In the previous entry of this series, I have talked about Warren Buffett - The most famous investor on earth. But what if I tell you that he had a teacher/mentor that shaped his investing approach? If Warren Buffett is the person who mastered value investing as an investment approach, this man is the father of value investing. Yes, I am talking about Benjamin Graham today.
Just a quick explanation of what is value investing;
It is essentially by taking into consideration the financial health of a company (balance sheets, dividends, assets), we can calculate out the intrinsic value of the company. From there, if the market price is lower than the calculated intrinsic value, it would be a good buy (undervalued).
Now, let me move onto him, his life and everything about him
1. Background
Benjamin Graham was born in 1894 in the UK, but he moved to the US after that. He attended Columbia University and graduated 2nd in his class in 1914 (he was 20). He declined an offer by the school to teach and moved onto Wall Street as a runner for stocks and checks.
He then started to analyze companies on his own and became a full partner in the company he worked in subsequently. His annual income was US$500,000 at one point in time, with a substantial amount of investment. This was when things took a turn for the worse.
In 1928, he started teaching investment classes in Columbia. In 1929 (he was 35), the stock market crashed and the great depression happened which caused him to lose most of his money. However, it is also because of this that led him to develop his own way of investing. He released his first book - Security Analysis in 1934 (he was 40) and his second book, and one that is more famous, - The Intelligent Investor in 1949 (he was 45). Those books then taught generations of investors after him on the principles and actual method of value investing.
In 1951 (he was 47), Benjamin Graham met the student that will make his investment method more famous than ever before - Warren Buffett. And I guess the rest was history. He then died in 1976 (he was 82).
Oh, his greatest gain was from GEICO, when he bought 50% of it in 1948 for $712,000 and it grew to $400 million in 1972.
2. Investment Approach
I believe that his investment approach is highly influenced by the great depression, which is partially caused by speculations. Hence, he would want a way to look at stocks in a more quantifiable way. He views investing as partial ownership of a business and we should not let the market determine the value of the stock that we buy. Hence we should focus on the business' performance and not the market value.
Hence, by focusing on undervalued stocks, 2 things can be achieved:
1) The margin of Safety (as the stock would have assets for liquidation in the event of bankruptcy)
2) More Room for growth (stocks with a low PE ratio have a higher room for growth)
Here are some of the things that he looks out for in a stock:
1. Debt to current asset ratio (<1.1)
2. Current ratio - Current asset / Current liabilities (>1.5)
3. Positive Earnings per share growth (for the past 5 years)
4. Price to earnings ratio - Price/earnings (<9)
5. Price to book ratio - Price/book value (<1.2)
6. Dividends - (healthy and sustainable, for the long wait for the undervalued stock to be correctly priced)
There are other things that Benjamin Graham looks out for but if I were to list them all out, there will be no end. According to Warren Buffett, his teacher's way of investing is really safe, and that if someone follows his advice and principles, they would not lose money.
3. Broader Impact on Industry
Benjamin Graham's investment method - Value investing is still being utilised and taught today, 50 years after his death. Hence, there no doubt that he is an impactful figure in the investment world. But I guess there are 3 fields that I would like to highlight:
a) Value investing
With his two books, Benjamin Graham has taught us the principles of value investing and made a fundamental distinction between investing and speculating. He has also focused on the psychological approach that we should have when it comes to investing - That our decisions should not be dictated by the movement of the market and that we should only buy stocks that we fully understand.
b) Value investing disciples
Several of his students/disciples have become successful in their ways. Some continued to practise the methods he laid out, while others built upon it. They are Warren Buffett, Irving Kahn, Charles Brandes, Walter J. Schloss.
Even though he is dead, his legacy lives on in the students who still practise his methods today.
c) Securities Act of 1933
He helped in the crafting of the landmark legislation of the securities act of 1933. This would require companies to provide financial statements that have been audited by independent accountants. This was significant as Benjamin was against the use of creative accounting to mask the actual financial condition of the company,
4. Personal Impact
As of writing this post, I have read once through The Intelligent Investor - I felt that it gave me a better understanding of what stocks stand for. His principle of not allowing markets to determine the value of my investment for me is also important.
Do I want to be an active value investor? No, sorry.... I do not have the time. I would rather do index investing (which is also recommended by Graham) and use the time saved to write this blog to teach people about finance.
5. Fun Fact
- His annual returns were 20+%
- He never used the phrase - Value investing, it is a term used to describe his way of investing
- Value investing has evolved significantly to include technology stocks or industries where book value would not be useful.
Conclusion:
Benjamin Graham is still and will always be influential with his method of value investing. His principles will always be relevant, and I find his investments even more useful now when there is much pessimism in the market. We should never let the market dictate the value of our investment. I hope that this article was educational to you.
Till next time,
Stay vested, stay frugal my friends
Dionysius
Sources:
0 comments:
Post a Comment