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The timeless principles of Benjamin Graham in value investing

Updated: Apr 9

Often hailed as the "father of value investing," Benjamin Graham's principles have guided countless investors through the intricacies of the stock market.

Benjamin Graham (1894-1976)

Benjamin Graham - The Father of Value Investing
Source: Wikipedia

Benjamin Graham was born in London in 1894 and later moved to New York City with his family. He faced financial hardships early in life, which perhaps influenced his later perspectives on money and investing.

Graham was a brilliant student and excelled academically. He graduated from Columbia University at the age of 20 and was immediately offered a teaching position in the finance department, making him one of the youngest faculty members.

His most significant contributions came in the field of investment philosophy. Graham believed in fundamental analysis and was a staunch advocate for looking deeply into a company's assets, earnings, dividends, and financial health before investing. He emphasized the importance of always having a "margin of safety" when investing, which means buying stocks at a price well below their intrinsic value.

Graham's early experiences, both personal and academic, laid the foundation for his groundbreaking approach to investing. Facing financial challenges in his youth gave him a unique perspective on the value of money, while his academic prowess provided him with the tools to analyse and understand the complexities of the financial world.

But it was not just his background that set him apart. He could synthesize these experiences and insights into a coherent investment philosophy. A philosophy that went beyond mere numbers and statistics.

As Graham delved deeper into the world of finance, he began to formulate an approach that emphasized the intrinsic value of stocks, an approach that would later be termed "Value Investing." This philosophy, rooted in Graham's life experiences and academic rigour, sought to uncover the real worth of a company, often hidden beneath market perceptions and trends.

Value investing, at its core, is about finding undervalued stocks — those trading for less than their intrinsic worth. It is not just about numbers; it is a philosophy, a mindset. And Graham was its most vocal proponent.

So, what makes his teachings so timeless and invaluable?

Margin of safety: The golden rule

The "margin of safety" is a cornerstone of Graham's investment philosophy. It is a simple yet powerful concept that emphasizes risk aversion and the protection of capital. The margin of safety provides a buffer against errors in valuation, unforeseen adverse events, and the inherent unpredictability of the stock market.

To understand the margin of safety, one must first grasp the difference between intrinsic value and market price. The intrinsic value of a stock represents its true worth based on fundamental analysis, which includes factors like a company's assets, earnings, dividends, and overall financial health.

The market price, on the other hand, is what the stock is currently trading for in the stock market. This price can be influenced by a myriad of factors, including market sentiment, news, and speculation, and may not always reflect the stock's true value.

To effectively apply the “margin of safety" principle in real-world investing, you begin by conducting a thorough fundamental analysis to estimate the intrinsic value of a stock.

Then, you can decide on a percentage that you believe offers a sufficient buffer against potential errors in your valuation or unforeseen market downturns. For me, I tend to give a buffer of 20% to 50% depending on the company’s economic moat, performance, capital allocation and financial health.

Once you have established your margin of safety, the next step is to actively monitor the market. It is not just about knowing the numbers; it is about being ready to act when the right opportunity presents itself.

It is essential to remain patient and disciplined. The market will not always offer opportunities, and there might be times when stocks are generally overpriced. During such times, it is crucial to resist the temptation to buy without a sufficient margin of safety.

Mr. Market: Your emotional business partner

Benjamin Graham's "Mr. Market" analogy is a brilliant conceptual tool designed to help investors navigate the emotional ebbs and flows of the stock market. Through this allegory, Graham aimed to highlight the irrational behaviour often exhibited by the market and to teach investors how to respond to it.

Mr. Market is a fictional character, a business partner to every investor. Each day, he offers to buy or sell shares of a company at a specific price. However, Mr. Market is highly emotional, and his offers are based on his mood, which can swing from extreme optimism to deep pessimism. On some days, he feels euphoric and quotes high prices, while on others, he is despondent and offers much lower prices.

Just like Mr. Market's mood swings, the stock market can be highly volatile and unpredictable. Prices can surge or plummet based on a myriad of factors, including news, rumours, global events, or even investor sentiment. This volatility, however, does not always reflect the true value or fundamentals of a company.

Every investor has a choice to either get influenced by Mr Market's daily offers or to ignore him and make decisions based on their analysis.

If Mr. Market offers a ridiculously low price for a stock that an investor believes is worth much more, the investor can choose to buy. Conversely, if Mr Market's price is absurdly high, the investor can simply ignore Mr Market and wait for a better opportunity.

Stock market volatility is investor's best friend.

The research imperative

Graham always emphasised thorough research. Blindly following market trends or tips can lead to disastrous outcomes.

Many investors, especially novices, often make the mistake of following market trends or acting on tips from friends, colleagues, or even so-called "experts." This herd mentality can lead to buying stocks at inflated prices during market euphoria or selling them at a loss during downturns. Graham warned against such behaviour, emphasising that it could lead to significant financial losses.

Graham believed in the value of independent thinking. Instead of relying on others' opinions, he encouraged investors to do their research and come to their conclusions. This approach not only provides a deeper understanding of potential investments but also builds confidence in decision-making.

For a deeper dive into this and to see how it is practically applied, I invite you to check out my detailed Fundamental Analysis of companies.

Investing vs. Speculating: Know the difference

Graham drew a clear line between investing and speculating. While the former is based on thorough analysis, the latter is more akin to gambling, driven by hope rather than concrete data.

Graham cautioned against the dangers of speculating, especially for those who believe they are investing. He believed that speculating without proper knowledge or understanding is a surefire recipe for financial disaster. He urged individuals to be honest with themselves about their financial activities: Are they making the right decisions based on research, or are they merely gambling, hoping to strike it rich?

While both investing and speculating can yield profits, their risk profiles are vastly different. Investors, with their research-driven approach, aim to minimise risks and achieve steady returns over time. Speculators, on the other hand, face higher risks, and while they might enjoy occasional windfalls, they are also more susceptible to significant losses.

The psychological aspect of investing

Graham was not only a financial analyst but also a keen observer of human behaviour. He recognized that the stock market, while seemingly vast in numbers and data, is significantly influenced by the collective emotions of its participants. This emotional undercurrent can often lead to irrational decisions, which deviate from the fundamentals of a company.

The emotional roller-coaster of investing that causes a man to lay down on his table.

The stock market is known for its volatility. Prices can soar or plummet based on news, rumours, global events, or even mere speculation. For individual investors, watching their investments fluctuate can be an emotional experience.

Graham cautioned against getting swept up in these emotions, advising investors to remain grounded and focused on the intrinsic value of their investments.


The teachings of Benjamin Graham are not just strategies. They are foundational principles for anyone serious about investing. In a world where market dynamics constantly evolve, Graham's wisdom remains a constant, guiding light.

Throughout his life, Graham championed the idea that investing should be approached rationally and with diligent research, rather than being swayed by market trends or emotions. He passed away in 1976, but his legacy and teachings continue to influence and guide investors worldwide.

As we navigate the intricate maze of stocks, bonds, and assets, let us remember to invest with knowledge, remain disciplined, and always seek that margin of safety.

In the words of Benjamin Graham himself, "The intelligent investor is a realist who sells to optimists and buys from pessimists."


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