Benjamin Graham’s background

Graham graduated at the top of his class at Columbia and wanted to study further to become a philosopher. But realized there was no money in it.

He then started the investment firm Graham & Newman, which became a workplace for many of the other most successful value investors. These included Walter Schloss and Warren Buffett.

Graham wrote the value investor’s bible, The Intelligent Investor

Graham’s great passion was to teach his knowledge to others. Therefore, he was a teacher at Columbia and had an investment course, which Warren Buffett, among others, attended.

Together with David Dodd, Benjamin Graham wrote the book The Intelligent Investor, which was the first book to review proven investment methods for finding undervalued companies.

Benjamin Graham’s strategies for value investing

The biggest lesson from Benjamin Graham, from The Intelligent Investor and according to those who worked with him, was to buy at a price below the true value of the company.

Here are the main methods of investing he invented and used:

• Net-nets: Buy shares in a company for a price significantly less than its actual assets. 2/3 of its net assets (Total Assets – Total liabilities). Gives 30% margin of safety.
• Takeover: If it was not possible to do the above, for example because it was a private company, then Graham and his associates needed to buy up the whole company and liquidate its assets.
• Risk arbitrage: Buying shares in a company and shorting the stock of the company they are arbitraging with.
• Convertible hedge arbitrage: Buying an equity bond or preferred stock, while shorting the common stock. The bigger the spread, the more they could earn in easy money.
• Hedged investing: Buy the stock of a company you believe in and short one of its industry peers you think is doing worse. However, according to Walter Schloss, this strategy did not work very well:

“For example, Graham decided that Illinois Central was a cheaper railroad at the price then than Missouri Kansas Texas. So he bought Illinois Central and sold Missouri Kansas Texas short.

While it may have been true statistically, it worked out very badly. It’s very difficult to short one railroad and buy another over a short period of time. Maybe over a longer period of time, it would work. Anyway. we stopped doing it.”

~Walter Schloss

More about Benjamin Graham

He was a Renaissance man with many interests, who liked intellectual challenges, and he did not believe in monogamous relationships.

• Read more: About the strategies of other famous value investors.