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Benjamin Graham on Value Investing Lessons from the Dean of Wall Street by Janet C Benjamin Graham on Value Investing Lessons from the Dean of Wall Street by Janet C. Lowe Copyright © Janet C. Lowe, 1994 Used by arrangement with Penguin Books, A division of Penguin Putnam, Inc. 246 pages Focus Take-Aways Leadership & Mgt. • Benjamin Graham is called “The Dean of Wall Street” for his lifetime of managing, Strategy writing and teaching investment strategies. Sales & Marketing • Value investing means using scientifi c techniques and formulas to assess a stock. Corporate Finance • A value investor maintains a long-term investment strategy. Human Resources • Early on, Graham thought that Calculating-Tabulating-Recording (CTR) would be a good investment. It became IBM. Technology & Production • Graham’s 1934 book, Security Analysis, is the seminal text on investing. Small Business • His book, The Intelligent Investor, tells how to make rational investment decisions. Economics & Politics • Graham’s classes at Columbia University were so practical that Wall Street Industries & Regions professionals and other faculty members enrolled. Career Development • Warren Buffett called Graham his second most signifi cant career infl uence (after Personal Finance his father). Concepts & Trends • Graham’s greatest fi nancial achievement was purchasing a controlling interest in GEICO, and making the insurance company successful. • He maintained that surplus value in a company should be distributed to shareholders. Rating (10 is best) Overall Applicability Innovation Style 7 8 8 8 To purchase individual Abstracts, personal subscriptions or corporate solutions, visit our Web site at www.getAbstract.com or call us at our U.S. offi ce (954-359-4070) or Switzerland office (+41-41-367-5151). getAbstract is an Internet-based knowledge rating service and publisher of book Abstracts. getAbstract maintains complete editorial responsibility for all parts of this Abstract. The respective copyrights of authors and publishers are acknowledged. All rights reserved. No part of this abstract may be reproduced or transmitted in any form or by any means, electronic, photocopying, or otherwise, without prior written permission of getAbstract Ltd (Switzerland). Relevance What You Will Learn In this Abstract, you will learn: 1) Who Benjamin Graham was and why his investing advice is still relevant; 2) Six factors to evaluate in judging a stock based on the value of the company; and 3) Graham’s rules and advice for investors. Recommendation Value investing is back in vogue. And so is Benjamin Graham. His books — Security Analysis and the Intelligent Investor — are the seminal texts on the subject of investing. Numerous investors (including Warren Buffett) owe their success to Graham’s writings. Janet C. Lowe’s book adds to the Graham myth. It weaves the story of Graham as a husband, father and loyal friend into his public life as a fund manager, writer and teacher. Lowe breathes life into an otherwise sterile topic, but her emphasis is on Graham’s personal history more than on his investment advice. She does make it clear that Graham’s fi scal belief system emphasizes intelligent investing by both the professional and individual investor. getAbstract.com recommends this book to people who follow — and hope to profi t from — the vicissitudes of the stock market and of its indelible characters. Abstract The Dean of Wall Street It was 1968, and Warren Buffett needed help. The market was down, and Buffet could fi nd no good stocks to buy. But the solution was clear. Buffett said to his friend Walter Schloos, “Let’s go out and see Ben and ask him what he would do.” “Be an investor, not a speculator.” “Ben” was Benjamin Graham. To many fi nancial professionals, he was the “Dean of Wall Street.” Buffett and dozens of other high-profi le investors held Graham in high regard for his management of the Graham-Newman Fund, his teaching at Columbia University and his publications on investing. In fact, Buffett claimed that Graham’s Intelligent Investor was the best investment book ever written. Graham was retired at the time that Buffett and a dozen other “students” made a pilgrimage to see him at the Hotel Coronado in San Diego. First, Graham quizzed his visitors on investing. He wanted them to realize that questionable accounting practices were commonplace — and that any investor who relied upon someone else’s coattails “The disciplined, was likely to get burned. The get-together was such a success that it became an annual rational investor neither follows meeting which Buffett continues to sponsor to this day. popular choice nor plays market The gospel according to Graham was value investing. He believed an investor should swings; rather he apply scientifi c techniques to the process of making investment decisions. He preached searches for that value investing requires the investor to ignore price cycles of individual stocks, or stocks selling at a price below their movements of the market as a whole. Instead, the investor should focus on the facts intrinsic value and surrounding a company’s fi nancial condition and its future earnings potential. The only waits for the consequence he attributed to market movement is that it makes buyable stocks either market to recog- harder or easier to fi nd. nize and correct its errors.” The Early Years The youngest of three sons, Benjamin Graham was born in London in 1894. The next year, his family moved to New York. Graham was a very bright child, but money Benjamin Graham on Value Investing © Copyright 2003 getAbstract 2 of 5 was always tight. Fortunately, he did well enough in school to receive a scholarship to Columbia University. However, even with the scholarship money, he had to drop out “Buffett and his of day classes and take a full-time job as a researcher with U.S. Express. He worked friends had gone on a census project in which he used newly developed punch card technology. The to California to company that supplied this technology was called Calculating-Tabulating-Recording. consult with Ben Graham for two Later, it would change its name to IBM. simple reasons. Graham knew Graham’s fi rst fi nancial job was with the Wall Street fi rm of Newberger, Henderson more about the & Loeb. He made $12 per week working as a runner. Soon, he was assigned to write subject of stocks concise descriptions of the fi rm’s daily bond purchase list. Not long after, he began and bonds than anyone they knew writing the fi rm’s market letter. Eventually, the fi rm promoted him to statistician after and they trusted one of his company debt analyses reached a partner’s desk. his insight.” As statistician, Graham conducted an evaluation of CTR bonds and stock. He determined that although CTR was selling for $40 a share, it had a book value of $130 a share. He also thought the company had good products and prospects. He took this information to the head of the fi rm, who told him to forget the company — that it was mostly “water” (goodwill and other ephemeral assets). The operating principle was that companies with too few assets and sales were poor investments. Buying stocks was like playing bridge — it was more important to play a hand right than to play it successfully. Graham listened, and took his employer’s position to heart. He never purchased a share of CTR or IBM. “He unfl inchingly treated investing Partner, Owner and Teacher as a science.” By the time he was 26, Graham was named partner at Newberger, Henderson & Loeb. He started to write for several fi nancial publications. One of his fi nest articles was “Lessons for Investors,” which details the genesis of his investment philosophy: “A speculation…cannot be a good investment, because speculation is based on anecdote rather than actuality. The absence of verifi cation pushes the risk far too high.” Graham’s fi rst attempt at independence came in 1923, when he raised $500,000 from friends and other contacts to start the Graham Fund. The fund invested in Du Pont and “A speculation, he taught, cannot be shorted General Motors, because Graham had spotted an imbalance between Du Pont’s a good investment, ownership of General Motors stock and the undervalued Du Pont stock. Graham also because specula- shorted Shattuck Corporation, the owners of the Schrafft’s restaurant chain. The Graham tion is based upon anecdote rather Fund eventually dissolved after Graham could not get his partner to agree to higher than actuality.” management compensation. Graham then started his Ben Graham Joint Account. During this period, he took on the Rockefeller Trust, the largest owner of eight oil pipeline companies. Reviewing U.S. Interstate Commerce Commission documents, Graham discovered that the Rockefeller companies held substantial amounts of investment-grade bonds. In some cases, the value of the bonds was greater than the value of the companies that held them. According to Graham, holding these bonds in reserve was an injustice to the shareholders of these companies — which included the Ben Graham Joint Trust. “An investment, he Graham calculated that Northern Pipe Line traded at $65 per share, but had an additional explained, was $95 per share value if the investment grade bonds were included in the calculation. When based on incisive, quantitative analy- he approached the president of the company for a shareholder distribution of the surplus sis, while specula- value of the bonds, the president rebuffed him. Graham won the ensuing battle after he tion depends upon fought a proxy war. His return on investment was 54%. whim and guess- work.” Graham returned to Columbia in 1928 to teach Advanced Security Analysis. In those days, any qualifi ed undergraduate or graduate student could take his class, and the Benjamin Graham on Value Investing © Copyright 2003 getAbstract 3 of 5 university also allowed other Columbia faculty members and professionals who worked on Wall Street to enroll.
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