Tuesday, 19 February 2013

Benjamin Graham and his profound investment principles

Graham had become well known during the 1920's.  At a time when the rest of the world was approaching the investment arena as a giant game of roulette, he searched for stocks that were so inexpensive they were almost completely devoid of risk.  

One of his best known calls was the Northern Pipe Line, an oil transportation company managed by the Rockefellers.  The stock was trading at $65 a share, but after studying the balance sheet, Graham realized that the company had bond holdings worth $95 for every share.  The value investor tried to convince management to sell the portfolio off, but they refused.  Shortly thereafter, he waged a proxy war and secured a spot on the Board of Directors.  The company sold its bonds off and paid a dividend in the amount of $70 per share.

When he was 40 years old, Graham published "Security Analysis", one of the greatest works ever penned on the stock market.  At the time, it was risky; investing in equities had become a joke [the Dow Jones had fallen from 381.17 to 41.22 over the course of three to four short years following the crash of 1929]. It was around this time that Graham came up with the principle of "intrinsic" business value - a measure of a businesses' true worth that was completely and totally independent of the stock price. Using this 'intrinsic value', investors could decide what a company was worth paying for - and make investment decisions accordingly.  His subsequent book, "The Intelligent Investor" [which Warren celebrates as "the greatest book on investing ever written"] introduced the world to Mr. Market - the greatest investment analogy in history.

Through his simple yet profound investment principles, Graham became an idyllic figure to the twenty-one year old Buffett. 


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