Benjamin Graham

Benjamin Graham

Postby winston » Sat Feb 28, 2009 9:30 am

Benjamin Graham: Three Timeless Principles Daniel Myers

Warren Buffett is the world's richest human. But he may owe it all to his teacher Benjamin Graham.

Warren Buffett is widely considered to be one of the greatest investors of all time, but if you were to ask him who he thinks is the greatest investor, he would probably mention one man: his teacher Benjamin Graham. Graham was an investor and investing mentor who is generally considered to be the father of security analysis and value investing.

His ideas and methods on investing are well documented in his books Security Analysis (1934) and The Intelligent Investor (1949), which are two of the most famous investing books. These texts are often considered to be requisite reading material for any investor, but they aren't easy reads. Here, we'll condense Graham's main investing principles and give you a head start on understanding his winning philosophy.

Principle No. 1: Always Invest With a Margin of Safety

Margin of safety is the principle of buying a security at a significant discount to its intrinsic value, which is thought to not only provide high-return opportunities but also to minimize the downside risk of an investment. In simple terms, Graham's goal was to buy assets worth $1 for 50 cents. He did this very, very well.

To Graham, these business assets may have been valuable because of their stable earning power or simply because of their liquid cash value. It wasn't uncommon, for example, for Graham to invest in stocks in which the liquid assets on the balance sheet (net of all debt) were worth more than the total market cap of the company (also known as "net nets" to Graham followers).

This means that Graham was effectively buying businesses for nothing. While he had a number of other strategies, this was the typical investment strategy for Graham. (For more on this strategy, read "What Is Warren Buffett's Investing Style?")

This concept is very important for investors to note, as value investing can provide substantial profits once the market inevitably re-evaluates the stock and raises its price to fair value. It also provides protection on the downside if things don't work out as planned and the business falters. The safety net of buying an underlying business for much less than it is worth was the central theme of Graham's success. When stocks are chosen carefully, Graham found that a further decline in these undervalued equities occurred infrequently.

While many of Graham's students succeeded using their own strategies, they all shared the main idea of the "margin of safety."
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
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Re: Benjamin Graham

Postby winston » Sat Feb 28, 2009 9:47 am

Principle No. 2: Expect Volatility and Profit From It

Also Investing in stocks means dealing with volatility. Instead of running for the exits during times of market stress, the smart investor greets downturns as chances to find great investments. Graham illustrated this with the analogy of "Mr. Market," the imaginary business partner of each and every investor. Mr. Market offers investors a daily price quote at which he would either buy an investor out or sell his share of the business. Sometimes, he will be excited about the prospects for the business and quote a high price. Other times, he will be depressed about the business's prospects and will quote a low price.

Because the stock market has these same emotions, the lesson here is that you shouldn't let Mr. Market's views dictate your own emotions or, worse, lead you in your investment decisions. Instead, you should form your own estimates of the business's value based on a sound and rational examination of the facts. Furthermore, you should only buy when the price offered makes sense and sell when the price becomes too high. Put another way, the market will fluctuate--sometimes wildly--but rather than fearing volatility, use it to your advantage to get bargains in the market or to sell out when your holdings become way overvalued.

Here are two strategies that Graham suggested to help mitigate the negative effects of market volatility:

--Dollar-cost averaging: Achieved by buying equal dollar amounts of investments at regular intervals. It takes advantage of dips in the price and means that an investor doesn't have to be concerned about buying his or her entire position at the top of the market. Dollar-cost averaging is ideal for passive investors and alleviates them of the responsibility of choosing when and at what price to buy their positions. (For more, read "DCA: It Gets You In At The Bottom" and "Dollar-Cost Averaging Pays.")

--Investing in stocks and bonds: Graham recommended distributing one's portfolio evenly between stocks and bonds as a way to preserve capital in market downturns while still achieving growth of capital through bond income. Remember, Graham's philosophy was, first and foremost, to preserve capital, and then to try to make it grow.

He suggested having 25% to 75% of your investments in bonds, and varying this based on market conditions. This strategy had the added advantage of keeping investors from boredom, which leads to the temptation to participate in unprofitable trading (i.e., speculating).
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
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Re: Benjamin Graham

Postby winston » Sat Feb 28, 2009 9:56 am

Principle No. 3: Know What Kind of Investor You Are

Graham said investors should know their investment selves. To illustrate this, he made clear distinctions among various groups operating in the stock market.

Active vs. passive: Graham referred to active and passive investors as "enterprising investors" and "defensive investors."

You only have two real choices: The first is to make a serious commitment in time and energy to become a good investor who equates the quality and amount of hands-on research with the expected return. If this isn't your cup of tea, then be content to get a passive, and possibly lower, return but with much less time and work. Graham turned the academic notion of "risk = return" on its head. For him, "work = return." The more work you put into your investments, the higher your return should be.

If you have neither the time nor the inclination to do quality research on your investments, then investing in an index is a good alternative. Graham said that the defensive investor could get an average return by simply buying the 30 stocks of the Dow Jones industrial average in equal amounts. Both Graham and Buffett said getting even an average return--for example, equaling the return of the S&P 500--is more of an accomplishment than it might seem.

The fallacy that many people buy into, according to Graham, is that if it's so easy to get an average return with little or no work (through indexing), then just a little more work should yield a slightly higher return. The reality is that most people who try this end up doing much worse than average.

In modern terms, the defensive investor would be an investor in index funds of both stocks and bonds. In essence, they own the entire market, benefiting from the areas that perform the best without trying to predict those areas ahead of time. In doing so, an investor is virtually guaranteed the market's return and avoids doing worse than average by just letting the stock market's overall results dictate long-term returns. According to Graham, beating the market is much easier said than done, and many investors still find they don't beat the market. (To learn more, read "Index Investing.")

Speculator vs. investor: Not all people in the stock market are investors. Graham believed that it was critical for people to determine whether they were investors or speculators. The difference is simple: An investor looks at a stock as part of a business and the stockholder as the owner of the business, while the speculator views himself as playing with expensive pieces of paper with no intrinsic value. For the speculator, value is only determined by what someone will pay for the asset. To paraphrase Graham, there is intelligent speculating as well as intelligent investing--just be sure you understand which you are good at.
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
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Re: Benjamin Graham

Postby winston » Sat Feb 28, 2009 10:02 am

Graham's basic ideas are timeless and essential for long-term success. He bought into the notion of buying stocks based on the underlying value of a business and turned it into a science at a time when almost all investors viewed stocks as speculative. Graham served as the first great teacher of the investment discipline, as evidenced by those in his intellectual bloodline who developed their own. If you want to improve your investing skills, it doesn't hurt to learn from the best; Graham continues to prove his worth in his disciples, such as Buffett, who have made a habit of beating the market.

--The price-to-earnings ratio is among the lowest 10% of the database (percent rank less than or equal to 10).

--The current ratio for the last fiscal quarter (Q1) is greater than or equal to 1.5.

--The long-term debt to working capital ratio for the last fiscal quarter (Q1) is greater than 0% and less than 110%.

--Earnings per share for each of the last five fiscal years and for the last 12 months have been positive.

--The company intends to pay a dividend over the next year (indicated dividend is greater than zero).

--The company has paid a dividend over the last 12 months.

--Earnings per share for the last 12 months is greater than the earnings per share from five years ago (Y5).

--Earnings per share for the last fiscal year (Y1) is greater than the earnings per share from five years ago (Y5).

--The price-to-book ratio is less than or equal to 1.2.
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
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Re: Benjamin Graham

Postby Cheng » Tue Feb 02, 2010 12:43 pm

I have compiled all of d.o.g.'s comments 2008-2009 in MS Word. They are excellent read especially if you are into SG markets, just wana share. :)

If you don't know who is d.o.g. (Disciple of Graham), he is the modern Graham. ;) I think he registered here as newdog. You have to read to find out more and his returns over the years are very good in my opinion.

http://www.4shared.com/file/202856176/c ... final.html

http://www.4shared.com/file/202856213/e ... final.html

I have his consent to share them. http://afralug.com/wsforum/showthread.php?tid=3456 :D
"The really big money tends to be made by investors who are right on qualitative decisions." Warren Buffett

"Risk no more than you can afford to lose, and also risk enough so that a win is meaningful." Ed Seykota

Scan with FA, Time with TA, Volatility is my Friend. :)
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Re: Benjamin Graham

Postby LenaHuat » Tue Feb 02, 2010 2:47 pm

Hi cheng :D
Thanks a million for this post. Oh ya, I value his comments too. He seems to be a pretty all rounder, knowledgeable in so many issues and very generous with his sharing.
Please be forewarned that you are reading a post by an otiose housewife. ImageImage**Image**Image@@ImageImageImage
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Re: Benjamin Graham

Postby Cheng » Tue Feb 02, 2010 3:42 pm

Worth reading. :)

A Conversation With Benjamin Graham

Benjamin Graham, senior author of Security Analysis, needs no introduction to the readers of this magazine [Financial Analysts Journal.] The Journal thanks Charles D. Ellis, a member of its Editorial Board, for making available this presentation, in question-and-answer format, to a recent Donaldson, Lufkin & Jenrette seminar.

In the light of your 60-odd years of experience in Wall Street what is your overall view of common stocks?

Common stocks have one important characteristics and one important speculative characteristic. Their investment value and average market price tend to increase irregularly but persistently over the decades, as their net worth builds up through the reinvestment of undistributed earnings--incidentally, with no clear-cut plus or minus response to inflation. However, most of the time common stocks are subject to irrational and excessive price fluctuations in both directions, as the consequence of the ingrained tendency of most people to speculate or gamble--i.e., to give way to hope, fear and greed.

What is your view of Wall Street as a financial institution?

A highly unfavorable--even a cynical--one. The Stock Exchanges appear to me chiefly as a John Bunyan type of Vanity Fair, or a Falstaffian joke, that frequently degenerates into a madhouse--"a tale full of sound and fury, signifying nothing." The stock market resembles a huge laundry in which institutions take in large blocks of each other's washing--nowadays to the tune of 30 million shares a day--without true rhyme or reason. But technologically it is remarkably well-organized.

What is your view of the financial community as a whole?

Most of the stockbrokers, financial analysts, investment advisers, etc., are above average in intelligence, business honesty and sincerity. But they lack adequate experience with all types of security markets and an overall understanding of common stocks--of what I call "the nature of the beast." They tend to take the market and themselves too seriously. They spend a large part of their time trying, valiantly and ineffectively, to do things they can't do well.

What sort of things, for example?

To forecast short- and long-term changes in the economy, and in the price level of common stocks, to select the most promising industry groups and individual issues--generally for the near-term future.

Can the average manager of institutional funds obtain better results than the Dow Jones Industrial Average or the Standard & Poor's Index over the years?

No. In effect, that would mean that the stock market experts as a whole could beat themselves--a logical contradiction.

Do you think, therefore, that the average institutional client should be content with the DJIA results or the equivalent?


Yes. Not only that, but I think they should require approximately such results over, say, a moving five-year average period as a condition for paying standard management fees to advisors and the like.

What about the objection made against so-called index funds that different investors have different requirements?


At bottom that is only a convenient cliche or alibi to justify the mediocre record of the past. All investors want good results from their investments, and are entitled to them to the extent that they are actually obtainable. I see no reason why they should be content with results inferior to those of an indexed fund or pay standard fees for such inferior results.

Turning now to individual investors, do you think that they are at a disadvantage compared with the institutions, because of the latter's huge resources, superior facilities for obtaining information, etc.?

On the contrary, the typical investor has a great advantage over the large institutions.

Why?

Chiefly because these institutions have a relatively small field of common stocks to choose from--say 300 to 400 huge corporations--and they are constrained more or less to concentrate their research and decisions on this much over-analyzed group. By contrast, most individuals can choose at any time among some 3000 issues listed in the Standard & Poor's Monthly Stock Guide. Following a wide variety of approaches and preferences, the individual investor should at all times be able to locate at least one per cent of the total list--say, 30 issues or more--that offer attractive buying opportunities.

What general rules would you offer the individual investor for his investment policy over the years?

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.

In selecting the common stock portfolio, do you advise careful study of and selectivity among different issues?

In general, no. I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook "Graham and Dodd" was first published; but the situation has changed a great deal since then. In the old days any well-trained security analyst could do a good professional job of selecting undervalued issues through detailed studies; but in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost. To that very limited extent I'm on the side of the "efficient market" school of thought now generally accepted by the professors.

What general approach to portfolio formation do you advocate?

Essentially, a highly simplified one that applies a single criteria or perhaps two criteria to the price to assure that full value is present and that relies for its results on the performance of the portfolio as a whole--i.e., on the group results--rather than on the expectations for individual issues.

Can you indicate concretely how an individual investor should create and maintain his common stock portfolio?

I can give two examples of my suggested approach to this problem. One appears severely limited in its application, but we found it almost unfailingly dependable and satisfactory in 30-odd years of managing moderate-sized investment funds. The second represents a great deal of new thinking and research on our part in recent years. It is much wider in its application than the first one, but it combines the three virtues of sound logic, simplicity of application, and an extraordinarily good performance record, assuming--contrary to fact--that it had actually been followed as now formulated over the past 50 years--from 1925 to 1975.

Some details, please, on your two recommended approaches.

My first, more limited, technique confines itself to the purchase of common stocks at less than their working-capital value, or net-current-asset value, giving no weight to the plant and other fixed assets, and deducting all liabilities in full from the current assets. We used this approach extensively in managing investment funds, and over a 30-odd year period we must have earned an average of some 20 per cent per year from this source. For a while, however, after the mid-1950's, this brand of buying opportunity became very scarce because of the pervasive bull market. But it has returned in quantity since the 1973-74 decline. In January 1976 we counted over 300 such issues in the Standard & Poor's Stock Guide--about 10 per cent of the total. I consider it a foolproof method of systematic investment--once again, not on the basis of individual results but in terms of the expectable group outcome.

Finally, what is your other approach?

This is similar to the first in its underlying philosophy. It consists of buying groups of stocks at less than their current or intrinsic value as indicated by one or more simple criteria. The criterion I prefer is seven times the reported earnings for the past 12 months. You can use others--such as a current dividend return above seven per cent or book value more than 120 percent of price, etc. We are just finishing a performance study of these approaches over the past half-century--1925-1975. They consistently show results of 15 per cent or better per annum, or twice the record of the DJIA for this long period. I have every confidence in the threefold merit of this general method based on (a) sound logic, (b) simplicity of application, and (c) an excellent supporting record. At bottom it is a technique by which true investors can exploit the recurrent excessive optimism and excessive apprehension of the speculative public.

"It is fortunate for Wall Street as an institution that a small minority of people can trade successfully and that many others think they can. The accepted view holds that stock trading is like anything else; i.e., with intelligence and application, or with good professional guidance, profits can be realized. Our own opinion is skeptical, perhaps jaundiced. We think that, regardless of preparation and method, success in trading is either accidental and impermanent or else due to a highly uncommon talent."

"...we must express some serious reservations and perhaps prejudices that we hold about the basic utility of industry analysis as it is practiced in Wall Street and as its results are exhibited in typical brokerage-house studies. Industry analysis relates to the past and the future. Insofar as it relates to the past, the elements dealt with have already influenced the results of the companies in the industry and the average market price of their shares. ...When industry analysis addresses itself to the future it generally assumes that past characteristics and trends will continue. We find these forward projections of the past to be misleading at least as often as they are useful."

"If we could assume that the price of each of the leading issues already reflects the expectable developments of the next year or two, then a random selection should work out as well as one confined to those with the best near-term outlook."


-- Security Analysis, Third Edition, 1951

http://www.bylo.org/bgraham76.html
"The really big money tends to be made by investors who are right on qualitative decisions." Warren Buffett

"Risk no more than you can afford to lose, and also risk enough so that a win is meaningful." Ed Seykota

Scan with FA, Time with TA, Volatility is my Friend. :)
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Re: Benjamin Graham

Postby Cheng » Tue Feb 02, 2010 3:48 pm

LenaHuat wrote:Hi cheng :D
Thanks a million for this post. Oh ya, I value his comments too. He seems to be a pretty all rounder, knowledgeable in so many issues and very generous with his sharing.


You are welcome! Glad you like it. Took me the whole afternoon to read finish everything and another few hours to compile. :lol:
"The really big money tends to be made by investors who are right on qualitative decisions." Warren Buffett

"Risk no more than you can afford to lose, and also risk enough so that a win is meaningful." Ed Seykota

Scan with FA, Time with TA, Volatility is my Friend. :)
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Re: Benjamin Graham

Postby winston » Sat Sep 29, 2012 6:10 am

Benjamin Graham: What This Womanizer Can Teach You About Investing
Author: InvestmentU

The “Father of Security Analysis” wasn’t much of a husband or father. He divorced his first wife in 1937, when divorce was still socially unacceptable, leaving his four children stigmatized.

The next year, he married a young actress. But his interest soon waned and he soon dumped her to marry his secretary. In between, he had so many lovers and affairs that in a new biography The Einstein of Money, the author calls him a “swinger.”

When he died in Provence at 87, it was in the arms of his long-time French mistress, whom he’d courted away from his son!

Needless to say, Benjamin Graham was not a family values guy. But he understood a lot about stock values. In fact, he pioneered the field of security analysis and made a fortune for himself in the stock market.

Understanding even a little bit about his methods can make you a much better investor.

http://www.yolohub.com/trading/benjamin ... -investing
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Re: Benjamin Graham

Postby behappyalways » Wed Feb 13, 2013 3:50 am

血要热 头脑要冷 骨头要硬
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