One of the most famous and successful investors of the 20th century, is Benjamin Graham. He was one of the first value investors. Other investors had used the same approach on investing before. But since Benjamin Graham began teaching value investing, it became more common.
The life of Benjamin Graham
Benjamin Graham was born in 1894. He died rich in 1976. Graham studied at the Columbia University and graduated as second best of his year. After graduation, he took a job at Wall Street. He became very successful as a security analyst and with investment strategies he invented.
In 1928, Benjamin Graham became a teacher at the Columbia Business School. At the Columbia Business School, Graham taught value investing. At that moment, he was already a very successful investor and had made a lot of money by investing in undervalued companies and with money-making strategies.
As one of the most successful investors and a famous value investor, Benjamin Graham wrote two very influential books about investing. He wrote "Security analysis" (1934) together with David Dodd. "Security analysis" contains their view on how to value companies and the shares of these companies. "Security analysis" became the bible for investors.
Benjamin Graham's second influential book, "The intelligent investor" (1949) was, and still is, one of the best books on investing. "The intelligent investor" makes a distinction between true investors and gamblers, or speculators. This book is also "The best book on investing", according to Warren Buffett.
Value investing and Benjamin Graham
As mentioned earlier, Benjamin Graham was one of the first value investors. He was very successful and made a lot of money with investing. As a value investor, Graham always tried to get his hands on the best (under)valued companies he could find.
The philosophy of Benjamin Graham relied on the knowledge and expertise of investors. Investors should always calculate the true value of a company by themselves. The calculated value of a company must be higher than the current market value. An investor must rely on facts and proper analysis. A right price for an investment is not the market value, but the value that is the outcome of proper analysis, Graham taught.
Benjamin Graham also taught that investing is about buying and owning a company. Furthermore, the company should have real income, or cash flow. If you do not think investing is owning a company, or you rely on the company's promise of future income, you are a speculator. And Benjamin Graham, being a value investor, certainly was not a speculator.
And finally, Benjamin Graham recognized that it was easy to find good investments in bad times in the market. But it is a whole lot harder to find good investments at good times in the market.
Investment method of Benjamin Graham
But now, how did Benjamin Graham selected the right investments? Which kind of analysis he used when investing?
First of all, he analyzed the 'earning power' of a company. He took the average income of the past 7 to 10 years, so he knew the company had a sustainable income. This also cleared him from insider tricks, like the addiction of some managers to temporary increase the income of a company.
Secondly, he used six so called business factors. Benjamin Graham used these business factors to analyze companies that he was interested in. The six business factors are explained below.
Profitability is the first business factor. Without profitability, a company does not have a meaning of life. Or at least not on the longer term. Graham calculated the profitability by dividing the operating income by sales.
The second business factor is stability. Benjamin Graham thought companies should perform in a pretty predictable way. He thought investing is about stability. He determined stability by analyzing the income per share of a company for a ten year period.
The third business factor Benjamin Graham used, is growth. He compared the growth of one company with the growth of an index of companies (like the Dow Jones Industrial Average). He compared the growth per share. If the growth of the company was higher than its equals, the company is worth investing in.
The financial position of a company in the fourth business factor. Graham determined the financial position of a company by analyzing its debt ratio. He compared the debts of a company with the assets. The smaller the debts compared to the assets, the better Benjamin Graham liked the company.
Benjamin Graham also thought investors should have a sustainable cash flow. Therefore the fifth business factor is a sustained dividend yield. The company should have had a history of uninterrupted dividend payments.
The final business factor is price history. Graham was only interested in companies of which the share price rose consistently through the years.
Benjamin Graham was a successful investor. This article explained the thoughts and philosophy of Benjamin Graham on investing. To become a successful investor yourself, you should learn how others did. Below you can find a list of 14 thoughts for investment decisions, based on the ideas of Benjamin Graham.
Benjamin Graham has written down 14 thoughts for good investment decisions:
- Invest, don't speculate
- Know the asking price
- Rake the market for bargains
- Buy the formula (not the price)
- Be suspicious on the company figures
- Don't stress out your investments
- Don't sweat the math (if your analysis is right)
- Diversify between investment products
- Diversify between different companies
- When at doubt, stick with quality
- Dividends are an indication
- Defend your rights as shareholder
- Be patient
- Think for yourself
On this site, you can find tools that can help you to invest just like Benjamin Graham did: