Benjamin Graham and His Approach to Investing

Benjamin Graham: “The Dean Of Wall Street”, “The Father of Value Investing”, mentor to the legendary Warren Buffett. Modern-day investors can learn a great deal from the legacy of this influential economist, author, professional investor and Columbia University professor.

As the author of four impressive financial books, Graham left his mark on the investment world through his common sense, strategic approach to investing. His most popular and widely acclaimed works, Security Analysis (1934, with David Dodd) and The Intelligent Investor (1949), are widely studied and their principles applied in investing to this day.

In Security Analysis, Graham wrote: “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.” He taught investors to ride out the fluctuations of the stock market for long term financial gain, effectively differentiating the investors from the speculators.

He believed in critical evaluation of a company and its financial state over time, allowing investors to buy stocks when they become available at a rate lower than their actual worth. This provided a “margin of safety” for the investor, an invaluable concept when investing in a volatile stock market. His theories of smart buying made sense then as they do today. If you can pick up stock in a typically financially stable company at a fair rate, you are making a wise investment.

Graham understood that this can only be accomplished through careful analysis and research. He wanted investors to take all of the emotion, game playing and gambling out of their stock market investment strategy in order to make their transactions and decisions as businesslike as possible. With this advice in mind, investors such as Charles Brandes and Irving Kahn saw great success in their own financial ventures.

Over the years, many other great financial minds have come forward to challenge Graham’s theories. William J. Bernstein’s The Intelligent Asset Allocator set out to prove that it is indeed impossible to predict or outwit the stock market. However, one might argue that Graham’s approach to investment involved no trickery or game playing whatsoever; he simply believed that an educated, calculated approach to investment increased an investor’s chances of coming out ahead over time. Academic studies such as “Contrarian Investment, Extrapolation and Risk”, among others, certainly support his claims that value stocks outperform the market over time.

Whether an investor worships Graham and his teachings or prefers to go it their own way, the wisdom and truth in his approach to investing cannot be discounted.