Epic Traders – “The Father of Investing” Benjamin Graham w/AudiobookPosted: October 11, 2012
Epic Traders – “The Father of Investing” Benjamin Graham
|Born||May 8, 1894
|Died||September 21, 1976 (aged 82)
|Institution||Columbia Business School, Graham-Newman Partnership|
|Alma mater||Columbia University|
William J. Ruane
Walter J. Schloss
|Contributions||Security Analysis (1934)
The Intelligent Investor (1949)
Benjamin Graham (May 8, 1894 – September 21, 1976) was a British-born 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 withDavid Dodd through various editions of their famous book Security Analysis. Graham’s followers include Warren Buffett, William J. Ruane, Irving Kahn,Walter J. Schloss, Chris Johnston and others. 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.
Life and career
Benjamin Graham was born Benjamin Grossbaum in London, England, to Jewish parents. He moved to New York City with his family when he was one year old. After the death of his father and experiencing poverty, he became a good student, graduating from Columbia University, assalutatorian 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.
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 andThe 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.” Graham exhorted the stock market participant to first draw a fundamental distinction between investmentand 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.”
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, thestock 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. 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 fellow who turns up every day at the stock holder’s door offering to buy or sell his shares at a different price. Rarely, the price quoted by Mr. Market seems plausible, but most of the time 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.
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 (MPT), which is based on the hypothesis of efficiency of financial markets. A popular proponent of MPT is, for example, William J. Bernstein, whose book The Intelligent Asset Allocator extends Graham’s The Intelligent Investor via an appreciation of long-term trends and the near impossibility of understanding the market at large. Modern Portfolio Theory, which is widely taught in American and British business schools, posits that it is generally impossible for any individual to consistently outwit the market, thus denying the possibility of any distinction between “market price” and “value” of a security.
Nevertheless, Graham’s approach retains a widespread and dedicated following and has demonstrated historical success in terms of investment returns. Indeed, numerous academic studies, including “Contrarian Investment, Extrapolation, and Risk”, “Good news for value stocks: Further evidence on market efficiency”, “The Cross Section of Expected Stock Returns”, and many others, have demonstrated that value stocks have outperformed growth stocks and the market in general over virtually all multi-year periods.
According to The Snowball (a biography of Warren Buffett), Graham had an affair with his deceased son’s girlfriend (Marie Louise Amingues) and used to travel to France frequently to visit her.He later separated from his wife Estey in New York, after she refused his offer of living in New York for six months and France for six months. Marie Louise was content to live with Graham without marriage.
- Security Analysis, editions 1934, 1940, 1951 and 1962 and 1988 and 2008 ISBN 978-0-07-159253-6
- The Intelligent Investor, editions 1949, reprinted in 2005; 1959, 1965, 1973  with many reprints since
- Storage and Stability: A Modern Ever-normal Granary, New York: McGraw Hill. 1937 ISBN 0-07-024774-9
- The Interpretation of Financial Statements
- 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