Benjamin Graham

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Books by Benjamin Graham

In response to his observations after the crash, he co-authored a book with David Dodd entitled "Security Analysis". Among the contributing authors was Irving Kahn, one of the world's most distinguished investors.

As a lecturer at Columbia Business School, Graham wrote "Security Analysis" in 1934, at the beginning of the Great Depression. In this book, the fundamentals of value investing are outlined. Originally published in 1934, the book has been revised six times and has been republished in 1940, 1951, 1962, 1988, 2008, and 2020.

In 1949, Graham published "The Intelligent Investor: A Definitive Book on Value Investing". There were subsequent editions published in 1954, 1959, and 1973. As portrayed in the book, Mr. Market is the business partner of an investor, who attempts to either sell his shares to the investor or buy them from the investor on a daily basis. As the title implies, Mr. Market represents the market, which is volatile and subject to constant fluctuations (in sentiment). The daily market price is determined by Mr. Market. He is often irrational and arrives at the investor's doorstep on different days with different prices, depending on his mood. There is no obligation on the part of the investor to accept a buy or sell offer.

With regard to Mr. Market, Graham urges investors not to rely on daily market sentiment, which is driven by emotions, but rather conduct their own analysis of the value of an individual stock. It is recommended that this analysis is conducted based on the company's financial and operational reports. In light of this analysis, the investor will be in a better position to make a judgment when Mr. Market presents him with an offer. Graham stated that an intelligent investor buys from pessimists and sells to optimists. Investors should look for opportunities that arise as a result of price-value discrepancies caused by economic depressions, market crashes, one-time events, temporary negative publicity, and human error. In the absence of such opportunities, investors should ignore the noise generated by the market.

Graham's Core Investment Principles

The following is a summary of Graham's key investment principles. Investors are advised by Graham to avoid following the crowd, to maintain a portfolio of 50% stocks and 50% bonds, to avoid day trading, to take advantage of market fluctuations, to avoid buying stocks simply because they are popular, to comprehend that market volatility is given and can be utilized to the investor's benefit, and to watch for creative accounting techniques used by companies to increase the value of earnings per share (EPS).

• A margin of safety should always be maintained when investing: Value investing suggests that a stock should only be bought if it is trading at a discount to its intrinsic value. Taking advantage of this discount not only provides a return opportunity, but also hedges against downside risk.
• Be prepared for volatility: The volatility of stocks is something that is to be expected and profited from. Mr. Market's mood swings are indicative of the market's volatility. As this volatility is fueled by many emotions and other factors, investors should not be impressed by it. Rather, an investor should evaluate the company on the basis of a sound and rational analysis. In view of the complexity of the valuation, you may want to hire a good wealth manager to assist you. The use of volatility should be exploited by selling overvalued stocks and buying undervalued ones.
• Identify your investment type: There are active and passive investors. It is important for an active investor to balance the quality and amount of research with the expected return. In some circumstances, this may require a great deal of time and effort. If these resources are not available, the investor should opt for a passive investment that may have a lower return. A good alternative is to invest in an index. It is also possible to pursue an active investment strategy with the assistance of an independent wealth manager without having to devote a large amount of time and energy to it.
• Understand the difference between speculators and investors: According to Graham, there are both smart speculators and smart investors; the key is to be clear about your strengths and weaknesses. In the view of an investor, a stock represents a piece of a company, whereas speculators view themselves as gamblers with expensive pieces of paper with no intrinsic value. For speculators, the value of an asset is determined solely by its market price.

How is the Intrinsic Value of a Stock determined?

Value investing primarily involves determining the intrinsic value of a share. The intrinsic value is independent of the market price. An intrinsic value of a stock can be determined and compared to its market value on the basis of factors related to the company, such as assets, earnings, and dividend payouts. In the event that the intrinsic value of a stock is greater than its current market price, the investor should buy the security and hold it until the intrinsic value and the market value of the stock converges (also known as mean reversion). In Benjamin Graham's view, the efficient market theory is a valid concept. According to this theory, the stock price includes all available information. In order for a market to be efficient, price convergence must be present. The irrationality of investors, according to Graham, provides a margin of safety when prices are irrationally low. In addition to uncertainty about the future and volatility in the stock market, other factors also contribute to this margin of safety.

It is also possible to value companies using other methods and ratios to determine whether the stock is overvalued or undervalued. Among these are the price-to-book ratio, the price-to-earnings ratio, free cash flows, and leverage ratios. Furthermore, it is worthwhile to analyze the purchases and sales of insiders. When analyzing investment opportunities, good wealth managers take into account a wide variety of key figures, including several valuation methods.

The Graham Number 22.5

A Graham number is a very simple method to value a stock and was named after Benjamin Graham. As a general test, it helps to identify stocks that are currently trading at a low price. According to Graham, the price-to-earnings ratio should not exceed 15x and the price-to-book ratio should not exceed 1.5x (15 x 1.5 = 22.5).

Nevertheless, these highly simplified valuation models should be used with caution, as price-to-earnings ratios and price-to-book ratios can vary greatly depending on the industry, and there are a number of other factors to take into account as well. Therefore, it may be advisable to seek advice from a professional, such as an independent wealth manager.