Benjamin Graham

“Someone is Sitting in the Shade Today Because Someone Planted a Tree a Long Time Ago.” – Warren Buffett

Benjamin Graham Sir Isaac Newton, the greatest mind of the last five hundred years is quoted, “If I have seen further than others, it is by standing On The Shoulders Of Giants…” Warren Buffett believes the same thing as other giants in the mentoring concept. In his case he was fortunate to have been mentored by Benjamin Graham. Without Graham there probably would have been no Warren Buffett. Benjamin Graham (May 8, 1894 – September 21, 1976) Buffett, who credits Graham as grounding him with a sound intellectual investment framework, described him as the second most influential person in his life after his own father.

Graham’s Principles Were Relevant Then… “For it is undoubtedly better to concentrate on one stock that you know is going to prove highly profitable, rather than dilute your results to a mediocre figure, merely for diversification’s sake. But this is not done, because it cannot be done dependably. The prevalence of wide diversification is in itself a pragmatic repudiation of the fetish of “selectivity,” to which Wall Street constantly pays lip service.” pg. 290 Originally Released in 1949

Graham’s Principles Are Relevant Today… “The quant method can be defined as any method for security selection that comes from a systematic, disciplined, and repeated application of a process…” “Back in 1949, when Benjamin Graham published the Intelligent Investor, he listed seven criteria that , in his opinion, defined “the quantitatively tested portfolio,” consisting of (1) adequate size of the enterprise, (2) sufficiently strong financial condition, (3) earnings stability, (4) dividend record, (5) earnings growth, (6) moderate P/E ratio, and (7) moderate ratio of price to book.” Pg. 3 Released in 2011

A Conversation with Benjamin Graham: “Let me suggest three such rules: (1) The individual investor should act consistently as an investor and not as a speculator. This means, in sum, that he should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that satisfies him that he is getting more than his money's worth for his purchase--in other words, that he has a margin of safety, in value terms, to protect his commitment. (2) The investor should have a definite selling policy for all his common stock commitments, corresponding to his buying techniques. Typically, he should set a reasonable profit objective on each purchase--say 50 to 100 per cent--and a maximum holding period for this objective to be realized--say, two to three years. Purchases not realizing the gain objective at the end of the holding period should be sold out at the market. (3) Finally, the investor should always have a minimum percentage of his total portfolio in common stocks and a minimum percentage in bond equivalents. I recommend at least 25 per cent of the total at all times in each category. A good case can be made for a consistent 50-50 division here, with adjustments for changes in the market level. This means the investor would switch some of his stocks into bonds on significant rises of the market level, and vice-versa when the market declines. I would suggest, in general, an average seven- or eight-year maturity for his bond holdings.” What general rules would you offer the individual investor for his investment policy over the years? Financial Analysts Journal, September 1976

Excerpts from Ben Graham’s Speech “Security in an Insecure World” “We come finally to common-stock investment. My recommendation is that the investor choose either his own list of, say, 20 or 30 representative and leading companies, or else put his money in several of the well-established mutual funds. … Many investors would think my prescription too simple. If they can get results equal to the averages in this easy way why shouldn’t they try to get a substantially higher return by careful and competently-advised selection? My short answer has already been given: If the investment funds as a whole can’t beat the average, even pretty clever investors as a whole can’t do it either. The underlying problem of selection is that the “good stocks– chiefly the growth stocks with better than average prospects- tend to be fully priced in relation to value.” St. Francis Hotel, November 15, 1963

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