Benjamin Graham

The Guru’s Guru

Benjamin Graham was an influential investment professional who is widely considered one of the best stock market investors of the 20th century. He also happens to be Warren Buffett’s self-acknowledged guru. Graham taught Buffett the art of value investing in the late 1940’s when he was studying at Columbia University.

During the Great Depression, Graham published his first seminal work “Security Analysis” (1934) while lecturing at Columbia Business School. His book presented the fundamentals of value investing, which involves buying undervalued stocks with high potential. At a time when the stock market was known as a speculative market, the notion of intrinsic value and margin of safety, which were first introduced in Security Analysis, paved the way for modern fundamental analysis.

Benjamin Graham and Mr. Market

In 1949, Graham published “The Intelligent Investor” – widely regarded a the definitive guide to value investing. This book features a character known as Mr. Market, Graham’s metaphor for the erratic behavior of securities.

Mr. Market is a investor’s imaginary business partner who daily tries to either sell his shares or buy the shares from the investor. Mr. Market is often irrational and shows up at the investor’s door with different prices on different days depending on his mood. Of course, the investor is not obligated to accept any offers.

Graham points out that instead of relying on daily market sentiments, which are run by investors’ greed or fear emotions, investors should analyze a stock’s worth based on the company’s operations and financials. This analysis should strengthen the judgment of the investor when they are made an offer by Mr. Market.

According to Graham, the intelligent investor sells to optimists and buys from pessimists. The investor looks for opportunities to buy low and sell high due to price-value discrepancies that arise from temporary negative publicity, economic down-turns, one-time events, and market crashes. If no such opportunity is present, the investor just ignores Mr. Market.

Apex Money

In the 1930’s Graham proposed a global reserve currency based on a basket of commodities. His idea was later espoused by Friedrich Hayek in his 1943 essay “A Commodity Reserve Currency”.  Graham’s thesis centered around 15 commodities based on their net global production and expanding to 30 max. He was so confident about the idea that he even tried to introduce it to the Bretton Woods Committee. In his own words he wrote: “If my name has any chance of being remembered by future generations it will be as the inventor of the Commodity Reserve Currency Plan.”

The SAT Project builds on Graham’s apex money work. The whitepaper can be found here.