Legend Profile- Benjamin Graham
A great deal can be learned by studying the investment approach of “experts” in the field. By “experts”, I am referring to a few industry legends that individuals study and revere for their methods and ultimate successes. Some people swear by one approach, while others follow another approach espoused by a different legend. This week is the first profile in a series where we will review the investment philosophies of a few legends. Read them all over the next few weeks and decide which approach you favour.
First up is Benjamin Graham, the “father of value investing”. He started his own firm on Wall Street and went on to hire the infamous Warren Buffett, who will be profiled in a future instalment. Benjamin Graham wrote two textbooks on investing, Security Analysis (with David Dodd) (1934) and The Intelligent Investor (Warren Buffett is quoted as saying this is the best book about investing ever written) (1949). Benjamin Graham’s approach to investing makes intuitive sense to me and is essentially what I have been doing on this site with the company profiles– stock ownership is first and foremost about owning a piece of the underlying company. The investor’s main concern should be satisfying oneself that the underlying company is worth your money. The ups and downs of the stock price or a downturn in the overall economy or stock market should not be met with panic, rather, in the long run, if the company is solid, the stock price will reflect that value in the long term. His two concepts of intrinsic value (what the company is worth) and margin of safety (don't lose money) form the backbone of his approach.
Benjamin Graham was an advocate of spending the time to determine the financial state of the company. This notion tied into his famous concept of “margin of safety” alluded to above. When a company is trading at a price that is a discount off of its intrinsic value, you have a “margin of safety” and that would make that company a good investment. For those companies with a large “margin of safety”, the stock price can fall significantly with the company still remaining a good investment. The opposite is the case for a company with a small “margin of safety”. A smart investor would buy a stock for less than it was worth to a knowledgeable buyer of the entire company - this was essentially his benchmark.
Benjamin Graham was also a proponent of diversification of your portfolio. He liked the idea of investing approximately equal amounts in a large number of stocks that met his criteria. Over time, you would experience superior results.
Benjamin Graham advocated sticking to the company fundamentals and not being swayed by the ups and downs of the market and all its volatility. An investor should focus on the company itself and what it is doing as opposed to market iterations. No one can truly know what the stock market will do so your best defence is to analyze the company and stick with your conclusions. I appreciate Benjamin Graham's approach perhaps because I enjoy looking at the various companies and analyzing them. It makes the process much more interesting when you can learn about the industry and get a real sense of what the company is doing. However, it also would seem to make intuitive sense whereby you are truly looking at the company itself and ignoring the irrationalities of the stock market ups and downs.
Stay tuned for more legend profiles!
** Top photo courtesy of Ricardo Gomez Angel on Unsplash