Benjamin Graham Story
Benjamin Graham is a famous American economist and a professional investor. He has gained recognition as the author of foundational work in value investing and is often called the “Father of Value Investing”.
Breaking Down Benjamin Graham
Benjamin Graham was born in 1894 in London, UK. His family moved to New York City when he was one year old. Graham’s father died when he was only nine years old, leaving the Graham family in a difficult financial situation and Benjamin with a strong determination to achieve financial security at all cost.
Graham’s personality and temper were developed under poverty-ridden New York, where he had to use his brain more than his muscles to survive on the street.
Due to the excellent results in exams, Benjamin received a scholarship from Columbia University, which he graduated in 1914 with a bachelor’s degree. After graduating, Graham was offered a teaching position, however, he went to Wall Street and worked for the firm of Newburger, Henderson, and Loeb for $12 per week. His early duties included being a runner, delivering securities and checks, writing descriptions of bond issues, and later writing the daily market letter of the firm. Before long, he began to analyze companies, and at the age of 26 he was promoted to full partner.
In 1926, Ben left Wall Street to set up his own company — Graham-Newman which he ran with Jerry Newman. Graham played an essential role in the growth of Warren Buffet as he was his mentor and teacher. He hired Warren as a security analyst thirty years later.
The Graham-Newman Company survived the crisis of 1929, the Great Depression, the Second World War, the Korean War, and only in 1956 ceased to exist.
What made Graham’s legacy so special?
No doubt, his studies, which remain relevant today, four decades after he last published his investment theories and since his death, and more than 80 years since his books were first published.
In brief, Benjamin Graham systematized the entire process of evaluating companies, all with the goal of finding low-risk (or no-risk) investments that would reward over the long run.
Ten basic principles of investing by Benjamin Graham (books citation)
1. Self-education is a key to success
“The art of investing has one feature, which is not always paid due attention. Unprofessional investor, possessing minimal abilities and applying minimum efforts, can achieve if not brilliant, then stable results. However, in order to achieve higher indicators, colossal costs of mental and physical energy will be required. Half-measures are indispensable here — if you try to get only a little new knowledge and only slightly improve your skills in order for the investment program to be slightly above average, you may find that you have only made it worse,” Graham writes.
2. If you are a beginner use only qualitative instruments
“We focused on the advantages of a simple portfolio policy, that is, the formation of a diversified portfolio through first-class bonds and shares of the largest companies. Such an investment policy with the minimum assistance of experts is able to implement any investor. Chasing the securities outside this reliable and safe policy is fraught with serious problems, especially emotional ones”, the author of the” Reasonable Investor “states.
3. If you are the newbie do not play against the market
“We strongly recommend that newcomers on the securities market do not spend their efforts and money on attempts to defeat the stock market. A good option for inexperienced investors is to use the minimum allowable means to test their judgments about underestimation or market revaluation of certain securities, “Graham said.
4. Think twice when you invest in something considered to be perspective
“1. Explicit prospects for business growth do not guarantee investors profit. 2. Experts can not offer reliable methods for selecting shares of the most promising companies in the most promising sectors, “the guru says.
5. Investments vs Speculations
“Not only investment, but also speculation can be reasonable. The latter are unreasonable in cases when: 1) the investor thinks he is investing, but is actually engaged in speculation; 2) the investor makes a major transaction without the relevant knowledge and experience, and 3) the investor conducts a risky speculative operation that requires more investment than he can afford to lose in case of failure, “- says Graham.
6. Do not forget to diversify your portfolio
“The main principle of passive investment policy: regardless of the situation on the market, part of the funds should be invested in bonds, part — in shares. The ratio between these two types of securities in the portfolio can be from 50:50 to 25:75 depending on the situation on the market. “ “An investor should enter an adequate but not excessive level of portfolio diversification. This can be achieved by buying shares of at least ten and a maximum of thirty different companies, “Graham writes.
7. Do not constitute portfolio only of shares, avoiding bonds for inflation expectations
“If an investor forms a portfolio solely from stocks, he risks seriously suffer as a result of both significant growth and a serious drop in their rate, especially if he is guided by inflation expectations in his actions. In this case, in the conditions of the bull market, he will perceive his growth not as a signal about the inevitable subsequent fall and the opportunity to sell shares on favorable terms. On the contrary, he will see in this confirmation of the correctness of the inflation hypothesis and will continue to buy shares regardless of how much the market has grown, “Graham said.
8. If you are not a professional, choose blue chips
“As an investment object, a passive investor must choose shares of financially stable companies that have demonstrated a high profitability for a long period of time. Aggressive investors can buy ordinary shares of other companies, choosing them based on clearly formulated criteria and on the basis of comprehensive analysis, “- says the teacher of Warren Buffett.
9. Use the Martingale Way
“An investor can resort to an investment strategy based on the method of averaged uniform investment. In this case, he will regularly (monthly or quarterly) invest in the purchase of shares of the same amount. Accordingly, in the falling market, it will buy more shares, and on the growing market — less. In the end, most likely, the price of its shares will be quite acceptable, “- says Graham.
10. Active investors should have a strong strategy
“The real chances for a higher profit compared to the average market for a long time can only give a special strategy. This strategy should be first thought out and effective, and secondly be unpopular among the participants of the stock market, “ the legendary financier considers.
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