Saturday, May 9, 2009

Who is that Benjamin Graham Anyways?

It is pretty obvious that this page focuses on Ben Graham and the influence he has had on the investing community. Any person claiming to be a value investor knows the fundamentals of his approach and any person doing transaction in the stock market have heard about him as the Dean of Wall Street. More precisely, with his colleague David Dodd, he initiated the idea of fundamental analysis and the value investing philosophy.

He started his career as a teacher at the Columbia Business School teaching about investing. The Great Crash of 1929 severely affected the performance of the Graham-Newman Partnership, which he had started a couple years ago with his partner Jerry Newman. Disappointed whit those results he pondered for years on a way to invest in the stock market but rationally and changed his teaching methods. His assistant, the professor David Dodd was mostly taking notes during those classes. In 1934, they decided to publish Security Analysis. With a staggering 770 pages, it laid the foundation for what would later be called value investing and since then, it has been considered by many investors to be a book that cannot be passed by. In 1949 he published the Intelligent Investor, which was a lighter version of Security Analysis, for some of the concepts had to be explained in further details. It is also from The Intelligent Investor that he publicized the character of Mr. Market.

The most fundamental statement he initiated in his book is that stocks were not just pieces of paper that went up and down in value, in responses to the forces of supply and demand; he stated that they were first and foremost parts of ownership in a business. Benjamin Graham insisted on the fact that if an investor comes to an approximation of the intrinsic value of the company per share and bought those share at a discount the their value, in the long haul, the market would converge to the fair value of those stocks, regardless of short term price fluctuations. And to date, many people still seem to ignore that because value investing is not the mainstream methodology.

Ben Graham also believed that there was a distinction between speculation and investment by a short statement with huge implication for the long standing definition of an investor. On page 18 of the fourth edition, it reads: “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.” In other words, fundamental analysis is crucial of an investor.

Those assumptions lead to think that investing in the stock market is a time consuming activity to take seriously; they imply going through the financial statements of interesting companies and doing your own research.

The teachings of Benjamin Graham have impacted his students and associates in a deep way. Warren Buffett is the one with the most impressive track record. The late William J. Ruane of the Sequoia Fund was also greatly influenced by his teachings and those are just a few of the great investors to have taken their framework from Ben Graham. Value investing is a very interesting way of looking at stocks and I greatly anticipate the results of its use, in the coming years, on my portfolio.

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