Great Investors: Benjamin Graham
If anyone could be considered the father of modern stock analysis, it would be Ben Graham. During the ‘30s, ‘40s and ‘50s, Graham pioneered the ideas of “value investing” and taught the next generation of investors to see the difference between stock evaluation and market speculation.
Ben Graham was born Benjamin Grossbaum in 1894. He was born in England, but his family emigrated to the United States when he was only a year old. His parents ran a reasonably successful importing business until his father died in 1903, at which point the business deteriorated. Ben was forced to begin working while still in school.
Like many great investors, Graham was a brilliant student. He graduated at the top of his class at Columbia University, and at age 20 he was offered teaching positions in three different departments at the college. Graham turned down the offers and went to look for work on Wall Street.
Graham quickly found a job as an assistant at the brokerage firm Newburger, Henderson & Loeb. His initial job was writing descriptions of the bonds that brokers would be recommending to clients. The company recognized Graham’s skill, and after a few weeks they let him write the recommendations by himself.
Graham’s role in the company changed several times within his first year, but he finally found his niche as a securities analyst. During his time at Newburger, he successfully detected a number of mispriced assets and trade opportunities. His analyses helped the brokerage make solid profits, and eventually led to Graham becoming a full partner in 1920. He was just 26 years old.
A few years later in 1923, Graham left Newburger to help create the firm Graham Corp. He met with great success, but had to shut down the corporation after two years due to failed profit negotiations with one of his major investors. The next year, he created a new investment company with fellow broker Jerome Newman. The company was wildly successful, and effectively raised his clients’ initial investments by 400% in just three years.
Despite his skill, Graham could not escape the effects of the 1929 and 1931 market crashes. Though he had a strategy to deal with a declining market, his tactics were overwhelmed by a market where no one wanted to buy. Graham managed to survive the crashes, however, and soon was back at work making successful investments.
By the late ‘30s, the partnership between Graham and Newman evolved into the Graham-Newman Corporation. It was one of the most successful on Wall Street, making average annual returns above 15%. Graham remained an active investment manager with the corporation until his retirement from trading in 1956.
Far more important than his success on Wall Street, Graham’s legacy lives in the knowledge he passed on to others. In 1928, a year before the crash, Graham accepted a teaching position at Columbia University. There, he taught students how to analyze stocks carefully and rationally, and helped them to distinguish between “investing” and “speculating.” As Graham’s personal success continued to increase, he found more and more students lining up to learn his approach to stock analysis and investing.
Graham’s lessons are still a foundational part of modern investing, but his teaching career is possibly best known for the students it produced. Warren Buffett, Walter Schloss and David Dodd are among the most famous students Graham taught at Columbia. Their successes have inspired a new generation of investors and have created a continual public interest in Graham’s theories.
The epitome of Graham’s teachings lives on in his two popular books Security Analysis (1932) and The Intelligent Investor (1949), both of which are still in print today.
Graham’s first book, Security Analysis, is a technical description of the stock evaluation process and the trademarks of a quality stock. It was written with his former student, David Dodd, and is considered the primary book on value investing.
In The Intelligent Investor, Graham outlined the principles of sound thinking within investing. The book is aimed at both amateur and professional investors. It describes the mindset value investors need to keep when purchasing and holding stocks. The Intelligent Investor is considered a foundational piece of financial education and is Warren Buffett’s favorite book on investing.
Though Graham was a man of huge successes, his personal life was less celebrated. He was divorced three times and has been referred to by some as a womanizer. His first divorce (in the ‘30s) was more damaging to his family than to him, leaving a mark on the social reputation of his wife and children. Graham died in 1976 in his house in France where he lived half of the year with his mistress.
“Operations for profit should be based not on optimism but on arithmetic.”
Graham is possibly the most academically-minded investor of all time. He not only took a purely mathematical approach to investing but also used his knowledge to improve his principles and formulas to educate future investors.
“The underlying principles of sound investment should not alter from decade to decade, but the application of these principles must be adapted to significant changes in the financial mechanisms and climate.”
The heart of Graham’s strategy was value. He did not purchase shares assuming a company would have success with a new product or venture. Instead, he found companies that already had solid book values but were selling below their logical prices. He spurned the idea of buying trendy or on-the-rise stocks and believed most investors were just speculators.
“Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal.”
Graham’s principles would have no credibility if they had not proven so effective. His concept of a close analysis of a company’s books proved to be extremely useful in an age when few others were doing the same. On one occasion, Graham’s analysis found that the Northern Pipeline Company was trading for $65 a share when it had railroad bond assets worth $95 a share. He purchased a large number of shares and convinced the company to sell the assets, resulting in a $70 dividend. Graham walked away with a huge profit, simply because he was willing to look at the fundamentals of a company.
Most businesses change in character and quality over the years, sometimes for the better, but perhaps more often for the worse. The retail investor need not watch his companies’ performance like a hawk, but he should give it a good, hard look from time to time.
The only problem with Graham’s investment approach is that it will never allow modern investors to be as successful as he was. The market has become much more efficient since the early 20th century. Scores of professional analysts with access to incredible amounts of data have left no obvious investments unchecked. Still, investors can find value stocks wherever a good company is ignored for being “boring” or temporarily unsuccessful. Just as speculation makes some stocks needlessly expensive, it makes others unexpectedly cheap.
To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.
Though he did not create private foundations nor publicize charitable donations, Graham was a very generous man. He often did expensive favors for his friends and always made enough time for those who wanted to talk. Most shockingly, he would give out stock advice to individuals, telling them the companies he intended to invest in, which allowed them to get in on a good buy without investing with his company.
Probably the most philanthropic act Graham undertook was publishing his books. In his writings, he outlined the strategies investors could use to make money in the same way he did. Graham owed much of his success to being different from other investors. Yet, he felt so compelled to teach others; he willingly gave away secrets and damaged his own ability to make profits for himself.