Benjamin Graham is one of the most influential investors in history. He is called the “dean of Wall Street”, the “father of Value Investing”, and was a very important mentor to Warren Buffett.
He is also the author of two books, Security Analysis and The Intelligent Investor, both of which are considered must-reads among the investing community. Security Analysis had such an impact on me that it was featured as one of Three Books That Shaped My Investment Philosophy.
I’m a big fan of studying the experts to hopefully learn a thing or two. For investing, one of the experts is definitely Ben Graham. So let’s dig in and figure out what made this genius tick!
Why Should We Study Graham?
I’ve already told you that Graham was the father of value investing. That in itself is enough to merit study. But he’s also contributed to many other paradigm shifts in the investing community.
Most notably, he was one of the first people to introduce the following concepts:
- Viewing the ownership of common stock as a partial ownership of the underlying company. Being a shareholder and being an owner are one and the same, at least according to Graham, and investing should be viewed differently than just the purchase and sale of financial securities.
- Taking an activist role in his investments. By being a shareholder, Graham understood that he had the power to vote for changes in upper management. This could be as small as minor strategy changes and as large as a complete management overhaul.
- Developing an investment “checklist” that must be filled out to asses the attractiveness of each investment opportunity.
Graham obviously had a role in some major changes on Wall Street. That’s why I think every serious investor should spend some time to learn about his life.
Graham came to Wall Street as a chalker in 1914 during the First World War. Yes, that literally means he wrote stock quotes on a chalkboard.
From there he moved his way up through the Wall Street ranks and started developing a name for himself until eventually he was managing money on behalf of customers. He soon realized he was gifted in this craft.
He experienced successive years of success until 1929, when his net worth was wiped out in the stock market crash of the Great Depression. Like most investors, he was trading on margin, which exacerbated his losses.
It was amid the turmoil of the Great Depression and vast financial losses that Graham (along with colleague David Dodd) published the first edition of Security Analysis. Then he focused
After the stock market crash, that Graham refined his deep-value strategies for investing in common stocks. He realized that in by investing in companies with a high margin of safety, he reduced his risk while simultaneously increased his potential return. All of this was published in Security Analysis.
Graham channelled his strategies into a rigorous set of rules to be checked before any money was committed to a new investment. His firm had stacks of photocopies of investment checklists that would be filled out from the inspection of financial statements of prospective investments. If the checklists didn’t pass, the investment wasn’t made.
Interestingly, the best investment of Graham’s career came when he broke these rules to make a purchase. The year was 1948, and the company was GEICO. Graham spent a considerable amount of money for a 50% stake in the company, and was named Chairman of the Board of Directors.
At the time, GEICO was the opposite of a value investment. They were a rapidly growing company that traded at a high multiple of earnings, and a high ratio to their book value. If Graham stayed true to his teachings, he wouldn’t have made the investment.
In The Intelligent Investor, Graham writes that the profits from the GEICO investment “far exceeded” the profits from the rest of the partnership’s investments over a twenty-year history. This blows my mind, and it’s surprising that Graham never questioned his value investing philosophy after his best investment opposed it so blatantly.
Eventually the Graham-Newman Partnership was closed, to be replaced by the Graham-Newman Corporation, which lasted until 1958 when it was liquidated. Graham’s investments average an annual return of 17% under his management, well above the returns of the S&P 500 Index.
That’s why he is known for being a legendary investor.
Graham’s influence today remains strong.
Both are on my bookshelf at home and have had a tremendous impact on the way I think about investing. These timeless novels (remember, Security Analysis was originally published in 1934 after the Great Depression and The Intelligent Investor was originally published in 1949) have taught millions of readers about the utility of value investing. Given that the principles still hold, almost one hundred years later, I have confidence that value investing is here to stay.
Graham also continues to influence the world through the success of his disciples. Notable among his students are:
- Warren Buffett of Berkshire Hathaway
- Irving Kahn, investor and founder of Kahn Brothers Group, Inc.
- William J. Ruane of investment firm Ruane Cunniff
- Walter Schloss of the WJS Partnership
I also consider myself a student of Benjamin Graham. My personal investment philosophy is a mix between a deep value investor and a dividend growth investor. If I had to select 5 things that make for an attractive investment, they would be:
- A deep discount to book value
- Low Price-to-Earnings ratio
- History of dividend payments
- Low payout ratio
- Strong prospects of future dividend increases
As you can see, 1 and 2 are directly related to the value investment philosophy developed by Graham and taught in Security Analysis. So I’ve got a lot to thank Graham for.
Graham has obviously had huge effect on the world of investing. Other than Warren Buffett, Graham has had a larger impact on my investment philosophy than anyone else.
I’m glad I decided to write a post about him. Stay tuned for more posts about other extremely successful investors!
Readers, have you learned anything from the teachings of Benjamin Graham in your evolution as an investor? Are there any other expert investors whose strategies you can identify with? Let me know in the comments section!