The Godfathers: Don Corleone, James Brown & Benjamin Graham

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Don Corleone was the original Godfather, the head of a New York Mafia family in Mario Puzo's 1969 best selling book of the same name.  James Brown, the iconic singer, was known as the Godfather of Soul.  Benjamin Graham could, rightfully, claim the title of Godfather of Value Investing, the core of fundamental stock analysis.

Ben Graham was born Benjamin Grossbaum in London in 1894.  His family emigrated to New York when he was one year old.  The Grossbaum's comfortable life style came to an end as the result of the father's death in 1903 and the subsequent decline of the family porcelain business.  The final blow to the family's fortunes came in the stock market crash of 1907.  His mother had been trading stocks on margin and was wiped out.  The family name was changed to Graham as a result of anti-German sentiments in America during World War I, which was not an uncommon practice during that period.

Mr. Graham graduated from Columbia University at the age of 20.  He worked successfully on Wall Street for decades first as an analyst and then as a partner in an investment firm.  He also taught at Columbia and at the New York Institute of Finance.  Mr. Graham coauthored a text book, Security Analysis, with David Dodd which was published in 1934.  The book he is best remembered for, The Intelligent Investor, was published for individual investors in 1949.  He revised the book four times, with the last edition being published in 1973.

It seems to me that people are shaped by the times in which they live.  Young Graham was undoubtedly affected by his mother's failures in the stock market.  I would guess that he promised himself not to repeat her mistakes.  When Benjamin Graham started his investing career, there was not much information readily available about public companies.  Analysts needed to be part detective in order to gain a clear idea of the financial condition of companies and their businesses.  Mr. Graham excelled at this, and his efforts resulted in large profits for his investment firm.  This success lent credence to his teachings about stock analysis, which he felt should be based on financial facts gleaned from business records, not on emotion and market rumor.

His primary message to individual investors was to seek a "margin of safety" in all of their stock investments.  He advised investors to find a publicly traded company with a market price significantly below the intrinsic value of the company as determined by his form of financial analysis.  He wanted them to always ask "how much" they were paying for the stocks they bought.

In his Introduction to the book, Mr. Graham recounts an article he had written for a women's magazine in which he had advised the readers to buy their stocks just as they bought their groceries, based on price; not as they purchased their perfume.  One of Mr. Graham's most famous passages in The Intelligent Investor is his description of Mr. Market.  If you look at my blog on January 10, 2011, you can read his timeless approach to the market and the movement of stocks traded in it.

I read the fourth and final edition of The Intelligent Investor in the early 80's and its message resonated with me then and continues to shape my investments to this day.  In the interest of full disclosure, I pattern my investment purchases on his teachings.  There is a revised edition of the book still available today.  The revised edition, with the full text of the 1973 edition plus commentary by Jason Zweig, a noted financial writer, and an additional preface by Warren Buffett, was published by HarperBusiness Essentials, a division of HarperCollins Publishers in 2003.  If, as you learn more about fundamental analysis, you find that it appeals to you as an investment strategy, you need to start with this book.  You can order one online by clicking the Amazon link above.

We will explore Benjamin Graham's methods and his recommended way of investing in the next blog.  As always, your comments are welcome.