Born in London, Graham immigrated to the United States at a young age where he grew up in New York before attending Columbia University, graduating in 1914 before beginning his career on Wall Street with Newburger, Henderson & Loeb, where he made partner within six years.
Widely regarded as the father of security analysis & value investing, Graham is well known for publishing two books, “Security Analysis” (1934) co-authored with David Dodd and “The Intelligent Investor”(1949) which are still in print today. In 1926 the Graham-Newman partnership was formed, which Graham managed until retirement in 1956, achieving an average annual return of 17%.
During his career he also lectured at Columbia university, including a student named Warren Buffett, where he coined the phrase “margin of safety” when evaluating companies with sound long term fundamental but a temporarily low stock price, effecting the difference between the purchase price and intrinsic value. He also used a character named “Mr. Market” to describe the market as a business partner who made new offers each day to buy or sell a business to you. As stock prices fluctuate in value it provides opportunities to buy when prices fall sharply and sell when they advance.
Overall his investment style focused on fundamental analysis, selecting companies with strong balance sheets, little debt, above-average profit margins and strong cash flow. More specifically he adhered to the following rules:
- Earnings-to-price yield at least twice the AAA bond yield.
- P/E ratio less than 40% of the highest P/E ratio the stock had over
the previous five years. - Dividend yield of at least two-thirds the AAA bond yield.
- Stock price below two-thirds of tangible book value per share.
- Stock price below two-thirds of “net current asset value.”
- Total debt less than book value.
- Current ratio greater than two.
- Total debt less than twice “net current assets.”
- Annual earnings growth in the prior 10 years of at least 7% annual compounded.
- No more than two declines of 5% or more in year-end earnings over the prior 10 years
References:
http://www.cabot.net/investing-advice/benjamin-graham/benjamin-graham-a-short-biography
http://www.investopedia.com/university/greatest/benjamingraham.asp
