Investment Strategies Prescribed by Benjamin Graham

Investment strategies prescribed by Benjamin Graham

Benjamin Graham, who was known as “The father of Value Investing” and “The Dean of Wall Street” was born in London, 1894. He was a brilliant student at Columbia University in New York. After graduating in 1914, Benjamin Graham took a job in Wall Street firm Newburger. That was the beginning of his professional life in stock market. He was an expert in making huge profit without taking big risks. He was successful in the money market for both himself and for his clients. He also wrote a book named, “The Intelligent Investor”. The book was very famous and it was described as the best book ever written about investing. He has created few principles for being successful in the money market. There is a saying that, serious investors should do study on Benjamin Graham’s work to learn finance and investments. Among all the strategies he developed, two of the most famous strategies were Value Investing and Margin of Safety.

In value investing, Benjamin Graham advised to look for the core and the intrinsic value of a company. When the intrinsic value of a company is found out to a reasonable level of accuracy, then the investors have to use the other factors of the market to for their advantage. After that they should wait to buy shares when the share price will fall below that intrinsic value and they can also expect that in near future the company will be overvalued. So, all they will have to do is Buy low and Sell High. Personally, Benjamin Graham used to follow long term strategies. He didn’t consider himself as a gambler in the stock price, rather he liked to consider himself as an investor in the actual company. He believed that, Patience is a virtue for those who want to be a value investor.

Margin of safety is an important part of Benjamin Graham’s value investment strategy. It mainly focus on the difference between the intrinsic value of the market price and stock price. If the margin is high there will be the chance of error in calculating intrinsic value will also high for the investors. This margin of safety can save an investor from taking bad decisions and also from market downturns. Benjamin Graham used to invest in those companies which has the liquid asset more than their market capital.

Besides Value investing and margin of safety, Benjamin Graham few more suggestions for the investors. Those will be briefly described below.

Benjamin Graham recommended to look for the average or better type companies. It is not necessary that an investor will always need to invest in top or best companies. The average and better companies will do fine if they have S&P earnings and dividend rating of B or better. And for stocks he suggested with to buy which have a ratings of B+ or better.

Benjamin Graham suggested to invest in those companies which have Total debt to Current asset ratio less than 1.10. Total debt to Current asset ratio’s data will be available in data which are supplied by S&P and in other services also.

He also advised to find the companies which have positive earnings per share growth in last five years. And the investors will have to stay away from companies which had earnings deficit in last five years, it will reduce the risk.

Then he told the investors to invest in those companies which are paying dividends now. It will help them to collect dividends easily rather than waiting for other companies to go all the way from undervalued to overvalued, it takes a lots of time.

In Conclusion

We can see the one of the most successful investors of all time, Benjamin Graham did not keep all his secrets of being the best to himself. Rather he described all the tricks for the other investors, so that they can also learn about investing. There we can see that he didn’t follow any single strategy all the time, he used different types of strategies for different companies time to time. If an investor can understand all the tips and if they can implement all these in money market, they will also be successful for sure.


Sources

  • http://www.investopedia.com/articles/07/ben_graham.asp
  • https://cabotwealth.com/daily/value-investing/benjamin-grahams-value-stock-criteria/
  • http://www.whatinvestment.co.uk/lessons-on-investing-from-warren-buffetand39s-mentor-benjamin-graham-2390873/

Author: Mahfujur Rahman

Mahfujur Rahman is one of the top contributors of GotAbout Business Strategy and Analysis. He has finished his BBA from North South University and currently doing his Masters of Business Administration in Dhaka University. He has a strong interest in Finance and Investment.

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