Benjamin Graham: Figuring it out (book review)

BEFORE Benjamin Graham started to work on Wall Street, investment analysis was a hit-and-miss affair, focusing more on recent price movements than on the merits of individual companies. Graham, a brilliant mathematician, took the process to a much higher level.

By doing so, he inspired a generation of investors, including Warren Buffett, one of the world’s richest men, who studied under him. Graham showed it was possible to find companies that were underpriced by the market, often because investors were too focused on short-term bad news. This “value” approach, based on careful analysis of a company’s cashflows and balance-sheet, is still popular today.

Graham’s influence has lasted because he was an excellent teacher, at Columbia University, and also a writer. His books, “Security Analysis” (1934, co-written with David Dodd) and “The Intelligent Investor” (1949) are still in print today. Any aspiring investor would do well to take a careful look at them.

It was Graham who came up with the idea of “Mr Market”, the manic-depressive whose mood swings should not infect investors, but be exploited by them. “You are neither right nor wrong because the crowd disagrees with you,” he wrote. “You are right because your data and reasoning are right.”

Graham also developed the concept of a “margin of safety”; investors should always try to buy shares well below the company’s intrinsic value. Investors should treat buying a single share in a company in the same way that they would approach buying the whole company; never do the former if you would not do the latter.

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Book: Einstein of Money: The Life and Timeless Financial Wisdom of Benjamin Graham