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BENJAMIN GRAHAM
"The Father of Security Analysis"



Born Benjamin Grossbaum, May 8, 1894, London, England (changed name around 1917)

Immigrated to the United States in 1895

Personal heroes and role models included Ulysses (The Odyssey), Marcus Aurelius, Issac Newton, and Benjamin Franklin

Skilled in mathematics, philosophy, English, Greek, Latin, French, and music

Graduated Phi Beta Kappa, second in his class at Columbia, 1914

Went to work for the Wall Street firm of Newburger, Henderson, and Loeb for $12 per week following graduation from college

Performed various jobs including being a runner, delivering securities and checks, writing descriptions of bond issues, and later was responsible for the daily market letter of the firm.

Began to analyze firms, the first being Missouri Pacific Railroad, wrote an analysis and recommendation which he showed to a friend who worked for Bache and Company, was subsequently offered a job, but stayed with Newburger, Henderson, and Loeb

In 1920, at the age of 26 was promoted to full partner

On June 1, 1923, formed the Grahar Corporation

On January 1, 1926, the Joint Account was formed replacing Grahar

Began teaching investments classes at Columbia in 1928

Graham-Newman formed in 1929

Wrote first edition of Security Analysis in 1934 with former student David Dodd

Wrote first edition of The Intelligent Investor in 1949

In 1950, a student named Warren Buffett enrolled in graduate school at Columbia to study under Graham, later hired Buffett in 1954

Disbanded Graham-Newman in 1956

Was major influence in the development of the Chartered Financial Analyst (CFA) certification

Formed the Rea-Graham fund on June 30, 1976

Passed away at the age of 82 on September 21, 1976

BENJAMIN GRAHAM'S STOCK SELECTION CRITERIA

REWARD CRITERIA:

1. An earnings-to-price yield at least twice the AAA bond yield.

2. A P/E ratio less than 40% of the highest P/E ratio the stock had over the past five years.

3. A dividend yield of at least two-thirds the AAA bond yield.

4. Stock price below two-thirds of tangible book value per share.

5. Stock price below two-thirds "net current asset value."

RISK CRITERIA:

6. Total debt less than book value

7. Current ratio greater than two.

8. Total debt less than twice "net current asset."

9. Earnings growth of prior 10 years at least at a 7% annual compound rate.

10. Stability of growth of earnings in that no more than two declines of 5% or more in year-end earnings in the prior 10 years are permissible.


INVESTMENT VS. SPECULATION

"An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return."


APPROACHES TO COMMON STOCK INVESTMENT

1. Cross-Section Approach
2. Anticipation Approach
3. Margin of Safety Approach


THE GRAHAM INVESTMENT PRINCIPLES: Lowe (1994)

1. Be an investor, not a speculator.
2. Know the asking price.
3. Rake the market for bargains.
4. Buy the formula: Intrinsic Value = EPS(2g + 8.5)(4.4/AAA)
5. Regard corporate figures with suspicion.
6. Don't stress out.
7. Don't sweat the math.
8. Diversify, rule #1. (Minimum of 25% bonds, 25% stocks)
9. Diversify, rule #2. (Hold a large number of securities)
10. When in doubt, stick to quality.
11. Dividends as a clue.
12. Defend your shareholder rights.
13. Be patient.
14. Think for yourself.


SIX ESSENTIAL BUSINESS FACTORS TO ANALYZE A BUSINESS

1. Profitability
2. Stability
3. Growth in earnings
4. Financial position
5. Dividends
6. Price history

INVESTMENT RESULTS

The Joint Account: Annual Rate of Return 1925-1935

Graham-Newman Corp.: 1945-1956 Average Risk-Adjusted Returns (Sharpe Measure) Average Risk-Adjusted Returns (Treynor Measure)

BIBLIOGRAPHY

Auxier, Albert L.. "Happy Birthday, Benjamin Graham." Barron's. May 9, 1994.

Bigus, Antol W.. "Managing Portfolios with Graham & Dodd." Journal of Portfolio Management. Spring 1977.

Blustein, Paul. "Ben Graham's Last Will and Testament." Forbes. August 1, 1977.

Buffett, Warren E.. "Benjamin Graham." Financial Analysts Journal. November/December 1976.

Buffett, Warren E.. "The Superinvestors of Graham-and-Doddsville." Hermes, Magazine of Columbia Business School. Fall 1984.

Buffett, Warren E.. "Up the Inefficient Market! Graham & Dodd Is Alive and Well in Wall Street." Barron's. February 25, 1985.

"A Conversation With Benjamin Graham." Financial Analysts Journal. September-October 1976.

Cottle, Sidney, Roger F. Murray, and Frank E. Block. Graham and Dodd's Security Analysis. 5th Edition. 1988.

Graham, Benjamin. "The Future of Common Stocks." Financial Analysts Journal. September-October 1974.

Graham, Benjamin. "The Future of Financial Analysis." Financial Analysts Journal. May-June 1963.

Graham, Benjamin. The Intelligent Investor. 1949 (1), 1954 (2), 1959 (3), 1965 (3 R), 1973 (4 R).

Graham, Benjamin. The Memoirs of the Dean of Wall Street. 1996.

Graham, Benjamin. "The New Speculation in Common Stocks." The Analysts Journal. June 1958.

Graham, Benjamin. "Renaissance of Value." Barron's. September 23, 1974.

Graham, Benjamin. "Some Investment Aspects of Accumulation Through Equities." Journal of Finance. 1962.

Graham, Benjamin. "Some Observations." Financial Analysts Journal. November-December 1967.

Graham, Benjamin. "Toward a Science of Security Analysis." The Analysts Journal. August 1952.

Graham, Benjamin. "Two Illustrative Approaches to Formula Valuations of Common Stocks." The Analysts Journal. November 1957.

Graham, Benjamin. "Will Market Tree Grow to the Sky?--Some of the Problems Ahead." The Commercial and Financial Chronicle. April 6, 1961.

Graham, Benjamin and David L. Dodd. Security Analysis. 1934 , 1940, 1951, 1962 (with Sidney Cottle and Charles Tatham).

Greenblatt, Joel M., Richard Pzena, and Bruce L. Newberg. "How the Small Investor Can Beat the Market." Journal of Portfolio Management. Summer 1981.

Hoffmister, Ronald J. and Edward A. Dyl. "Dividends and Share Value: Graham and Dodd Revisited." Financial Analysts Journal. May-June 1985.

Kahn, Irving and Robert D. Milne. Benjamin Graham: The Father of Financial Analysis. The Financial Analysts Research Foundation. 1977.

Lauterbach, Beni and Joseph D. Vu. "Ben Graham's Net Current Asset Value Rule Revisited: The Size-Adjusted Return." Quarterly Journal of Business and Economics. Winter 1993.

Lowe, Janet. Benjamin Graham on Value Investing: Lessons from the Dean of Wall Street. 1994.

Lowe, Janet. "Rediscovering Benjamin Graham." Better Investing. August 1994.

Lowe, Janet. Value Investing Made Easy. 1996.

Lowenstein, Roger. Buffett: The Making of An American Capitalist. Chapter 3. 1995.

Murray, Roger F.. "Graham and Dodd: A Durable Discipline." Financial Analysts Journal. September-October 1984.

Oppenheimer, Henry R.. Common Stock Selection: An Analysis of Benjamin Graham's "Intelligent Investor" Approach. UMI Research Press, 1981.

Oppenheimer, Henry R.. "Ben Graham's Net Current Asset Values: A Performance Update." Financial Analysts Journal. November-December 1986.

Oppenheimer, Henry R.. "A Test of Ben Graham's Stock Selection Criteria." Financial Analysts Journal. September-October 1984.

Oppenheimer, Henry R. and Gary G. Schlarbaum. "Investing with Ben Graham: An Ex Ante Test of the Efficient Markets Hypothesis." Journal of Financial and Quantitative Analysis. September 1981.

Oppenheimer, Henry R. and Gary G. Schlarbaum. "Investment Policies of Property-Liability Insurers and Pension Plans: A Lesson from Ben Graham." Journal of Risk and Insurance. December 1983.

Rea, James B.. "Remembering Benjamin Graham-Teacher and Friend." Journal of Portfolio Management. Summer 1977.

Sivy, Michael. "The Six Rules of Investing from Legendary Ben Graham." Money. 1995.

Sturm, Paul. "What If Ben Graham Had a PC?" Smart Money. March 1994.

Train, John. The Money Masters. Chapter 4. 1987.

Vu, Joseph D.. "An Empirical Analysis of Ben Graham's Net Current Asset Value Rule." Financial Review. 1988.

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