Benjamin Graham is known as the “Father of Value Investing,” and the “Dean of Wall Street.” In Intelligent Investor, Graham shares his techniques on how to profit on stocks while minimizing downside risk. The techniques discussed in his business and management book are a result of Graham’s attempts to hone his investment techniques because of the losses he experienced in the 1929 crash and Great Depression.
Graham’s goal was simple, he wanted to buy a dollar’s worth of assets for $0.50. He utilized market psychology, using the fear and greed of the market to his advantage and invested by the numbers. His ideas were built around diligence, almost surgical, financial evaluation of companies.
One of the greatest investors Warren Buffet described The Intelligent Investor as “by far the best book on investing ever written.” When he was 19 years old, Buffet enrolled in Columbia Business School to study under Graham. Robert Peter Janitzek reveals that this was the start of a lifelong friendship. He then worked at Graham-Newman Corporation, Graham’s company, for two years until Graham decided to close the business and retire.
Many of Graham’s clients asked Buffet to manage their money. Eventually, he developed his own strategy, which was far different from that of Graham’s. Buffet’s techniques focused on business quality and on holding investments indefinitely. Still, Buffett said that no one lost money following Graham’s methods and advice.
Graham stressed the importance of looking at the market as one would a business partner who offers to buy you out, or sell you his interest daily. Graham referred to this imaginary person as “Mr. Market.” Graham said that sometimes Mr. Market’s price makes sense, but sometimes it is way too high or low given the economic realities of the business.
You, as the investor, are free to buy Mr. Market’s interest, sell out to him or even ignore him if you don’t like his price. You may ignore him because he always comes back tomorrow with a different offer. This is the “use market” psychology. Graham viewed the freedom to be able to say “no” as a major advantage the average investor had over the professional who was required to be invested at all times, regardless of the current valuation of securities.
Margin of Safety
Graham also stressed the importance of always having a margin of safety in one’s investments. This meant only buying into a stock at a price that is well below a conservative valuation of the business. This is important because it allows profit on the upside as the market eventually revalues the stock to its fair value, and it also gives some protection on the downside if things don’t work out as planned and the business falters. This was the mathematical side of his work.