Benjamin Graham was an American economist, professional investor and scholar.
Benjamin Graham was born Benjamin Grossbaum to Jewish parents in London on the 8th of May 1894. When he was around a year old he moved to New York City with his parents. His father was an importer who died whilst Benjamin was young. The family experienced poverty in the United States due to an economic crisis. This early experience encouraged Benjamin to work hard and be wise with money.
When he was 20 Benjamin graduated from Columbia University, as the second highest graduate of his class and was offered job teaching. However, he had other plans and went to work as a chalker for Newburger, Henderson and Loeb on Wall Street. His intelligence and talents in financial research at Newburger, Henderson and Loeb led Benjamin to become a partner in the firm. By the age of 25 he is reported to have been earning around $500, 000 annually.
In 1926, Graham formed a partnership with another broker called Jerome Newman. Soon after he also started lecturing on finance at Columbia University, sharing his knowledge of business, finance and investment with others. Graham is considered the first advocate of value investing which he began teaching at Columbia Business School in 1928. This was the topic of the book Security Analysis. This book has become an investment, finance and student classic credited with having laid the intellectual foundation for what later became known as value investing. The book was first published in 1934, following Benjamin’s unprecedented losses on Wall Street during The Crash of 1929. This almost wiped Graham out financially but his business partnership survived and the lessons learned formed part of the lessons taught in his books and lectures. Graham also wrote other books including The Intelligent Investor published in 1949.
Graham caused some controversy during his career because he was critical of the type of complicated and irregular financial reporting characteristic of corporations at the time. He believed their practices made it hard for investors to understand the true state of their finances. He was an advocate of distributing business profits to shareholders (dividend payments) rather than re-investing or using them to pay debts (retained earnings).
Two of Benjamin Graham’s most cited theories were that of “Mr. Market” which was introduced in The Intelligent Investor and margin of safety.
Mr. Market has been cited many times to explain that the stock market tendency to fluctuate should not be relevant when investors are deciding whether to buy or sell their stocks and more focus should be on the realities of the business reflected in finances, management and competitive advantage. The term Mr Market is still widely used in the world of finance and investment today.
Margin of safety is the difference between the intrinsic value of a stock and its market price or how much sales output or sales levels within a business are able to fall before a business breaks even.
Benjamin Graham was an inspiring business man and teacher highly praised for his knowledge and skills in business. It has been said that he averaged about 20% annual return through many years in times when investing in stocks and shares was regarded as gambling. His low risk and high return theories and strategies gave him the reputation as an innovator in financial analysis.