Monday, March 3, 2008

Great Stock Market Investing Minds - Benjamin Graham

A beginner's guide to 'The Father Of Value Investing', one of the great stock market investing minds.

I thought I would write a series of articles about some of history's greatest stock market investing minds starting today with Benjamin Graham. Benjamin Graham was a professional investor, a successful author and is widely considered to be the father of value investing. And in a stint teaching at Columbia University 'The Dean Of Wall Street' taught some of great minds of the following generation of investors.

Graham first went to work on Wall Street for Newburger, Henderson & Loeb after graduating from Columbia at the age of 20. Then in 1926 he formed the Graham-Newman partnership with Jerome Newman. Graham is believed to have been personally ruined by the great stock market crash of 1929 and the Great Depression which followed. His partnership survived the crash and recovered to produce outstanding investment returns over an extended period. From what I recall, his average annual return was in the vicinity of 17%.

In 1934, along with co-author and fellow Columbia professor David Dodd, Benjamin Graham published Security Analysis. Security Analysis was an attempt by the authors to bring some structure and rigor to the field of stock market investing. After the carnage of the 1929 crash this was greatly needed.

Security Analysis is a hefty volume and I wouldn't recommend it to beginner investors, however it's well worth a read if you can set aside the time. Don't make it the first stock market investing book you read, but once you have the investing basics under control then you should definitely tackle Security Analysis.

The other perhaps better know volume to be penned by Graham was The Intelligent investor. I have already mentioned this book in Stock Market Investing Books For Beginners. The Intelligent Investor is one of the best stock market books I've ever read. As a beginner, the simple yet powerful concepts introduced in the book were both enlightening and inspiring. First published in 1949 and regularly updated until his death in 1976, this book has stood the test of time. Value investors the world over frequently quote Graham's text.

Benjamin Graham is responsible for the Mr Market metaphor. Mr Market wasn't a superhero, but rather a way for investors to think about the stock market. Graham said to consider your participation in the stock market to be like co-owning a profitable, stable business with a partner called Mr Market. Each day he will approach you with a price at which he would be willing to either buy out your share of the business, or sell you his. However, Mr Market is manic-depressive and the prices he offers fluctuate wildly as his mood changes. But the good news is he cames back day after day with a new offer and you are under no obligation to either buy from or sell to Mr Market on any given day. Your challenge is to not be distracted by Mr Market's erratic behavior and to take advantage of outstanding opportunities presented by Mr Market as they arise.

(Please note: My copy of The Intelligent Investor is out on loan, so the above description may not be true to Graham's original writing. However you should get the general idea.)

Another theme central to Benjamin Graham's teachings is the concept of a Margin Of Safety. What this means is that when you approach a particular investment opportunity, you should ensure you buy at a price sufficiently below what you think the value is that, should anything unforeseen happen you should still end up with a satisfactory result. In addition, he advocated diversification as a way of reducing the risk associated with any given investment.

Measures used by Graham to determine value include Price To Earnings Ratios, Dividend Yields and Net Tangible Assets. In addition Debt Levels and management attitude to shareholders should also be considered.

I'm running out of time and space in this post. There is much more the Benjamin Graham's teachings to what can be condensed into a single blog post. I suspect I will write another one at some point to fill in all of the gaps I have left in this post. I just wanted to finish up here by giving some indication of the caliber of students he taught while at Columbia.

Warren Buffett is possibly the most famous and arguably most outstanding of these. Buffett actually spent some time working with his teacher in the Graham-Newman partnership. He then went on to form his own investment partnership before eventually leading Berkshire Hathaway to almost unparalleled success.

Other student's of Graham's include Walter Schloss and William Ruane. Both very successful professional investors in their own right, William J. Ruane went on to manage the very successful Sequoia fund while Walter J. Schloss recorded a return of 16% over a half century of stock market investing.

I highly recommend Benjamin Graham's writings and teachings. Both beginners and the more experienced will learn a great deal about stock market investing from Benjamin Graham.

6 comments:

4Life said...

Excellent read! Thanks for sharing it. I plan to include your article in my weekly carnival/article review Friday.

Best Wishes,
Dividends4Life

aussieinvestor said...

Thanks Dividends4Life - I appreciate your kind words. I've just had a quick browse through some of the posts on your blog. You've got some great work on there. Thanks for stopping by.

Mark Perkins said...

cool site

Bud said...

I think you might like my new self-published book. My book, "The Four Filters Invention of Warren Buffett and Charlie Munger" examines each of the basic steps they perform in framing and making an investment decision. Here is a 10 min. audio book summary: http://www.frips.com/4fsummary.mp3

Here is the review that George at valueinvestingnews.com and fatpitchfinancial.com did on my book. http://www.valueinvestingnews.com/four-filters-invention-warren-buffett-ch-0

As for my own views, “The Four Filters Invention of Warren Buffett and Charlie Munger” at http://www.frips.com is designed to be the next “Intelligent Investor.” It is a small book at 98 pages, and it concentrates mainly on the sequential process outlined by Warren Buffett. How do the best “frame” their investing decisions? The Four Filters cluster around the important business variables of Products, Customer-Sustainablility, Managers, and Price/Value.

The book also strives to prove that Buffett and Munger invented a Behavioral Finance Formula composed of three qualitative steps and one quantitative step, that is underappreciated by the
business and academic communities. In that respect, Buffett and Munger will have a greater long term impact on academics than the Efficient Market Hypothesis.

While my book is concentrated on Munger and Buffett’s approach to framing, this book contains the best of Graham, Carret, Fisher, Buffett and Munger. Read the summary a few times, and you will be motivated and hypnotized into thinking about ways you “frame” your important decisions. This is a subtle peek into sensible and optimal thinking within Behavioral Finance.

QUALITY STOCKS UNDER THREE DOLLARS said...

Benjamin Graham is known as the father of value investing.

QUALITY STOCKS UNDER FOUR DOLLARS said...

Ben Graham is the one that warrem buffett considers to be responsible for his investing success.