Graham was Warren Buffett’s teacher
Buffett studied with Graham at Columbia and worked at Graham-Newman from 1954 to 1956. He has called Graham the biggest influence on him after his father
Famous Traders · Value
Benjamin Graham
Benjamin Graham / The Father of Value Investing
Warren Buffett’s teacher, who taught the world to separate price from value. He lost about 70% of his portfolio in the crash of 1929, then came back to build principles that put safety before profit. On this page you can try dealing with Mr. Market, hunt for stocks cheaper than the cash in the company, and see how much a margin of safety helps.
GRAHAM-NEWMAN · LEDGERMargin of Safety
BG- Estimated value$100
- Mr. Market’s price$60
- Margin of safety40%
- 1934Security Analysis
- 1948Bought 50% of GEICO
- 1949The Intelligent Investor
VALUE · NOT PRICEEST. 1926
Illustration: a ledger page in accountant style. The figures on the card are examples. No openly licensed photo was found
Born1894
Security Analysis1934
The Intelligent Investor1949
Graham-Newman per year (1936–56)~20%
Joint Account · 1929–1932−70%Cumulative loss during the crash, less than the Dow, but a wound that shaped his principles
Graham-Newman · 1936–1956~20%Approximate average annual return, against about 12.2% for the market, per figures compiled by Wikipedia
GEICO · 194850%The stake bought for about $712,000, a deal that made more than all his other deals combined
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ProfileQuick facts
NameBenjamin Graham, born Benjamin Grossbaum
Born9 May 1894 in London, England. His family moved to New York when he was about 1 year old
EducationColumbia University, graduating in 1914 second in his class (salutatorian), with offers to teach in three departments
First jobJoined Wall Street at Newburger, Henderson & Loeb in 1914 at about $12 a week, and became a partner at about 26
FirmManaged money with Jerome Newman from the 1920s, and founded Graham-Newman Corporation in 1936, which closed in 1956
BooksSecurity Analysis (1934, with David Dodd) and The Intelligent Investor (1949)
TeachingTaught at Columbia Business School from 1928. His most famous student was Warren Buffett. He later also taught at UCLA
Died21 September 1976 in Aix-en-Provence, France, aged 82
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From London to Wall StreetFrom a poor boy in New York to teacher of the world’s investors
Graham grew up in a struggling family after his father died. He studied hard, graduated second in his class at Columbia and was offered teaching posts in three departments, but chose Wall Street because he needed to earn money for his family
In those days company information was scarce and most people bought stocks on rumours. Graham instead sat reading financial statements and government agency reports, until he found stocks priced below the cash the companies held. Tap each line to follow his journey
CAREER · LEDGERGraham’s ledger of life
1894 · Born in London as Benjamin Grossbaum. His family moved to New York when he was about 1 year old. His father ran a porcelain business but died when Graham was young, leaving the family in hardship
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CASE FILE · 1926–1928Northern Pipeline: a stock cheaper than the bonds in its safe
An oil pipeline company spun off from Standard Oil gave investors only brief reports, but its filings with the Interstate Commerce Commission showed it held a large amount of bonds. Graham bought shares and pressed for the excess cash to be returned to shareholders
- Share price when Graham found it$65
- Bonds and cash per shareAbout $90–95
- Shares Graham held2,000 of 40,000
- Held by the Rockefeller FoundationAbout 23%
- Outcome of the 1928 meetingWon 2 board seats
- Cash returned to shareholders$70 per share
- Total value per original shareMore than $110
Figures from articles by Beyond Ben Graham and Cannon Financial, which state slightly different bond values per share ($90 and $95)
The principle Graham stressed in every edition of his booksAn investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative
Paraphrased from the definition of investing in Security Analysis and The Intelligent Investor, not a direct quote
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Mr. MarketLab: dealing with a moody business partner
Graham compared the market to a partner called Mr. Market who offers to buy or sell every day. Some days he’s cheerful and quotes absurdly high prices; some days he’s gloomy and quotes shockingly low ones. Meanwhile the business’s value grows quietly. Set your rule for what discount you buy at and how expensive you sell at, then see the result over 5 years
Mr. Market’s priceBusiness value▲ Buy▼ Sell
100 following your rule—
Buy and hold from day one—
Number of buys / sells—
Time holding the stock—
A hypothetical model: business value starts at 100 and grows 6% a year. The weekly price swings randomly around value and is slowly pulled back (calm, normal, manic moods). In the model the price is always pulled back to value, which real markets don’t guarantee. Buys and sells use all the money, cash earns no interest, and dividends and fees are excluded. Not real stock data
What this means for traders
Gold and currencies also have days when the market is overexcited or overly fearful, such as days when economic data is released. A price running hard doesn’t mean you have to trade. Graham taught us to decide by conditions set in advance, not by other people’s moods
COST · MARGIN OF SAFETY
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Analyst deskThe analyst’s desk: find stocks cheaper than the money in the company
Graham liked stocks priced below current assets minus all liabilities (net current asset value, or NCAV), because it’s like getting the factories and brands for free. He advised buying when the price is no more than 2/3 of NCAV. For ordinary investors, he had another set of defensive criteria focused on financial strength and a reasonable price. Pick a hypothetical company or enter your own numbers
NCAV per share—
Net-net buy price (2/3)—
Graham Number—
P/E · P/B—
NCAV = current assets (cash, receivables, inventory) − total liabilities · Graham Number = √(22.5 × earnings per share × book value per share), from the criteria of P/E no more than 15 times P/B no more than 1.5 · The full defensive criteria also include company size, 20 years of uninterrupted dividends and 10 years of positive earnings, which require historical data. Companies A–D are hypothetical
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Margin of safetyLab: how big a discount is enough to allow for error?
You estimate a stock is worth 100, but no estimate is ever 100% accurate. The true value could be higher or lower. That’s why Graham bought when the price was far enough below his estimate. Adjust the discount and the uncertainty of the estimate, and see how the chance of losing changes
Price paid—
Chance true value is below the price—
Profit if the estimate is exactly right—
The worst 1-in-10 case—
A simple model: true value follows a lognormal distribution around the estimate of 100, with uncertainty as the approximate standard deviation. It assumes the price eventually returns to true value, which in real markets can take a long time or never happen
What this means for traders
In trading, a margin of safety means not betting everything on your own confidence. Use an order size you can survive if your analysis is wrong, and place your stop loss before entering. The more volatile the market, the bigger the margin you need
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Fact checkFact check: truth and stories passed along
Graham is quoted so often that inaccurate stories have crept in. We sort each one by the weight of the evidence
Value investors never suffer big losses
Graham’s investment account fell about 70% during the crash, even if that was less than the Dow. His safety-first principles grew out of this wound
Graham-Newman beat the market by about 20% a year
Wikipedia cites an average return of about 20% a year against about 12.2% for the market, but the figures vary by source and method, such as whether gains from GEICO stock are included
One deal made more than all the others combined
In the postscript to The Intelligent Investor, Graham wrote that the profit from GEICO exceeded the total of all his other decisions, and asked whether luck and skill can really be told apart
Mr. Market was Buffett’s idea
The Mr. Market character comes from Graham’s The Intelligent Investor. Buffett retold it in his shareholder letters, so many people remember it as Buffett’s
Graham only bought cheap stocks and ignored growth businesses
His main work was stocks priced below working capital, but his biggest profit came from GEICO, a high-growth business, and later revised editions of his book included a formula for valuing growth stocks
Graham was the first activist investor
The Northern Pipeline case is the most often cited early example of pressuring management, but whether he was truly the first is hard to prove
Security Analysis was written alone
It was written with David Dodd, a Columbia lecturer who helped compile material from the course Graham taught, which is why the approach is often called Graham-and-Dodd
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LessonsLessons for Forex and gold traders
Your checklist
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Set the price you’re willing to pay in advance
Graham worked out value before looking at price, then bought when the price was far enough below it. Traders can use the same principle by setting the entry and stop loss before opening an order, and not chasing price out of fear of missing out
Price movement is not an order
Mr. Market offers a price every day, but you don’t have to accept every offer. Big news or a spiking chart doesn’t mean you have to trade. Wait for price to meet the conditions you set
Always allow for error
Every estimate can be wrong. A margin of safety is the allowance for that. In trading, it means an order size you can survive losing on, and not using full leverage
Diversify
Graham held dozens of cheap stocks at once, knowing some would be wrong. Traders shouldn’t stake their whole account on a single pair or asset either
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Quiz5-question quiz
Question 1 / 5
Which book did Graham write with David Dodd?
Security Analysis, published in 1934
What does Mr. Market mean in Graham’s book?
The market is like a moody business partner; you can choose whether or not to accept the offer
What is a net-net stock by Graham’s criteria?
The price is so low it’s like getting the business for free, because current assets after all debts still exceed the price
In 1929–1932, roughly how much did Graham’s investment account fall?
About 70%. Less than the Dow, but a lesson that made him focus on safety
Which company’s shares did Graham-Newman buy in 1948 in what became its most profitable deal?
GEICO, buying 50% for about $712,000
0/5
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Price is what you payPrice is what you pay; value is what you get
What you can apply from Graham is setting your conditions before the market stirs your emotions, allowing for error in every decision, and keeping costs low. Here are tools on 1TRADER that can help
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Further readingFurther reading
- The Intelligent InvestorBenjamin Graham (revised edition with commentary by Jason Zweig) · 1949A book for ordinary investors, with the Mr. Market and margin of safety chapters, which Buffett has called the best book about investing ever written
- Security AnalysisBenjamin Graham and David Dodd · 1934An in-depth textbook on analysing securities from financial statements, for anyone who wants to see the thinking behind Graham’s numerical criteria
Sources for this article
- Wikipedia: Benjamin Graham
- Columbia University: Benjamin Graham (C250)
- Cabot Wealth: Benjamin Graham, a short biography
- Novel Investor: The Rise and Fall and Rise of Ben Graham
- Beyond Ben Graham: The Man Who Beat Big Oil (Northern Pipeline)
- Cannon Financial: Activist Investing (Northern Pipeline)
- IFA: The Impact of GEICO on Benjamin Graham and Warren Buffett
- Playbill: Baby Pompadour (1934)
- Fortune via Pragmatic Capitalism: The best advice I ever got (Buffett)
- AAII: Benjamin Graham’s Net Current Asset Value Approach
- CFA Institute: Benjamin Graham, the Father of Financial Analysis
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FAQFrequently asked questions
Who is Benjamin Graham?
A British-born American investor and teacher (1894–1976), honoured as the father of value investing, author of Security Analysis and The Intelligent Investor, and Warren Buffett’s teacher
What is a margin of safety?
The gap between estimated value and the price paid. The further below value you buy, the more estimation errors or bad luck you can absorb without losing money
What is Mr. Market?
A fictional character in The Intelligent Investor who represents the market as a moody business partner, offering to buy or sell every day at prices that depend on his mood. Investors should take advantage of his crazy offers, not follow his moods
What is a net-net stock?
A stock whose market price is below current assets minus all liabilities (NCAV). Graham advised buying when the price is no more than 2/3 of NCAV, and holding many at once to diversify
How can Forex and gold traders use Graham’s ideas?
Set your entry price and stop loss in advance, don’t chase price with the market’s mood, use an order size that allows for error, and diversify rather than putting everything into a single asset
Educational content, not investment advice. Return figures are publicly reported and vary by source. The labs use models and hypothetical companies. · risk disclosure · Forex glossary