Benjamin Graham, known as the “father of value investing,” laid the foundation for modern investment theory and heavily influenced investors like Warren Buffett and many others.
His philosophy is detailed in his books (especially The Intelligent Investor and Security Analysis), but a summary is below:
- Intrinsic Value – Every stock has an intrinsic value, which is its true worth based on fundamentals like earnings, assets, and dividends. Therefore, the key is to buy when the market price is less than the intrinsic value.
- Margin of Safety – This is Graham’s most important concept. The definition of Margin of Safety is the difference between a company’s intrinsic value and its market price. By understanding this, it protects investors from errors in judgment or market volatility. The key people Graham stressed are “the essence of investment management is the management of risks, not the management of returns.”
- Mr. Market Analogy – Graham personified the market as “Mr. Market”, namely, an emotional, irrational business partner who offers to buy or sell shares every day. Sometimes Mr. Market is overly optimistic or pessimistic. The intelligent investor takes advantage of Mr. Market’s mood swings, not follows them.
- Defensive vs. Enterprising Investors – A defensive Investor will seek safety and minimal effort, have a diversified portfolio of quality stocks or index funds and will avoid frequent trading. But an enterprising investor who is willing to do extra research will look for undervalued stocks (bargain issues) and may analyse small-cap stocks, special situations, or distressed assets.
- Focus on Fundamentals – Graham emphasised analysing (a) earnings and earnings stability, (b) dividend record, (c) financial strength (namely the balance sheet) and (d) price-to-earnings (P/E) and price-to-book (P/B) ratios.
- Avoid Speculation – Graham stressed that Investing is based on analysis, the safety of principal, and adequate return. Anything else is speculation, which should be avoided at all costs. Graham noted, “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return.”
- Value Over Growth – Graham preferred stocks that were cheap relative to their assets or earnings, even if growth was slow. He was sceptical of paying a high price for future growth, which is uncertain.
I hope that you found the above interesting, and any feedback would be welcome.
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