Benjamin Graham
This article is about an American economist. For information on the Australian AFL and NFL player, see Ben Graham. Benjamin Graham (
May 8,
1894 –
September 21,
1976) was an influential
economist and professional
investor who is today often called the "Father of
Value Investing" and the "Dean of Wall Street."
He is perhaps best known today from frequent references made to him by billionaire investor
Warren Buffett, who studied under Graham at
Columbia University, and was his only pupil to receive an A+. Other well known students of Graham include
William Ruane,
Irving Kahn,
Walter Schloss, and
Charles Brandes.
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 over his students that two of them, Buffett and Kahn, named their sons after him.
Graham, who was of
Jewish descent and whose original last name was Grossbaum, was born in
London and his family emigrated to the
United States when he was one year old. He received his
Bachelor's degree from
Columbia University in
1914. Before graduation, he was offered teaching positions in three different academic departments: philosophy, English, and mathematics.
His book,
Security Analysis, with
David Dodd, was published in
1934 and has been considered a bible for serious investors since it was written. 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 on investing ever written."
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 speculations. It read, "
An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative."
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 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. 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.
Graham's favorite allegory is that of Mr. Market, a very obliging 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 behaviour.
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.
Benjamin Graham wrote that he wished every day to do something foolish, something creative, and something generous. Warren Buffett said that Graham excelled most at the last. Undoubtedly, Graham's generosity in sharing his investment philosophy has benefitted generations of stock market participants.
*
Security Analysis*
The Intelligent Investor*
Warren Buffett*
Philip Fisher*
Value investing*
David Dodd*
John Burr Williams*
Valuation using discounted cash flows*
Gordon modelSee
List of personalities associated with Wall Street.
*
ModernGraham.com - A Resource for Intelligent Investors*
The Graham Investor*
Ludwig von Mises, Meet Benjamin Graham: Value Investing from an Austrian Point of View by
Chris Leithner. Paper Prepared for "Austrian Economics and Financial Markets" |
Audio lecture on the paper, presented at the
Ludwig von Mises Institute.
*
The Rediscovered Benjamin Graham - selected writings of the wall street legend, by
Janet Lowe.
*
Honoring Benjamin Graham: The Father of Value Investing,
Albert L. Auxier, Ph.D. Associate Professor of Finance,
University of Tennessee,
Knoxville.
*
Benjamin Graham Quotes*
Benjamin Graham: Intrinsic Value and Buying Cash at a Discount by Dr. Steve Sjuggerud, Editor, The Investment U E-Letter.
