Benjamin Graham

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For other persons of the same name, see Ben Graham.
Benjamin Graham

Born May 8, 1894(1894-05-08)
Died September 21, 1976 (aged 82)
Nationality United States
Occupation Economist
Stock investor
Known for
Security Analysis (1934)

Benjamin Graham (May 8, 1894 — September 21, 1976) was an American economist and professional investor. Graham is considered the first proponent of Value Investing, an investment approach he began teaching at Columbia Business School in 1928 and subsequently refined with David Dodd through various editions of their famous book Security Analysis. Well known disciples of Graham include Jean-Marie Eveillard, Warren Buffett, William J. Ruane, Irving Kahn and Walter J. Schloss. Buffett, who credits Graham as grounding him with a sound intellectual investment framework, described him as the second most influential person in his life after his own father. In fact, Graham had such an overwhelming influence on his students that two of them, Buffett and Kahn, named their sons, Howard Graham Buffett and Thomas Graham Kahn, after him.

Contents

[edit] History

The cover of Benjamin Graham: The Memoirs of the Dean of Wall Street.

Graham was born in London and moved to New York with his family when he was one year old. After the death of his father and experiencing the humiliation of poverty, he became a good student, graduating from Columbia, as salutatorian of his class, at the age of 20. He received an invitation for employment as an instructor in English, Mathematics, and Philosophy, but took a job on Wall Street eventually starting the Graham-Newman Partnership.[1]

His book, Security Analysis, with David Dodd, was published in 1934 and has been considered a bible for serious investors since it was written.[citation needed] It and The Intelligent Investor published in 1949 (4th revision, with Jason Zweig, 2003), are his two most widely acclaimed books. Warren Buffett describes The Intelligent Investor as "the best book about investing ever written."[2]

Graham exhorted the stock market participant to first draw a fundamental distinction between investment and speculation. 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." [3]

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 in the long run be reflected in its stock price).

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, on the other hand, is one who has more time, interest, and possibly more specialized knowledge to seek out exceptional buys in the market.[citation needed]

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, a statement which Warren Buffett regarded as the most important words about investment ever written.[citation needed] Graham said 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.[citation needed]

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. Often, the price quoted by Mr. Market seems plausible, but often 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.[citation needed]

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 extremely relevant today.

In recent years, Graham's "Mr. Market" approach has been challenged by Modern Portfolio Theory, as advanced by such proponents as William J. Bernstein, whose book The Intelligent Asset Allocator is a direct challenge to Graham's The Intelligent Investor. Modern Portfolio Theory posits that it is generally impossible for any individual to outwit the market, and is widely taught in American and British business schools. Nevertheless, Graham's approach retains a widespread and dedicated following. Indeed, numerous academic studies, including "Contrarian Investment, Extrapolation, and Risk"[4], "Good news for value stocks: Further evidence on market efficiency"[5], "The Cross Section of Expected Stock Returns"[6], and many others, have proven that value stocks outperform the market over virtually all multi-year periods.

According to Warren Buffett, Graham said that he wished every day to do something foolish, something creative, and something generous.[7] Buffett said that Graham excelled most at the last.[8]

[edit] Bibliography

[edit] Books Authored By

  • The Intelligent Investor
  • Storage and Stability: A Modern Ever-normal Granary[15]
  • The Interpretation of Financial Statements
  • World Commodities and World Currency
  • Benjamin Graham, the memoirs of the dean of Wall Street[16]

[edit] Papers

  • ——— (1917). "Some Calculus Suggestions by a Student". The American Mathematical Monthly 24 (6): 265–271. doi:10.2307/2973181. 
  • ——— (1943). "The Critique of Commodity-Reserve Currency: A Point-by-Point Reply". The Journal of Political Economy 51 (1): 66–69. doi:10.2307/1826594. 
  • ——— (1946). "The Undistributed Profits Tax and The Investor". The Yale Law Journal 46 (1): 1–18. doi:10.2307/791630. 
  • ——— (1947). "Money as Pure Commodity". American Economic Review 37 (2): 304–307. doi:10.2307/1821137. 
  • ——— (1947). "National Productivity: Its Relationship to Unemployment-in-Prosperity". American Economic Review 37 (2): 384–396. doi:10.2307/1821149. 
  • ——— (1962). "Some Investment Aspects of Accumulation Through Equities". The Journal of Finance 17 (2): 203–214. doi:10.2307/2977419. 
  • ——— (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. 

[edit] Books about

  • Au, Thomas P. (2004). A Modern Approach to Graham and Dodd Investing. Hoboken, NJ: Thomas Wiley. ISBN 0471584150. 

[edit] See also

[edit] Notes

  1. ^ Jason Zweig, on page xi of The Intelligent Investor, Revised Edition.
  2. ^ Warren Buffett, "Preface to the Fourth Edition", in Benjamin Graham, "The Intelligent Investor", 4 ed., 2003.
  3. ^ Benjamin Graham, "The Intelligent Investor", 4 ed., 2003, Chapter 1, page 18.
  4. ^ Josef Lakonishok, Andrei Shleifer and Robert W. Vishny, "Contrarian Investment, Extrapolation, and Risk", The Journal of Finance, Vol. 49, No. 5 (Dec., 1994)
  5. ^ Rafael La Porta, Josef Lakonishok, Andrei Shleifer and Robert Vishny, "Good news for value stocks: Further evidence on market efficiency", The Journal of Finance, Vol. 52, No. 2 (Jun., 1997)
  6. ^ Eugene Fama and Kenneth French, "The Cross Section of Expected Stock Returns", The Journal of Finance, Vol. 47, No. 2 (Jun., 1992)
  7. ^ Buffett, Warren E.: "Benjamin Graham", Financial Analyst Journal, November/December 1976.
  8. ^ Financial Analysts Journal, November/December 1976. (Reprinted on page x of the preface to revised Fourth Addition of The Intelligent Investor.)
  9. ^ Graham and Dodd. 1934. Security Analysis: Principles and Technique, 1E. New York and London: McGraw-Hill Book Company, Inc.
  10. ^ Graham and Dodd. 1940. Security Analysis: Principles and Technique, 2E. New York and London: McGraw-Hill Book Company, Inc.
  11. ^ Graham et al. 1951. Security Analysis: Principles and Technique, 3E. New York: McGraw Hill Book Company, Inc.
  12. ^ Graham et al. 1962. Security Analysis: Principles and Technique, 4E. New York: McGraw-Hill Book Company, Inc.
  13. ^ Graham and Dodd. 1988. Security Analysis: Principles and Technique, 5E. McGraw-Hill Professional
  14. ^ Graham and Dodd. 2008. Security Analysis: Principles and Technique, 6E. McGraw-Hill Professional
  15. ^ Benjamin Graham. 1937. Storage and Stability: A Modern Ever-normal Granary. New York: McGraw Hill.
  16. ^ Graham and Ed. Chatman. 1996. Benjamin Graham, the memoirs of the dean of Wall Street. New York: McGraw Hill.

[edit] External links

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