Benjamin Graham

Benjamin Graham (/ɡræm/; né Grossbaum; May 9, 1894 – September 21, 1976) was a British-born American economist, professor and investor. He is widely known as the "father of value investing",[1] and wrote two of the founding texts in neoclassical investing: Security Analysis (1934) with David Dodd, and The Intelligent Investor (1949). His investment philosophy stressed investor psychology, minimal debt, buy-and-hold investing, fundamental analysis, concentrated diversification, buying within the margin of safety, activist investing, and contrarian mindsets.

For other people with the same name, see Ben Graham (disambiguation).
Benjamin Graham
Graham reading an edition of Moody's Manual, 1955
Born
Benjamin Grossbaum

(1894-05-09)May 9, 1894
London, England, UK
DiedSeptember 21, 1976(1976-09-21) (aged 82)
Aix-en-Provence, France
NationalityAmerican
InstitutionColumbia University
University of California, Los Angeles
Alma materColumbia University
ContributionsSecurity Analysis (1934)
The Intelligent Investor (1949)
Benjamin Graham formula

After graduating from Columbia University at age 20, he started his career on Wall Street, eventually founding the Graham-Newman Partnership. After employing his former student Warren Buffett, he took up teaching positions at his alma mater, and later at UCLA Anderson School of Management at the University of California, Los Angeles.

His work in managerial economics and investing has led to a modern wave of value investing within mutual funds, hedge funds, diversified holding companies, and other investment vehicles. Throughout his career, Graham had many notable disciples who went on to receive substantial success in the world of investment, including Irving Kahn and Buffett, the latter going on to describe him as the second most influential person in his life after his own father. Another one of Graham's famous students was Sir John Templeton.[2][3]

Early life

Graham was born Benjamin Grossbaum in London, England[4] to Jewish parents.[5][6] On his mother's side, he was the great-grandson of Rabbi Yaakov Gesundheit and a cousin of neuroscientist Ralph Waldo Gerard.[7] He moved to New York City with his family when he was one year old. The family changed their name from Grossbaum to Graham in a desire to assimilate into American society and avoid anti-Semitic and anti-German sentiments.[7]

After the death of his father, who owned and managed a successful furniture store, the family experienced poverty which Graham said later influenced his investing theories by inspiring an early appreciation of buying low-priced bargains.[7] Graham became a good student, graduating as salutatorian of his class at Columbia. He declined an offer to teach English, mathematics, and philosophy, choosing instead to take a job on Wall Street, where he eventually started his Graham-Newman Partnership. Early on, Graham made a name for himself with "The Northern Pipeline Affair", an early case of shareholder activism involving John D. Rockefeller.[8] Graham's research indicated Northern Pipeline Co. held vast cash and bond assets that he believed were not being put to good use, and bought enough shares to force a proxy vote to distribute these assets to shareholders.

Investment and academic career

His first book, Security Analysis with David Dodd, was published in 1934.[9][10][11][12][13] In Security Analysis, he proposed a clear definition of investment that was distinguished from what he deemed speculation. It read, "An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative."[14]

Warren Buffett describes The Intelligent Investor (1949) as "the best book about investing ever written."[15] Graham exhorted the stock market participant to first draw a fundamental distinction between investment and speculation.

An early copy of Graham's Intelligent Investor

Graham wrote that the owner of equity stocks should regard them first and foremost as conferring part ownership of a business. With that perspective in mind, the stock owner should not be too concerned with erratic fluctuations in stock prices, since in the short term the stock market behaves like a voting machine, but in the long term it acts like a weighing machine (i.e. its true value will be reflected in its stock price in the long run). Graham distinguished between the passive and the active investor. The passive investor, often referred to as a defensive investor, invests cautiously, looks for value stocks, and buys for the long term. The active investor, in contrast, is one who has more time, interest, and possibly more specialized knowledge to seek out exceptional buys in the market.[16] Graham recommended that investors spend time and effort to analyze the financial state of companies. When a company is available on the market at a price which is at a discount to its intrinsic value, a "margin of safety" exists, which makes it suitable for investment.

Graham wrote that investment is most intelligent when it is most businesslike. By that he meant that the stock investor is neither right nor wrong because others agreed or disagreed with him; he is right because his facts and analysis are right.[17] Graham's favorite allegory is that of Mr. Market, a fellow who turns up every day at the stock holder's door offering to buy or sell his shares at a different price. Usually, the price quoted by Mr. Market seems plausible, but occasionally it is ridiculous. The investor is free to either agree with his quoted price and trade with him, or to ignore him completely. Mr. Market doesn't mind this, and will be back the following day to quote another price. The point is that the investor should not regard the whims of Mr. Market as determining the value of the shares that the investor owns. He should profit from market folly rather than participate in it. The investor is best off concentrating on the real life performance of his companies and receiving dividends, rather than being too concerned with Mr. Market's often irrational behavior.[18]

Graham was critical of the corporations of his day for obfuscated and irregular financial reporting that made it difficult for investors to discern the true state of the business's finances. He was an advocate of dividend payments to shareholders rather than businesses keeping all of their profits as retained earnings. He also criticized those who advised that some types of stocks were a good buy at any price, because of the prospect of sustained stock price growth, without a good analysis of the business's actual financial condition. These observations remain relevant today.[19]

Graham's average investment performance was ~20% annualized return over 1936 to 1956. The overall market performance for the same time period was 12.2% annually on average.[20] Despite this, both Buffett and Berkshire Hathaway vice chairman Charlie Munger[21] consider following Graham's method strictly to be outdated, with Buffett stating during a 1988 interview with journalist Carol Loomis for Fortune, "Boy, if I had listened only to Ben, would I ever be a lot poorer."[22]

Graham's largest gain was from GEICO, which his Graham-Newman Partnership purchased 50% of in 1948 for $712,000. The position grew to $400 million by 1972, contributing more to the portfolio than all of Graham-Newman's other investments combined.[23] GEICO was eventually acquired in whole by Berkshire Hathaway in 1996,[24] having previously been saved by Buffett and John J. Byrne in 1976.[25]

Personal life

According to The Snowball, after his son's death, Graham had an affair with the deceased's girlfriend Marie Louise "Malou" Amingues (who was several years older than his son[26]) and used to travel to France frequently to visit her. He later separated from his wife, Estey, after she refused his offer to split their residence six months each year between New York and France. Amingues was content to live with Graham without marriage.[27]

On September 21, 1976, Graham died in Aix-en-Provence, France, at the age of 82.

Legacy

His contributions spanned numerous fields, one of which was fundamental value investing.

Graham is considered the "father of value investing,"[1] and his two books, Security Analysis and The Intelligent Investor, defined his investment philosophy, especially what it means to be a value investor. Arguably, his most famous student was Warren Buffett, who is consistently ranked among wealthiest persons in the world.[28] According to Buffett, Graham used to say that he wished every day to do something foolish, something creative, and something generous.[29] And Buffett noted, Graham excelled most at the last.[30]

While many value investors have been influenced by Graham, his most notable investing disciples include Charles Brandes, as well as William J. Ruane, Bert Olden, Irving Kahn and Walter J. Schloss. In addition, Graham's thoughts on investing have influenced the likes of Seth Klarman and Bill Ackman.[31][32] While some of Graham's investing concepts are now regarded as superseded or outdated, many others are still recognized as important and Security Analysis or The Intelligent Investor are required reading for new hires at many investing firms around the world.[7]

Alongside his work in investment finance, Graham also made contributions to economic theory. Most notably, he devised a new basis for both U.S. and global currency as an alternative to the gold standard.[33] Graham regarded this currency theory as his most important professional work; it was largely ignored in his lifetime but gained serious attention decades after his death in the aftermath of Financial crisis of 2007–2008.[7]

Bibliography

Books
  • Security Analysis, editions 1934,[34] 1940,[35] 1951[36] and 1962[37] and 1988[38] and 2008[39] ISBN 978-0-07-159253-6
  • The Intelligent Investor, editions 1949,[40] reprinted in 2005; 1959,[41] 1965,[42] 1973[43] with many reprints since
  • Storage and Stability: A Modern Ever-normal Granary, New York: McGraw Hill. 1937 ISBN 0-07-024774-9[44]
  • The Interpretation of Financial Statements, 1937, 2nd Edition
  • World Commodities and World Currency, New York & London, McGraw-Hill Book Company. 1944 ISBN 0-07-024806-0
  • Benjamin Graham, The Memoirs of the Dean of Wall Street (1996) ISBN 978-0-07-024269-2[45]

Papers
  • ———; Graham, Benjamin (1917). "Some Calculus Suggestions by a Student". The American Mathematical Monthly. The American Mathematical Monthly, Vol. 24, No. 6. 24 (6): 265–271. doi:10.2307/2973181. JSTOR 2973181.CS1 maint: numeric names: authors list (link)
  • ———, Benjamin (1943). "The Critique of Commodity-Reserve Currency: A Point-by-Point Reply". The Journal of Political Economy. 51 (1): 66–69. doi:10.1086/255988. JSTOR 1826594.CS1 maint: numeric names: authors list (link)
  • ———; Graham, Benjamin (1946). "The Undistributed Profits Tax and The Investor". The Yale Law Journal. The Yale Law Journal, Vol. 46, No. 1. 46 (1): 1–18. doi:10.2307/791630. JSTOR 791630.CS1 maint: numeric names: authors list (link)
  • ——— (1947). "Money as Pure Commodity". American Economic Review. 37 (2): 304–307. JSTOR 1821137.CS1 maint: numeric names: authors list (link)
  • ——— (1947). "National Productivity: Its Relationship to Unemployment-in-Prosperity". American Economic Review. 37 (2): 384–396. JSTOR 1821149.CS1 maint: numeric names: authors list (link)
  • ———; Graham, Benjamin (1962). "Some Investment Aspects of Accumulation Through Equities". The Journal of Finance. The Journal of Finance, Vol. 17, No. 2. 17 (2): 203–214. doi:10.2307/2977419. JSTOR 2977419.CS1 maint: numeric names: authors list (link)
  • ——— (1962). "The Commodity-Reserve Currency Proposal Reconsidered". In Yeager, Leland B. (ed.). In Search of Monetary Constitution. Cambridge, MA: Harvard University Press. pp. 184–214.CS1 maint: numeric names: authors list (link)

See also

References
  1. "8 Brilliant Lessons From The Investor That Taught Warren Buffett Everything He Knows". Business Insider. Retrieved 2017-02-21.
  2. Chapman, Scott A. (2019-08-20). Empower Your Investing. Post Hill Press. p. 41. ISBN 978-1-64293-238-6. Archived from the original on 2020-01-06.
  3. Berryessa, Norman; Kirzner, Eric (1988-12-22). Global Investing: The Templeton Way. McGraw-Hill Education. p. 125. ISBN 978-1556238734.
  4. The Motley Fool. Investment Greats: Ben Graham. April 17, 2009.
  5. However, he wrote in his Memoirs that, "I must confess here that I feel little emotional loyalty to the Jewish people from whom I sprung". Graham, Benjamin; Chatman, Seymour Benjamin. Benjamin Graham: The Memoirs of the Dean of Wall Street, pp. 63–64. McGraw-Hill, 1996. ISBN 0-07-024269-0
  6. Grego, Gabriele (December 8, 2014). "The Jewish Origins of Value investing". The Times of Israel. It also should be pointed out that most value investors, including Benjamin Graham, Seth Klarman, Bruce Berkowitz, Bruce Greenwald, Lawrence Tisch and Joel Greenblatt, are Jewish.
  7. Joe Carlen (2012) The Einstein of Money: The Life and Timeless Financial Wisdom of Benjamin Graham, Prometheus, ISBN 1616145579
  8. Bloomberg, How Benjamin Graham Revolutionized Shareholder Activism. May 17th, 2013.
  9. New York Times, August 16, 1998 Gretchen Morgenson – Market Watch MARKET WATCH; A Time To Value Words of Wisdom“ … Security Analysis by Benjamin Graham and David Dodd.”
  10. New York Times, January 2, 2000 Business Section Humbling Lessons From Parties Past By BURTON G. MALKIEL “BENJAMIN GRAHAM, co-author of "Security Analysis,"long ago put his finger on the most dangerous words in an investor's vocabulary: "This time is different." Burton G. Malkiel is an economics professor at Princeton University and the author of "A Random Walk Down Wall Street" (W.W. Norton).
  11. Amazon: Editorial Reviews https://www.amazon.com/Security-Analysis-Benjamin-Graham/dp/1932378073 “Security Analysis is the bible of fundamental analysis. Originally published in 1934, the tome systematically lays bare the science of security analysis.”
  12. About.com Investing for Beginners http://beginnersinvest.about.com/cs/productreviews/gr/112702a.htm “Benjamin Graham's Security Analysis has been called the "Bible" of investing.”
  13. AbeBooks.com http://www.abebooks.com/book-search/title/security-analysis/author/benjamin-graham/sortby/1/n/200000080/page-1/ “Just as value investing never goes out of style, neither does the value investor's bible, 'Security Analysis,' by Benjamin Graham and David L. Dodd, which has withstood the test of time as well or better than any investment book ever published.”
  14. Benjamin Graham, The Intelligent Investor, 4th ed., 2003, chapter 1, page 18.
  15. Warren Buffett, "Preface to the Fourth Edition", in Benjamin Graham, "The Intelligent Investor", 4 ed., 2003.
  16. Benjamin Graham, The Intelligent Investor, 4th ed., 2003, Chapter 1.
  17. The Intelligent Investor p. 524 (Revised Ed 2006)
  18. Benjamin Graham, "The Intelligent Investor", 4 ed., 2003, Chapter 20.
  19. The Economist, Benjamin Graham: Figuring it out. July 7th, 2012.
  20. Reese, John P. (December 18, 2012). "Ben Graham's 60-Year-Old Strategy Still Winning Big". Forbes.com. Archived from the original on March 15, 2018. Retrieved January 13, 2020.
  21. Chapman, Scott A. (2019). Empower your investing : adopting best practices from John Templeton, Peter Lynch, and Warren Buffett. New York: Post Hill Press. pp. 202–203. ISBN 978-1-64293-238-6. OCLC 1112253785.
  22. Chapman, Scott A. (2019). Empower your investing : adopting best practices from John Templeton, Peter Lynch, and Warren Buffett. New York: Post Hill Press. p. 190. ISBN 978-1-64293-238-6. OCLC 1112253785.
  23. Chapman, Scott A. (2019). Empower your investing : adopting best practices from John Templeton, Peter Lynch, and Warren Buffett. New York: Post Hill Press. p. 253. ISBN 978-1-64293-238-6. OCLC 1112253785.
  24. "74. Geico (Berkshire Hathaway)". Forbes. Archived from the original on August 27, 2015. Retrieved August 8, 2015.
  25. Gorham, John (July 24, 2000). "See Jack Run". Forbes. Archived from the original on June 29, 2015.
  26. Snowball, Page 164
  27. Snowball, Page 391
  28. "Warren Buffett". Forbes. Retrieved 28 January 2018.
  29. Buffett, Warren E.: "Benjamin Graham", Financial Analyst Journal, November/December 1976.
  30. Financial Analysts Journal, November/December 1976. (Reprinted on page x of the preface to revised Fourth Addition of The Intelligent Investor.)
  31. "Seth Klarman - Video Conference with the Ben Graham Centre for Value Investing [2009] - ValueWalk". ValueWalk. 2016-08-27. Retrieved 2017-02-21.
  32. "These Are The 12 Books That Bill Ackman Has All His Analysts Read". Business Insider. Retrieved 2017-02-21.
  33. Bloomberg, Benjamin Graham’s Clever Idea for Averting Currency Wars. February 28th, 2013.
  34. Graham and Dodd. 1934. Security Analysis: Principles and Technique, 1E. New York and London: McGraw-Hill Book Company, Inc.
  35. Graham and Dodd. 1940. Security Analysis: Principles and Technique, 2E. New York and London: McGraw-Hill Book Company, Inc.
  36. Graham et al. 1951. Security Analysis: Principles and Technique, 3E. New York: McGraw Hill Book Company, Inc.
  37. Graham et al. 1962. Security Analysis: Principles and Technique, 4E. New York: McGraw-Hill Book Company, Inc.
  38. Graham and Dodd. 1988. Security Analysis: Principles and Technique, 5E. McGraw-Hill Professional
  39. Graham and Dodd. 2008. Security Analysis: Principles and Technique, 6E. McGraw-Hill Professional
  40. Benjamin Graham. 1949. The Intelligent Investor, 1E. Harper&Brothers, New York, 264 pp
  41. Benjamin Graham. 1959. The Intelligent Investor, 2E revised. Harper&Brothers, New York, 292 pp
  42. Benjamin Graham. 1965. The Intelligent Investor, 3E revised. Harper's, New York, 332 pp
  43. Benjamin Graham. 1973. The Intelligent Investor, 4E revised. Harper&Row, Publishers, New York, 340 pp
  44. Benjamin Graham. 1937.ISBN 0-07-024774-9 Storage and Stability: A Modern Ever-normal Granary. New York: McGraw Hill. 1937
  45. Graham and Ed. Chatman. 1996. Benjamin Graham, the memoirs of the dean of Wall Street. New York: McGraw Hill.
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