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Summary Article: Benjamin Graham The father of modern security analysis
from QFinance: The Ultimate Resource
LIFE AND CAREER

Benjamin Graham was an economist and investor who defended rigorous security analysis throughout his career. He studied at Columbia University, but declined a teaching position to be a chalker on Wall Street with Newburger, Henderson and Loeb. Bright and ambitious, he was soon undertaking financial research for the firm, and was eventually made a partner. Although the market crash of 1929 almost wiped him out, Graham continued to make useful returns for the firm, while also writing investment books, and lecturing at Columbia. He was a strong advocate of financial analysis training, and helped found the Chartered Financial Analyst (CFA) program. Warren Buffett studied under him at Columbia, and asked him for an investing job, which Graham eventually gave him, starting Buffett on his career.

KEY THINKING
  • Graham revolutionized investment thinking by introducing the concepts of security analysis, fundamental analysis, and value investing.

  • His books expanded on the definition of a cheap company, based on a principle of “margin of safety.” His preference for value investing was based on investors seeking out bargains among undervalued companies, buying into them, and then waiting for their fair value to be realized.

  • Two of his books, Security Analysis and The Intelligent Investor, are considered the bibles for both individual investors, and financial professionals.

  • Created an imaginary investor called Mr Market to demonstrate his views about wise investing, and choosing stocks based on their fundamental value rather than because of advice or market direction.

IN PERSPECTIVE
  • In Security Analysis, he presented his principles of value-oriented investment, using fundamentals in guiding the valuation of securities; he extended this approach in his books, Interpretation o Financial Statements and the Intelligent Investor.

  • Distinguished between the passive and the active investor. The former invests cautiously, looks for value stocks and buys for the long term, while the active investor takes more time getting to know companies to find the best buys in the market.

  • Recommended that investors spend time and effort to analyze the financial state of companies.

  • Criticized corporations that produced unhelpful financial reports, which hid the real state of their finances from potential investors.

  • Advocated dividend payments for shareholders, instead of firms keeping all of their profits as retained earnings. Dividends, he argued, indicated that a company was profitable, and could offer a return even if its stock was performing poorly.

  • Popularized the examination of price-to-earnings ratios, debt-to-equity ratios, dividend records, net current assets, book values, and earnings growth.

  • In Storage and Stability, he examined wider economic issues, such as the effect of deflation on farmers, workers, and producers, and proposed the creation of pools of commodities to act as buffer stocks against general price deflation.

  • In World Commodities and World Currency, he proposed an international “commodity standard,” where macroeconomic policies would focus on a general basket of commodities, a concept supported by Keynes, Hayek, and Friedman.

“Wall Street people learn nothing and forget everything.”

Benjamin Graham
Copyright © Bloomsbury Information Ltd, 2009, 2011, 2012, 2013, 2014

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