“If you are shopping for common stocks, choose them the way you would
buy groceries, not the way you would buy perfume.“
Benjamin Graham, whose original name was Grossbaum, (changed to Graham by its family), was born in London in 1894 in a Jewish family. His parents moved to New York City when he was one year old. At the age of 13, Ben had his first taste of the stock market. His mother opened an account to buy an odd lot of US Steel.
Benjamin Graham attended Boys High School in Brooklyn. Later he went to Columbia University, graduating in 1914, at the age of 20, with the title of Salutatorian: an award granted to the second ranked graduate of all graduates across the US.
After graduation, Graham received an invitation to teach English, mathematics, and philosophy at the university, which he refused to move to Wall Street. His first job was at the brokerage firm Newburger, Henderson & Loeb, earning $12 per week ($332 today adjusted for inflation) as an assistant. In the beginning, he was delivering securities and checks and writing descriptions of bond issues. Later, he started writing for the daily market letter for the firm, ending up analyzing companies. In 1920, at the age of 26, he was promoted to full partner.
Wealth and Portfolio
His open-ended mutual fund “Graham-Newman Corporation” managed together with Jerome Newman had returned 20% on average per year during between 1926 to 1956, while the market returned 12.2% per year. In 1953, at the peak of his fund track-record, Graham-Newman partnership disclosed in the “Fiscal Year Financial Statements shareholders letter” that they had $7,999,916.16 in AUM (Assets Under Management). His fund had investments in more than 100 different securities, 5 different industries and 5 different asset classes, with these allocations:
Common Stocks: 81.5% (Railroads: 7.3%; Utilities: 2.7%; Industrials: 70.4%; Banks: 0.8%; Insurance Companies: 0.3%)
Preferred Stocks: 7.1%
Holding and Investment Companies: 7.5% allocation
Career and Life
Three years after reaching the position of partner, in 1923, he left the company and set his own partnership: Graham Corp. with Louis Harris until 1925. Later, he set up his second company that evolved into “Graham-Newman Corporation”, together with Jerome Newman. In 1928, Benjamin Graham also started teaching investment classes, at Columbia University, where he famously mentored Warren Buffett, Irving Kahn, and other famous Value Investors. It was also during these times, as a teacher, that Benjamin Graham wrote two of the most iconic books on investing: “Security Analysis” in 1934 with David Dodd, and “The Intelligent Investor” in 1949. The American economist died in Aix-en-Provence, France, at the age of 82.
Known for being the father of value investing, whereby investors use fundamental analysis to find undervalued stocks, Graham had six key factors to help his company valuation: profitability, stability, earnings growth, financial position, dividends and price history. In the end, this system would allow him to find low-risk (or risk-free) investments that were rewarded in the long run.
Graham believed that the owner of equity stocks should see them as a partial ownership of a company, while ignoring erratic fluctuations in its price. As he says, “in the short term the stock market behaves like a voting machine [driven by sentiment], but in the long term it acts like a weighing machine [driven by financial results]”. For him there was nothing more important than investing with a margin of safety, which we can read in his book in the Chapter 4 of his book The Intelligent Investor: “there has developed the general notion that the rate of return which the investor should aim for is more or less proportionate to the degree of risk he is ready to run. Our view is different. The rate of return sought should be dependent, rather, on the amount of intelligent effort the investor is willing and able to bring to bear on his task.”
The original Benjamin Method for finding the intrinsic value of a stock was:
V= EPS x (8.5+ 2g), where V= intrinsic value; EPS= trailing 12-month EPS of the company; 8.5= The price-to-earnings (P/E) ratio of a zero-growth stock; g= long term growth ratio of the company
On the other hand, the fair value of a stock, would be calculated as follows: √(22.5 x EPS x BPS)
One of the best investments is GEICO, which became a premier insurance company, due to significant low-cost advantage (4x more cost efficient that industry peers). After WWII, the insurance industry suffered sharp inflation and was induced to underwrite losses. In 1948, Graham-Newman Corporation bought a 50% stake on GEICO for $712,500.00, a distinct move in the portfolio. The company kept growing over the next 25 years, where Graham and his colleges served the board until Graham resigned in 1965 and Newman retired in 1971. By that time, 25 years later, Graham-Newman Corporation stake on GEICO has grown to $400,000,000.00, a ROI of 54,040.35% (28.67% annualized).
There are no records of “bad investments”, by Benjamin Graham, but the crash of 1929 was a tough one for Graham. After the long bull market from 1921 to 1929, complacency became an enemy and the leverage used by Graham made him lose 70% of all his fund money, from 1929 to 1932, against an 80% broad market loss measured by the Dow Jones Industrial Average, keeping only 30 cents on a dollar. In 1935, they had fully recovered from all the losses.
Eduardo Ferreira, BSc in Economics
Pedro Marafusta, BSc in MAEG