Benjamin Graham was a poet, translator, mathematician, and financial strategist, but his most significant contribution to finance was the development of the concept of value investing. This strategy involves buying undervalued securities with strong fundamentals and holding them for the long term.
His meticulous analysis and emphasis on the margin of safety became the cornerstones of value investing. This philosophy was formalised in his seminal work, Security Analysis, co-authored with David Dodd in 1934. He further distilled his philosophy in his book The Intelligent Investor (1949), making his investment strategies accessible to a wider audience.
The key pillar of value investing was his principle of “the margin of safety”. This principle advocates purchasing securities at prices significantly below their “intrinsic value”, thus providing a cushion against errors in judgement or market volatility. This helps in protecting investors from making substantial losses, while ensuring higher probability.`
In his 1976 interview with Medical Economics Journal, he said, “The only thing you can be sure of is that there are times when a large number of stocks are priced too high and other times when they’re priced too low. My investigations have convinced me you can predetermine these logical ‘buy’ and ‘sell’ levels for a widely diversified portfolio without getting involved in weighing the fundamental factors affecting the prospects of specific companies or industries.”
He added, “What’s needed is, first, a definite rule for purchasing that indicates that you’re acquiring stocks for less than they’re worth. Second, you have to operate with a large enough number of stocks to make the approach effective. And, finally, you need a very definite guideline for selling.” With this single response, he highlighted intrinsic value, diversification, and a plan to book profits beforehand.
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