Benjamin Graham

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For other people of the same name, see Ben Graham (disambiguation).
Benjamin Graham
Benjamin Graham.jpg
Born (1894-05-08)May 8, 1894
London, England
Died September 21, 1976(1976-09-21) (aged 82)
Aix-en-Provence, France
Nationality United States
Institution Columbia Business School, Graham-Newman Partnership
Field Finance
Investment
Alma mater Columbia University
Influenced Jean-Marie Eveillard
Warren Buffett
William J. Ruane
Irving Kahn
Walter J. Schloss
Hani Anklis
David Dodd
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 with David Dodd through various editions of their famous book Security Analysis. Graham's followers include Warren Buffett, William J. Ruane, Irving Kahn, Walter J. Schloss 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.

Contents

Life and career [edit]

Early life [edit]

Benjamin Graham was born Benjamin Grossbaum in London, England,[1] to Jewish parents.[2] 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, as salutatorian 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.

Career [edit]

Benjamin Graham and his memoirs

His book, Security Analysis, with David Dodd, was published in 1934 and has been considered a bible for serious investors since it was written.[citation needed] 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 about investing ever written."[3] 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 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."[4]

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 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.[5] 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.[citation needed] 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.[6] 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. Usually, the price quoted by Mr. Market seems plausible, but occasionally 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.[7]

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.[8]

Legacy [edit]

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 by Lakonishok et al. (1994),[9] La Porta et al. (1997),[10] Fama and French (1992),[11] 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 Warren Buffett, Graham said that he wished every day to do something foolish, something creative, and something generous.[12] Buffett said that Graham excelled most at the last.[13]

As well, Graham's currency proposal is still discussed as a possible improvement on the modern currency system.[14]

Personal life [edit]

Gnome-searchtool.svg This section's factual accuracy is disputed. (December 2012)

Even though the following statements are mentioned in The Snowball (a biography of Warren Buffett), they were not said by Buffett and the author (Alice Schroeder) does not include any sources for these statements. According to The Snowball, after his son's death, Graham had an affair with his deceased son's girlfriend Malou (Marie Louise Amingues) who was several years older to his son,[15] 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.[16]

Bibliography [edit]

Books [edit]

Papers [edit]

  • ——— (1917). "Some Calculus Suggestions by a Student". The American Mathematical Monthly (The American Mathematical Monthly, Vol. 24, No. 6) 24 (6): 265–271. doi:10.2307/2973181. JSTOR 2973181.  More than one of |author1= and |last= specified (help)
  • ———, Benjamin (1943). "The Critique of Commodity-Reserve Currency: A Point-by-Point Reply". The Journal of Political Economy 51 (1): 66–69. doi:10.1086/255988. JSTOR 1826594. 
  • ——— (1946). "The Undistributed Profits Tax and The Investor". The Yale Law Journal (The Yale Law Journal, Vol. 46, No. 1) 46 (1): 1–18. doi:10.2307/791630. JSTOR 791630.  More than one of |author1= and |last= specified (help)
  • ——— (1947). "Money as Pure Commodity". American Economic Review 37 (2): 304–307. JSTOR 1821137. 
  • ——— (1947). "National Productivity: Its Relationship to Unemployment-in-Prosperity". American Economic Review 37 (2): 384–396. JSTOR 1821149. 
  • ——— (1962). "Some Investment Aspects of Accumulation Through Equities". The Journal of Finance (The Journal of Finance, Vol. 17, No. 2) 17 (2): 203–214. doi:10.2307/2977419. JSTOR 2977419.  More than one of |author1= and |last= specified (help)
  • ——— (1962). "The Commodity-Reserve Currency Proposal Reconsidered". In Yeager, Leland B. (ed.). In Search of Monetary Constitution. Cambridge, MA: Harvard University Press. pp. 184–214. 

See also [edit]

References [edit]

  1. ^ The Motley Fool. Investment Greats: Ben Graham. April 17, 2009.
  2. ^ However, he wrote in his Memoirs that, "I must confess here that I feel little emotional loyalty to the Jewish people from whom I sprung". Graham, Benjamin; Chatman, Seymour Benjamin. Benjamin Graham: The Memoirs of the Dean of Wall Street, pp. 63-64. McGraw-Hill, 1996. ISBN 0-07-024269-0
  3. ^ Warren Buffett, "Preface to the Fourth Edition", in Benjamin Graham, "The Intelligent Investor", 4 ed., 2003.
  4. ^ Benjamin Graham, "The Intelligent Investor", 4 ed., 2003, Chapter 1, page 18.
  5. ^ Benjamin Graham, "The Intelligent Investor", 4 ed., 2003, Chapter 1.
  6. ^ The Intelligent Investor p. 524 (Revised Ed 2006)
  7. ^ Benjamin Graham, "The Intelligent Investor", 4 ed., 2003, Chapter 20.
  8. ^ The Economist, Benjamin Graham: Figuring it out. July 7th, 2012.
  9. ^ Lakonishok, Josef; Shleifer, Andrei; Vishny, Robert W. (1994). "Contrarian Investment, Extrapolation, and Risk". Journal of Finance 49 (5): 1541–1578. doi:10.1111/j.1540-6261.1994.tb04772.x. 
  10. ^ La Porta, Rafael; Lakonishok, Josef; Shleifer, Andrei; Vishny, Robert (1997). "Good news for value stocks: Further evidence on market efficiency". Journal of Finance 52 (2): 859–874. doi:10.1111/j.1540-6261.1997.tb04825.x. 
  11. ^ Fama, Eugene; French, Kenneth (1992). "The Cross Section of Expected Stock Returns". Journal of Finance 47 (2): 427–465. doi:10.1111/j.1540-6261.1992.tb04398.x. 
  12. ^ Buffett, Warren E.: "Benjamin Graham", Financial Analyst Journal, November/December 1976.
  13. ^ Financial Analysts Journal, November/December 1976. (Reprinted on page x of the preface to revised Fourth Addition of The Intelligent Investor.)
  14. ^ Bloomberg, Benjamin Graham's Clever Idea for Averting Currency Wars. February 28th, 2013.
  15. ^ Snowball, Page 164
  16. ^ Snowball, Page 391
  17. ^ Graham and Dodd. 1934. Security Analysis: Principles and Technique, 1E. New York and London: McGraw-Hill Book Company, Inc.
  18. ^ Graham and Dodd. 1940. Security Analysis: Principles and Technique, 2E. New York and London: McGraw-Hill Book Company, Inc.
  19. ^ Graham et al. 1951. Security Analysis: Principles and Technique, 3E. New York: McGraw Hill Book Company, Inc.
  20. ^ Graham et al. 1962. Security Analysis: Principles and Technique, 4E. New York: McGraw-Hill Book Company, Inc.
  21. ^ Graham and Dodd. 1988. Security Analysis: Principles and Technique, 5E. McGraw-Hill Professional
  22. ^ Graham and Dodd. 2008. Security Analysis: Principles and Technique, 6E. McGraw-Hill Professional
  23. ^ Benjamin Graham. 1949. The Intelligent Investor, 1E. Harper&Brothers, New York, 264 pp
  24. ^ Benjamin Graham. 1959. The Intelligent Investor, 2E revised. Harper&Brothers, New York, 292 pp
  25. ^ Benjamin Graham. 1965. The Intelligent Investor, 3E revised. Harper's, New York, 332 pp
  26. ^ Benjamin Graham. 1973. The Intelligent Investor, 4E revised. Harper&Row, Publishers, New York, 340 pp
  27. ^ Benjamin Graham. 1937.ISBN 0-07-024774-9 Storage and Stability: A Modern Ever-normal Granary. New York: McGraw Hill. 1937
  28. ^ Graham and Ed. Chatman. 1996. Benjamin Graham, the memoirs of the dean of Wall Street. New York: McGraw Hill.

External links [edit]

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