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Biography of Benjamin Graham

Benjamin Graham was born in London in 1894, the son of an importer. His family migrated to
America when Ben was very young and opened an importing business. They did not do well,
Graham’s father dying not long after moving to America and his mother losing the family
savings in 1907 during an economic crisis.
Graham, a star student, managed to get to Columbia University and, although offered a teaching
post there after graduation, took a job as a chalker on Wall Street with Newburger, Henderson
and Loeb. Before long, his natural intelligence won out when he began doing financial research
for the firm and he became a partner in the firm. He was soon earning over $500,000 a year, a
huge sum; not bad for a 25 year old.
In 1926, Graham formed an investment partnership with another broker called Jerome Newman.
He also started lecturing at night on finance at Columbia, a relationship that was to continue
until his retirement in 1956.
The Crash of 1929 almost wiped Graham out but the partnership survived with the assistance of
friends and the sale of most of the partners’ personal assets. At one stage, Graham’s wife was
forced to return to work as a dance teacher. Graham was soon back on his feet but he had
learned valuable lessons that would soon be brought home to investors in his books.
In 1934, Benjamin Graham together with David Dodd, another Columbia academic, published
the classic Security Analysis which has never been out of print. Despite the crash, the book
proposed that it was possible to successfully invest in common stocks as long as sound
investment principles were applied. Graham and Dodd introduced the concept of ‘intrinsic
value’ and the wisdom of buying stocks at a discount to that value.
The partnership between Graham and Newman continued until 1956 but never again lost money
for its investors, earning, we understand, an annual return of about 17 per cent. Graham
continued as a partner, while writing and lecturing at Columbia, before retiring from that
institution, also in 1956.
Warren Buffett studied under Graham at Columbia and approached him for a job in his
investment firm. Graham declined but Buffett was persistent, and Graham finally yielded,
giving Buffett a job in the firm. This was the start Buffett needed and he has never failed to
acknowledge what he learned from Ben Graham.
It is interesting that one of the Graham Newman investments was GEICO, which, as you
probably know, was an early acquisition of Berkshire Hathaway and which remains today a
major investment vehicle in the Buffett Group.
Graham had originally bought GEICO in 1948. Apparently, after the partnership bought it as a
private business, it was found that an investment firm could not own an insurance company and

accordingly Graham and Newman converted it to a public company and distributed its shares
amongst their investors.
In 1949, Graham wrote The Intelligent Investor, considered the Bible of value investing. That
book too has never been out of print.Benjamin Graham died in 1976, with the reputation of
being the ‘Father of Security Analysis.’

Graham's Investment Philosophy
In The Intelligent Investor, Benjamin Graham sums up his investment philosophy by saying that
an intelligent investor must be "businesslike" in approach. Investing in shares in a company is
just like owning a share in a business enterprise and the investment must be approached as if
one were buying a business, or a partnership in one.
There are four guiding principles for Graham:
1. KNOW THE BUSINESS
The investor needs to become knowledgeable about the business or businesses carried on by the
company in which they propose to invest – what it sells, how it operates, what is the competitive
environment, what are the threats and opportunities, the strengths and weaknesses.
An investor who bought a fruit shop, or a shoe factory, without investigating these things, and
knowing them, would be foolish. The same applies to share investment. An investor who does
not understand the business should not be investing in it.
2. KNOW WHO RUNS THE BUSINESS
An investor who cannot operate the business for himself or herself, needs a manager. This is the
position of the average share investor, who owns a share of an enterprise that is run by others.
The owner of a business in this position would want a manager who will manage the business
competently, efficiently and honestly. The share investor should not be satisfied with less.
Unless the investor believes, through sound research, that the company is managed efficiently,
competently and honestly, in the best interests of the shareholders, the investment should not be
made.
3. INVEST FOR PROFITS
An investor would not normally buy a business that did not, on proper research, appear to have
reasonable expectations of producing good profits over time. Share investors should take the
same approach and buy, as Graham says, "not on optimism, but on arithmetic".
4. HAVE CONFIDENCE
Graham encourages investors to properly research their investments and, if they believe their
investment judgment to be sound, to act on it. He cautions investors in this position against
listening to others.

"You are neither right nor wrong because the crowd disagrees with you. You are right [or wrong]
because your data and reasoning are right [or wrong]."

Mr. Market
Benjamin Graham used an imaginary investor called Mr Market to demonstrate his point that a
wise investor chooses investments on their fundamental value rather than on the opinions of
others or the direction of the markets.
EXPLANATION
Graham’s parable goes something like this. Think of yourself as owning a share in a business in
partners with others. One of your partners, say Mr Market, is somewhat of a neurotic who on
any given day will offer to buy your share or sell you his at a specific price. His moods can
fluctuate anywhere between incredible optimism and overwhelming depression. One day he will
nominate a higher price to buy or sell, the next day he might increase it, lower it, or even appear
uninterested in whether he buys or sells.
The point that Graham makes is that Mr Market’s judgment is formed more by mood swings
that by rational thought and that this gives the wise investor buying and selling opportunities. If
Mr Market’s price is unreasonably high, then wise investors have the opportunity to sell. On the
other hand, if it is unreasonably low, then they have the opportunity to buy.
The important thing is that a successful and careful investor makes her or his own decision,
based on their own ideas of the worth of the investment.
SIGNIFICANCE OF MR MARKET
Graham does not conclude from Mr Market’s wild behaviour that market fluctuations should be
ignored. They can be valuable as an indicator that something is going wrong, or right, with the
investment. However, their true significance, in Graham’s words is that "they provide … an
opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great
deal".
Warren Buffett considers that Graham’s views on market fluctuations warrant "special attention"
from the investor

The Margin of Safety
Benjamin Graham tells us that investment policy can be reduced to three simple words: "Margin
of Safety" - the price at which a share investment can be bought with minimal downside risk.
The important point here is that the margin of safety price is not the same as the price that an
investor calculates a share to be intrinsically worth.
THE INTRINSIC VALUE OF A SHARE
An investor may calculate the intrinsic value of a share by differing methods and will eventually
come up with a price that he or she believes represents good buying value. Graham had his

methods of calculating intrinsic value, Warren Buffett has his, other successful investors have
theirs.
Graham acknowledges, however, that calculations may be wrong, or that external events may
take place to affect the value of the share. These cannot be predicted. For these reasons, the
investor must have a margin of safety, an inbuilt factor that allows for these possibilities.
PRIME BONDS VS GOVERNMENT BONDS
For Benjamin Graham, the benchmark for calculating the margin of safety was the interest rate
payable for prime quality bonds. As Graham wrote in an era when prime bonds were much more
prominent, it is more practical now to adopt, as Warren Buffett apparently does, the rate of
return of government bonds as the benchmark.
Graham then uses a comparative approach. If the risk in two forms of investment is the same,
then it must be better to take the investment with the higher return. Conversely, an investment
with higher risk, such as shares, should, when calculating the margin of safety, have a higher
return
EXAMPLE
Modifying then the example that Benjamin Graham uses in his book, we can take a share
investment that is yielding 10 per cent earnings. For example, company A is earning 90 cents
per share and is selling in the market at 10 dollars. If the rate of return on government bonds is 5
per cent, then the share is yielding annually an excess of 5 per cent. Over a period of ten years,
the excess yield will total about 50 per cent, which, in Graham’s opinion, may be enough, if the
share investment was wisely chosen in the first place. Of course, the total margin of safety will
fluctuate depending upon the quality of the share investment.
Even so, something may go wrong. Graham believes however, that, with a diversified portfolio
of 20 or more representative share investments, the margin of error approach will, over time,
produce satisfactory results.
ACCORDING TO BENJAMIN GRAHAM:
"[To] have a true investment, there must be a true margin of safety. And a true margin of safety
is one that can be demonstrated by figures, by persuasive reasoning, and by reference to a body
of actual experience".
The Interpretation of Financial Statements
Benjamin Graham has served as an inspiration to such legendary investors as Warren Buffett
and Walter Schloss. His classic book on investment The Intelligent Investor is considered a
classic.
In 1934, Graham wrote, in conjunction with David Dodd, what is considered to be the standard
book on stock investment principles, Security Analysis. Its size and complexity make it difficult
reading for the lay investor but Graham has overcome this to some extent with his explanatory
book, the subject of this review.

In The Interpretation of Financial Statements, Graham explains, and illustrates, the meaning of
those financial terms and principles that need to be understood by anyone considering a stock
market investment. Complex concepts like current ratio, intangible assets and book value
become much clearer after a reading of this book. Graham takes the reader through balance
sheets, profit and loss accounts, and financial statements, chatting comfortably to the reader
about the complexities of debt accrual and amortisation with humor and common sense.
As Warren Buffett has said on many occasions, if you don’t understand the business, don’t
invest in it. This 115-page book makes it all that much easier to look beyond a company’s
financial statements and discover the truth.
There is an excellent glossary that defines essential financial and investment terms.
While several of Graham’s examples may be dated, the text is not and remains as current as
today’s Dow Jones Index.
This is a book that nobody seriously considering a stock investment should be without. Even
non-stock investors with an indirect interest in the stock market through retirement and mutual
funds can benefit from a reading of this book. It can help them understand what their fund
managers are doing with their money.
An essential work for the investor’s bookshelf.
The Intelligent Investor
If you don’t have this book in your library, then you should not even be contemplating an
investment in shares directly, or even indirectly, though a mutual fund.
It is surely not a co-incidence, as Warren Buffett graphically illustrates in his Appendix to this
book, that some of the world’s most successful investors learned at the feet of Benjamin Graham
and have applied his principles with great success.
This book, like all of Graham’s writings, is easy enough to understand for even the most lay of
investors. Graham sets the scene early in the book by explaining the difference between
intelligent investing and mere speculation. Using the history of stock market booms and crashes
and illustrating them with real life examples, Graham explains how an intelligent investor can
stay ahead of the market.
Graham sets out investment principles for both the defensive investor and one who is more
enterprising and shows how investor can identify under priced stocks.
As Warren Buffett has said, the two most important chapters in the book are Chapter 8, The
Investor and Market Fluctuations, where Graham develops his concept of Mr Market, and
Chapter 20, Margin of Safety where he preaches the wisdom of leaving enough room to cover
mistakes in judgment of a share’s intrinsic value.
A must buy book, worth every penny.