Meet the Father of Value-based Investing

February 9, 2019

Picture of Benjamin Graham

Many investors think value investing is synonymous with Warren Buffet. Although they are not wrong, any serious investor should know that Benjamin Graham is credited as the father of not only value investing but the creation of the security analysis profession as well. Buffet is the most famous and successful student of Graham. So why is this investment strategy so effective?

Imagine Stock Picking Based on Your Gut

While many of our daily decisions can be made from our intuition and result in a positive outcome, leaving the future of your investments to this can have dire consequences. Benjamin Graham (1894-1976), a star student at Columbia University during the ‘dirty thirties’ (1930s) experienced this problem first hand without the amazing tools of analysis we have today.

To remedy the problem, Graham started devising security analysis methods that focused on the fundamental evaluation of a company’s data instead of rumour, self-aggrandizing brochures or suspect filings by companies at the time. Instrumental in drafting the Securities Act of 1933 (U.S.) was a huge step forward for his methods and the industry as a whole, as it required public companies to provide financial statements that were audited by independent accountants.

It was Never About Cheap Stocks

While the new regulations provided a stable flow of financial data for stock analysis by Graham, his methods have often been simply referred to as finding ‘cheap stocks’. This connotation is by far an oversimplification of his methods. Graham often used two main ideas to explain his core theories including ‘Mr. Market’ and the ‘margin of safety’ in respect to stock picking. The first refers to the idea that investors are in a position of power with the ability to say no when the ‘price is not right’ as Mr. Market will always come back tomorrow with a different price.

The second idea, a margin of safety, outlines how an investor should buy into equities with a certain percentage of downside risk already priced into their acquisition. This percentage should consider the intrinsic value of the equity, not its current book value. In this way, if the stock falls by five, ten or 15 per cent, which equals your margin of safety, you would not lose anything.  These are only two of his concepts, but as you can see, it was about investing wisely, not buying a bottom-dollar stock.

Graham’s Legacy

At a time when investing in common stocks was considered gambling, Graham is reported to have had a 20 per cent annual return. What is even more impressive is that his investment theory achieved significant rates of return through low-risk investments. Graham is often forgotten today in light of the massive success of Warren Buffet – which will be highlighted in a future ‘Wealth Sense’ column – but he laid the groundwork for Buffet and the current ability of equity analysts to factors in low price-to-earnings values, companies trading a discounts to book value, high dividend yielding equities and low price-to-book ratios.

Buffet would take these fundamentals and advance them to a point where most Investment Advisors today employ some or all to assess equities and funds for their clients.

Author Steve McBride, Investment Advisor, Echelon Wealth Partners looks forward to connecting with you about your future wealth management needs.



This blog is solely the work of Steve McBride for the private information of his clients. Although this author is a registered Investment Advisor with Echelon Wealth Partners Inc. (“Echelon”) this is not an official publication of Echelon, and this author is not an Echelon research analyst. The views (including any recommendations) expressed in this newsletter are those of this author alone, and they have not been approved by, and are not necessarily those of, Echelon.

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