We held a birthday party at our office the other day, even though the birthday boy could not attend. We were celebrating the 122nd birthday of Benjamin Graham, one of the most influential men many people have never heard of. Known as the father of value investing, Graham codified a number of principles we—and many others—use to this day.
Born into a poor Jewish family in Great Britain, Graham grew up in New York, where he was a top student who graduated at age 20 from Columbia University before becoming a professional investor on Wall Street. Graham went on to teach at Columbia and UCLA, and his students number among the best-known investors of our times: Warren Buffett, William Ruane and Walter Schloss among others. His disciples are legion.
In his seminal books, Security Analysis and The Intelligent Investor, Graham emphasized the differences between “investment” and “speculation:” Investment is based on research and analysis into risk and potential return. Speculation, on the other hand, is based largely on sentiment. As a teaching tool, Graham developed his famous character, “Mr. Market,” to explain how market behavior can lure people into trading stocks emotionally, describing Mr. Market as a salesman who shows up daily on your doorstep offering to buy or sell shares—sometimes at reasonable prices, other times at outlandish ones. The key takeaway is that the prices he offers may or may not be ones you should accept—and you’re free to say no, even if others are piling on. Mr. Market is completely unfazed by rejection; you may rest assured he’ll be back tomorrow—with new prices.
The market, Graham said, acts like a “voting machine” in the short term, displaying capricious price volatility that reflects the aggregate sentiment of market participants. But over the long term it acts more like a “weighing machine,” reflecting each company’s “intrinsic” value—another Graham concept—meaning a value derived from factors such as financial strength, competitive position, etc. From that you can estimate intrinsic value per share; however, since every analysis has limitations, he advised investors to require a “margin of safety” in the price they pay— it should represent a significant discount to intrinsic value. When investors use Graham’s approach, they act like part-owners of the businesses they ultimately buy. This, in a nutshell, is value investing. He emphasized that while other investors may not agree with you—especially over the short term—that does not indicate whether you’re right or wrong. The accuracy of your own analysis determines that.
These ideas are important components of our investment philosophy, thus making Benjamin Graham a giant on whose shoulders we are proud to stand, and whose birthday we’re happy to celebrate.