A Young Analyst on Wall Street, Benjamin Graham

An Enterprising Young Analyst on Wall Street by the name of Benjamin Graham

In the early 1930s an enterprising young analyst on Wall Street by the name of Benjamin Graham noticed that the vast majority of hotshot stock pickers on Wall Street didn’t care at all about the long-term economics of the businesses that they are busy buying a selling. All they cared about was whether the stock prices, over the short run, were going up or down.

Graham also noticed that these hot stock pickers, while caught up in their speculative frenzy, would sometimes drive up the stock prices to ridiculous levels in relation to the long-term economic realities of the underlying businesses. He also realized that these same hotshots would sometimes send stock prices spiraling to insane lows that similarly ignored the businesses’ long term prospects. It was in these insane lows that Graham saw a fantastic opportunity to make money.

Graham reasoned that if he bought these “oversold businesses” at prices below their long-term intrinsic value, eventually the market would acknowledge its mistake and revalue them upward. Once they were revalued upward, he could sell them at a profit. This is the basis for what we know today as value investing. Graham was the father of it.

What we have to realize, however, is that Graham really didn’t care about what kind of business he was buying. In his world every business had a price at which it was a bargain. When he started practicing value investing back in the 1930s, he was focused on finding companies trading at less than half of what they held in cash. He called it “buying a dollar for 50 cents.” He had other standards as well, such as never paying more than 10 times a company’s earnings and selling the stock if it was up 50%. If it didn’t go up within 2 years, he would sell it anyway.

Yes, his perspective was a bit longer than that of the Wall Street speculators, but in truth he had zero interest in where the company would be in ten years.

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