Benjamin Graham, Value Investor
The Benjamin Graham value investing strategy is still one of the best ways to make money with stocks in the market today.
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Benjamin Graham's 1949 book The Intelligent Investor is the classic book on value investing. Warren Buffett, possibly the world's best investor, called this book "the best book about investing ever written." That's high praise!
Who is Benjamin Graham?
Benjamin Graham was an economist and a professional investor. In his book Security Analysis, he and David Dodd developed and refined a stock market strategy. Value investing is the systematic analysis of the financial strength of companies and their ability to produce revenue, profit, and growth through normal business operations.
Where some investing might be speculation ("We believe this stock will be worth more in the future because we hope people want to pay more for it in the future"), Graham's principles include research, knowledge, and safety. He encourages investors to think of themselves as owners of a business. Just as you would do your homework before buying a restaurant, factory, or consulting business, so should you examine the financial health and prospects of a stock.
What is Benjamin Graham Value Investing?
Perhaps Graham's most important insight is that investing in a stock can and should be like owning part or all of a business. A business has value because of the money it can produce for its owners now and in the future. The appropriate price for a stock—a fraction of ownership of the company—thus depends on the money the company can produce.
This is the core of value investing.
Though this work is decades old, the relevance of security analysis is higher than ever. Even as the market exhibits wild fluctuations almost every day, the price of a stock over the long term still depends on the strength of the business. By following Graham's principles, smart investors can make wise decisions based on facts, not fear, and will make money in the market.
Of course, you must first understand how to invest in the stock market. Yet even as Graham's tome is full of pen-and-paper exercises, the principles of his approach have spread far and wide.
Does Value Investing Still Work Today?
Yes! Some of the best investors in the world—Warren Buffett and Charlie Munger—studied Graham's approach. They put their own spin on things. In fact, Buffett's insight takes Graham's strategy one step further. Where Graham might buy a good stock when it's undervalued and sell it when it's overvalued, Buffett prefers to avoid unnecessary investing costs altogether by never selling great stocks.
That's the start of good investing, and in 2019 you have an advantage that Graham and younger Munger and Buffett never had. The Internet's leveled the playing field in ways perhaps those investors could never have imagined. There's a wealth of information at your fingertips and a tremendous amount of computing power in your hands right now. Where Benjamin Graham had to fill in charts and graphs himself, a few minutes and a spreadsheet could help him figure out important statistics like "What's the right price to pay for a stock?" and "What's discounted cash flow?" and "What's a good price for a share of this company with a margin of safety?
The most fun part of investing is watching your money grow, and the second most enjoyable part is figuring out great stocks to buy at good prices. Now you can use computers to do the boring numerical analysis for you. Start with learning about free cash flow and you'll soon be on your way.