Articles tagged with: Benjamin Graham

The Intelligent Investor by Benjamin Graham

20 March 2008 Sören Zschoche 5 Comments Books

The intelligent Investor Source: businessweek.comThe Intelligent Investor by Benjamin Graham, is a book which characterized the way many people think about the stock markets like no other book ever did before. Warren Buffett once called it “The best book for investors which has ever been written”. Probably this book also shows his point of view and perhaps without it he wouldn´t be that rich today. The author Benjamin Graham was Buffett’s teacher on Columbia University and the things he though and wrote down have remained valid until today, which nearly resembles a little wonder in the permanent changing economic world.

But what is it that makes this book so unique, that even the richest man of the world calls it his favorite book? First of all we can say that the author was a really brilliant man who together with David Dodd. He discovered that markets are irrational and you can profit of it. Today this is also known as value investing and can, if you adopt it correctly, make you very rich.

The book is structured in 20 chapters, which respond to nearly everything you need to know to become a professional “intelligent” investor. Especially the difference between an investor and a speculator is one of the central points of the book. Other emphases are the margin of safety, and things which train you to make your own decisions and to build up the self-discipline you need for that. The only disadvantage of the book is that there isn´t said much about techniques of the share analysis, but for this area Benjamin wrote another book with the name “Security Analysis”.

So, I really suggest you to read this book, because it´s probably the best one which has ever been written about investing. Seriously.

Ben Graham’s Margin of safety

11 February 2008 Sören Zschoche 92 Comments Investing

The genius investor Warren Buffett once called it “buying one dollar for 70 cent”, the Margin of safety which was developed by the brilliant man Benjamin Graham in 1934. The precept of the margin of safety is very logic and works as follows.

Most people believe that the stock markets are rational, so that the stock-rate always reflects the actual value of a company. But that´s not true , you can prove that very easily. We you look back to the big ups and downs in times of a market crash. It´s definitely not logical that a company looses 60 % of its value and wins 120 % back in a short period of 2 years while the earnings constantly grow by 5 %. So we can conclude that the markets are irrational because sometimes the people become too afraid and sell very cheap stocks and sometimes they are just too optimistic and buy too expensive stocks. It´s not very intelligent but most people like to follow the herd.

But now, let´s get back to the margin of safety. If you know that the stock markets are irrational then why don´t make profit of it? First you look for very unpopular “cheap” stocks, the market capitalisation has to be far below the intrinsic value. That could be companies in trouble, after they reported bad news or complete industries with problems.

Now you calculate the value of the company in order to do that you can use different methods. 1. The Earning-capacity value 2. The Net asset value 3. The liquidation value. So for example, if you calculated that the intrinsic value of a company has the value of 100 Million USD, but the market capitalisation just lies at 70 Million USD, you get a margin of safety of 30% or 30 Million USD. You buy this stock and when the market capitalisation achieves the intrinsic value again you sell it.

Note: The margin of safety has not to be exactly 30 percent, but the higher it is the safer is the investment.