Benjamin Graham

Infobox Person
name = Benjamin Graham

| imagesize = 75px
caption =
birth_date = birth date|1894|5|8
birth_place =
death_date = death date and age|1976|9|21|1894|5|8
death_place =
other_names =
known_for = (1934)
occupation = Stock investor
nationality = flag|United States

Benjamin Graham (May 8, 1894 – September 21, 1976) was an influential 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". Well known disciples of Graham include Jean-Marie Eveillard, Warren Buffett, William J. Ruane, Irving Kahn and Walter J. Schloss. 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.

History

Graham, who was of Jewish descent and whose original last name was Grossbaum, was born in London and moved to New York with his family when he was one year old. Benjamin Graham's parents changed the family name to Graham during World War I, when German-sounding names were regarded with suspicion. After the death of his father and experiencing the humiliation of poverty, he became a good student, graduating from Columbia, 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. [Jason Zweig, on page xi of The Intelligent Investor, Revised Edition.]

His book, "Security Analysis," with David Dodd, was published in 1934 and has been considered a bible for serious investors since it was written.Fact|date=February 2008 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." [Warren Buffett, "Preface to the Fourth Edition", in Benjamin Graham, "The Intelligent Investor", 4 ed., 2003.]

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 a satisfactory return. Operations not meeting these requirements are speculative." Fact|date=February 2008

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. Fact|date=June 2007

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.Fact|date=July 2008 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.Fact|date=July 2008

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. Often, the price quoted by Mr. Market seems plausible, but often 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.Fact|date=September 2008

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, as advanced by such proponents as William J. Bernstein, whose book "The Intelligent Asset Allocator" is a direct challenge to Graham's "The Intelligent Investor". Modern Portfolio Theory posits that it is generally impossible for any individual to outwit the market, and is widely taught in American and British business schools. Nevertheless, Graham's approach retains a widespread and dedicated following. Indeed, numerous academic studies, including "Contrarian Investment, Extrapolation, and Risk" [Josef Lakonishok, Andrei Shleifer and Robert W. Vishny, "Contrarian Investment, Extrapolation, and Risk", The Journal of Finance, Vol. 49, No. 5 (Dec., 1994)] , "Good news for value stocks: Further evidence on market efficiency" [Rafael La Porta, Josef Lakonishok, Andrei Shleifer and Robert Vishny, "Good news for value stocks: Further evidence on market efficiency", The Journal of Finance, Vol. 52, No. 2 (Jun., 1997)] , "The Cross Section of Expected Stock Returns" [Eugene Fama and Kenneth French, "The Cross Section of Expected Stock Returns", The Journal of Finance, Vol. 47, No. 2 (Jun., 1992)] , and many others, have proven that value stocks outperform the market over virtually all multi-year periods.

According to Warren Buffett, Benjamin Graham said that he wished every day to do something foolish, something creative, and something generous. [Buffett, Warren E.: "Benjamin Graham", "Financial Analyst Journal", November/December 1976.] Warren Buffett said that Graham excelled most at the last. [Financial Analysts Journal, November/December 1976. (Reprinted on page x of the preface to revised Fourth Addition of The Intelligent Investor.)]

Bibliography

Books authored

*"Security Analysis", editions 1934, [Graham and Dodd. 1934. "Security Analysis: Principles and Technique", 1E. New York and London: McGraw-Hill Book Company, Inc.] 1940 [Graham and Dodd. 1940. "Security Analysis: Principles and Technique", 2E. New York and London: McGraw-Hill Book Company, Inc.] , 1951 [Graham et al. 1951. "Security Analysis: Principles and Technique", 3E. New York: McGraw Hill Book Company, Inc.] and 1962 [Graham et al. 1962. "Security Analysis: Principles and Technique", 4E. New York: McGraw-Hill Book Company, Inc.]
*"The Intelligent Investor"
*"Storage and Stability: A Modern Ever-normal Granary" [Benjamin Graham. 1937. "Storage and Stability: A Modern Ever-normal Granary". New York: McGraw Hill.]
*"The Interpretation of Financial Statements"
*"World Commodities and World Currency"
*"Benjamin Graham, the memoirs of the dean of Wall Street" [Graham and Ed. Chatman. 1996. "Benjamin Graham, the memoirs of the dean of Wall Street". New York: McGraw Hill.]

Papers

*cite journal |last=——— |first= |authorlink= |coauthors= |year=1917 |month= |title=Some Calculus Suggestions by a Student |journal=The American Mathematical Monthly |volume=24 |issue=6 |pages=265–271 |doi=10.2307/2973181 |url= |accessdate= |quote=
*cite journal |last=——— |first= |authorlink= |coauthors= |year=1943 |month= |title=The Critique of Commodity-Reserve Currency: A Point-by-Point Reply |journal=The Journal of Political Economy |volume=51 |issue=1 |pages=66–69 |doi=10.2307/1826594 |url= |accessdate= |quote=
*cite journal |last=——— |first= |authorlink= |coauthors= |year=1946 |month= |title=The Undistributed Profits Tax and The Investor |journal=The Yale Law Journal |volume=46 |issue=1 |pages=1–18 |doi=10.2307/791630 |url= |accessdate= |quote=
*cite journal |last=——— |first= |authorlink= |coauthors= |year=1947 |month= |title=Money as Pure Commodity |journal=American Economic Review |volume=37 |issue=2 |pages=304–307 |doi=10.2307/1821137 |url= |accessdate= |quote=
*cite journal |last=——— |first= |authorlink= |coauthors= |year=1947 |month= |title=National Productivity: Its Relationship to Unemployment-in-Prosperity |journal=American Economic Review |volume=37 |issue=2 |pages=384–396 |doi=10.2307/1821149 |url= |accessdate= |quote=
*cite journal |last=——— |first= |authorlink= |coauthors= |year=1962 |month= |title=Some Investment Aspects of Accumulation Through Equities |journal=The Journal of Finance |volume=17 |issue=2 |pages=203–214 |doi=10.2307/2977419 |url= |accessdate= |quote=
*cite book |chapter=The Commodity-Reserve Currency Proposal Reconsidered |title=In Search of Monetary Constitution |last=——— |first= |authorlink= |editor=Yeager, Leland B. (ed.) |year=1962 |publisher=Harvard University Press |location=Cambridge, MA |isbn= |pages=184–214 |url=

Books about

*cite book |title=A Modern Approach to Graham and Dodd Investing |last=Au |first=Thomas P. |authorlink= |coauthors= |year=2004 |publisher=Thomas Wiley |location=Hoboken, NJ |isbn=0471584150 |pages= |url=

ee also

*Warren Buffett
*Philip Fisher
*Value investing
*David Dodd
*John Burr Williams
*Valuation using discounted cash flows
*Gordon model
*Benjamin Graham formula
*William J. Bernstein

Notes

External links

* [http://c250.columbia.edu/c250_celebrates/your_columbians/benjamin_graham.html Columbia University biography]
* [http://www4.gsb.columbia.edu/valueinvesting/ Heilbrunn Center at the Columbia Business School]
* [http://cepa.newschool.edu/het/profiles/bgraham.htm Storage and Stability, plus list of other major works by Graham]
* [http://www.moderngraham.com ModernGraham.com - Site dedicated to the study of Benjamin Graham]
* [http://www.grahaminvestor.com The Graham Investor]
* [http://www.wiley.com/legacy/products/subject/finance/bgraham/index.html The Rediscovered Benjamin Graham - selected writings of the wall street legend] , by Janet Lowe.
* http://www.fhsu.edu/econ/tom/bgraham.html