Ben Graham is in my opinion the most important figure in the history of value investing. Graham is a household name among experienced value investors. It is absolutely imperative for new investors to study all of his writings, including his two most famous books, Security Analysis and its more readable cousin The Intelligent Investor. I recommend reading the latter first, and then studying the former in detail.
Reading The Intelligent Investor was a game changer for me years ago, and it laid the foundation for my investment philosophy and strategy that I use today. In fact, I name my two separate strategies I employ the Defensive and the Enterprising strategies, after the two approaches that Graham discusses in his book.
I will be writing notes and thoughts on Ben Graham and his works much more on Base Hit Investing. Below are some brief bio notes as well as links to more info on Graham.
- Co-author (with David Dodd) of the famous text Security Analysis. This text sits on the desks of all successful value investors. It has been studied by all of the greats including Buffett, Klarman, Schloss, Greenblatt, Ruane, Kahn, Neff, and countless others.
- Author of The Intelligent Investor, his other famous book. This one has also been read by all the greats, but was written for the individual investor that wanted to improve his skill from home. This book is all you really need in order to form a successful investment approach.
- Along with his famous writings, he is perhaps most revered for being the mentor to the world’s greatest investor Warren Buffett. Graham taught Buffett at Columbia, grading him with the only A+ he ever gave in his class. Later Buffett worked for Graham at Graham’s investment fund.
- Although famous for his teaching and writing, he was an extremely successful investor. He put together a long 20 year plus track record of about 20% annual returns vs the overall market average of about 12%.
- His investment record was built on a very low risk, highly diversified approach to stock selection. Graham was more interested in the safety of principal first, followed by a satisfactory return second.
Graham Investment Philosophy:
- Graham invested based on statistical data. He used simple analysis based on public information like balance sheets and income statements. He used very little qualitative information, preferring to stick to his hard facts and numbers.
- Graham said “Investing is most intelligent when it is most businesslike”. He thought of stocks as fractions of businesses, backed by assets and earning power, as opposed to pieces of paper that could be traded back and forth. This idea was somewhat novel in his day.
- His approach was centered on what he famously called “Margin of Safety”. Graham didn’t want to take big risks with his investments. He learned from the depression how badly things can get if stocks are purchased when they are too expensive and selling for far more than their true value (or without a margin of safety)
- Experiencing the depression led him to look for ways to invest where the downside was extremely limited. Graham felt that if you protected the downside, the upside would take care of itself.
- He essentially became a risk manager, taking the same attitude an insurance company would have. He wanted to own a diversified basket of extremely undervalued stocks, knowing that some wouldn’t work out, but the aggregate profits would likely exceed the aggregate losses over time.
- This approach worked extremely well, allowing Graham to significantly outperform the market, averaging about 20% returns annually while taking very little risk.
- Graham’s main strategy was to buy stocks selling for 2/3 of their liquidation value
- His returns came largely from low risk investments called “net-nets”, or stocks selling for less than their net working capital, which he defined as current assets minus current liabilities and all other long term debt. It is essentially the value of the company if they were to close their business and liquidate their assets.
- Later in his career, when these net-nets became harder to find, he devised simple formulas for beating the market. In 1975 he wrote about a very simple value formula that used low PE ratios and had a few other inputs for quality. This strategy averaged 15% per year in a backtest from 1925-1975 vs the Dow’s average of 7%.
- Graham was always very interested in finding simple ways to allocate capital. He was always focused on the numbers. He never talked to management, and didn’t really care what the business did. He only wanted cheap stocks relative to asset values and earnings.
- Graham was also very interested in helping the individual investor. He recommended two basic approaches to investment:
- Enterprising (Aggressive) designed for the professional, focused full time investor
- Defensive (Conservative) designed for the non-professional individual investor
- Both strategies were similar, and both were based on the same common investment principles of value, diversification, and patience.
Over the course of the last 5 years, I’ve studied Graham’s work in detail and modeled my investment strategy after a few of his tenets. One of the key principles I learned from Graham is that it is possible to achieve outstanding long term investment results by analyzing the data while not placing a huge amount of importance on any one stock or decision. This allows investors who don’t have above average insights on business or management capabilities to design a low risk, effective approach to investment.
I believe that most investors should start by emulating Graham’s low risk approach to investment. As investors improve their analytical skills over time, they may choose to become more qualitative (meaning focusing more on business products and industry, management skill, etc…). But Graham’s technique provides a method that is easily replicable and investable using only publicly available information with no predictions necessary. This is a base that can be improved by the very best investors, but in fact is very satisfactory in and of itself.
Key Books by Graham:
Other Books Discussing Graham:
- Money Masters of Our Time
- Benjamin Graham: Memoirs of the Dean of Wall Street
- Rediscovered Ben Graham: Selected Writings of the Wall Street Legend
- Benjamin Graham on Investing
- Snowball: Warren Buffett and the Business of Life
Other Links on Graham that I’ve saved on my favorites lists (Thanks to ValueWalk.com and ValueHunter):
- Ben Graham Lectures: An outstanding collection of transcripts from Graham’s class he taught at Columbia
- Superinvestors of Graham and Doddsville: As I’ve mentioned on other pages here on BHI, this is a key piece by Buffett discussing the track records of other investors who built their strategies on Graham’s principles
- Ben Graham: Then and Now: A Forbes piece on Graham from 2008
- “How to Handle Your Money“: Interview with Ben Graham
- Valuation Technique (1947) by Ben Graham
- Toward a Science of Security Analysis by Ben Graham
- A Conversation with Ben Graham: Great interview from the Financial Analysts Journal from 1976
- An Hour with Ben Graham: Another great interview from 1976
- Renaissance of Value by Ben Graham (1974)
- Ben Graham’s Lost Magic Formula by Lonnie Rush of Guru Focus
- The above links are some of my favorites. You can also find much more on ValueWalk.com’s outstanding resource page on Ben Graham, including the Graham-Newman partnership letters, which I strongly recommend. In fact, I’ve read each of them and studied the individual year’s results and holdings, an extremely valuable learning experience. I recommend comparing Graham’s returns in each individual year and notice how his performance compared to the Dow in various markets.