin Graham, an influential investor from the early 20th century whose research in securities created the basis for the detailed fundamental valuation that all market participants use today in stock analysis. His renowned book, The Intelligent Investor, stands as the cornerstone of value investing.
Key Takeaways
You need to know that Benjamin Graham was an investor and researcher born in England whose contributions framed modern stock analysis. By age 25, he earned about $500,000 yearly, but the 1929 crash wiped out most of his investments. That event led him to co-author Security Analysis, and in 1949, he published The Intelligent Investor, often called the investor's bible. As a Columbia University instructor, he mentored Warren Buffett, now a billionaire investor.
Early Life and Education
Benjamin Graham entered the world in 1894 in London, UK. His family relocated to America when he was young, only to lose their savings in the 1907 Bank Panic. On a scholarship, he studied at Columbia University and, after graduating, took a Wall Street job with Newburger, Henderson, and Loeb. By 25, his annual earnings hit around $500,000. The 1929 Stock Market Crash devastated his holdings, teaching him critical lessons about investing. Those insights prompted him to collaborate with David Dodd on the research book Security Analysis, with contributions from investor Irving Kahn.
Notable Accomplishments
Consider Benjamin Graham a pioneer in stock analysis, especially value investing. As Graham and Dodd defined it, value investing means calculating a stock's intrinsic value apart from its market price, using fundamentals like assets, earnings, and dividend payouts, then comparing the two. If the intrinsic value exceeds the market price, buy and hold until mean reversion aligns them—this theory holds that prices eventually match true value in an efficient market.
Graham strongly supported efficient markets; without them, value investing loses its point, as it relies on markets correcting to intrinsic values over time, despite investor irrationality. He observed that investor irrationality, unpredictability, and market swings allow for buying undervalued stocks, providing a margin of safety—essentially, a buffer against errors. You can achieve this by targeting stocks with high dividend yields, low debt-to-equity ratios, and diversified portfolios to cushion against potential bankruptcies. Graham typically bought at two-thirds of net-net value for that safety margin.
Benjamin Graham's Intrinsic Value Formula
- The original formula was V = EPS × (8.5 + 2g), where V is intrinsic value, EPS is trailing 12-month EPS, 8.5 is the P/E for a zero-growth stock, and g is the long-term growth rate.
- In 1974, it updated to include a risk-free rate: V = [EPS × (8.5 + 2g) × 4.4] / Y, with Y as the current AAA corporate bond yield.
Published Works
Security Analysis, published in 1934 amid the Great Depression while Graham lectured at Columbia Business School, outlined value investing by advocating the purchase of undervalued stocks with growth potential. At a time when markets were seen as speculative, it introduced intrinsic value and margin of safety, promoting fundamental analysis free of speculation.
In 1949, Graham released The Intelligent Investor, the definitive guide on value investing, featuring Mr. Market as a metaphor for price mechanics—an irrational partner offering daily buy or sell deals based on mood swings. You aren't required to accept them; instead, base decisions on company reports and financials, not emotions. Sell to optimists, buy from pessimists, capitalizing on discrepancies from depressions, crashes, or errors. If no opportunities arise, ignore the noise.
Legacy
One of Graham's standout students was Warren Buffett, who studied at Columbia, worked at Graham-Newman Corporation until Graham's retirement, and applied his principles to amass a fortune of nearly $120.6 billion by January 2024, ranking him among the world's richest. Other protégés include Irving Kahn, Christopher Browne, and Walter Schloss. Though Graham passed in 1976, his methods endure in value investing and fundamental analysis for assessing company prospects.
Frequently Asked Questions
You might wonder about the Graham and Dodd Award—it honors excellence in research and writing in the Financial Analysts Journal, named for Benjamin Graham and David Dodd, former Columbia finance professors. Graham is known as the father of investing for his value strategies, research, and mentorship of Buffett, plus books like The Intelligent Investor. His three core principles? Invest with a margin of safety, expect and profit from volatility, and understand your investor type to match your strengths.
The Bottom Line
In summary, Benjamin Graham earned his title as the father of value investing through his innovative style, writings, and research. He taught at Columbia University, rising to finance professor, and his book The Intelligent Investor brought value investing to the masses. His principles have shaped some of the greatest investors worldwide.
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