Benjamin Graham Investment Strategy: How to Value Invest

Benjamin Graham Investment Strategy: How to Value Invest

Are you searching for a proven strategy to make money in the stock market? Look no further! The Benjamin Graham investment philosophy, designed for the intelligent investor, can help you become an investing whiz.

As a defensive investor, you can discover the power of value investing and watch your wealth grow exponentially. So let's dive into this proven investment philosophy and learn how to maximize your potential!

Table of Contents

Who Was Benjamin Graham, and Why Should You Care?

If you're unfamiliar with Benjamin Graham, you're in for a treat. Benjamin Graham was an American economist and investor known as the "father of value investing." He developed a philosophy of buying undervalued stocks with strong fundamentals and wrote two influential books on investment analysis: "Security Analysis" in 1934 and "The Intelligent Investor" in 1949.

With a solid foundation in financial analysis and a proven track record, it's no wonder the Benjamin Graham investment philosophy continues to stand the test of time, with his most notable prodigy being Warren Buffet, who amassed enormous wealth through value investing.

Related: The Best Value Investing Books (2022): Why You Should Read Them

What Is the Benjamin Graham Investment Philosophy?

At its core, Graham's investment philosophy focuses on finding undervalued stocks by analyzing a company's net current assets, book value, and positive earnings. By identifying hidden gems the market overlooks, investors can hold onto these value stocks until they reach their true value. This value-driven approach offers a recipe for long-term success, even during market volatility.

Understanding the Key Principles of Benjamin Graham's Investment Philosophy

To become an intelligent investor, it's essential to understand the key principles behind Graham's investment philosophy. Here are the cornerstones of his approach:

  1. Margin of Safety: By focusing on a stock's net current asset value, investors can ensure they're buying at a significant discount to intrinsic value, minimizing risk and protecting investments from unforeseen events.
  2. Diversification: Graham believed that defensive investors should spread their investments across various sectors, companies, and market capitalization levels. This approach reduces the impact of a single stock's poor performance, ensuring your portfolio stays afloat during market fluctuations.
  3. Mr. Market: Graham's metaphorical figure representing daily stock market fluctuations advises intelligent investors to take advantage of market swings by buying undervalued stocks and selling overpriced ones. Keeping a cool head and remaining rational allows investors to make smarter decisions.
  4. Long-term Investing: Graham's investment philosophy emphasizes the power of long-term investing. By focusing on earnings growth and ignoring short-term market fluctuations, intelligent investors can give their investments the time they need to grow and flourish.

Challenges and myths of the Benjamin Graham investment strategy

As with any investment approach, the Benjamin Graham Investment Strategy comes with its own set of challenges and misconceptions. To help you confidently apply this strategy as an intelligent investor, let's debunk some myths and offer tips for overcoming common obstacles.

Myth 1: The Benjamin Graham Investment Strategy is outdated

Some investors might argue that this strategy is outdated since it was developed during a different era of investing. However, Graham believed that the core principles of value investing and a focus on fundamentals remain relevant today. Moreover, successful investors like Warren Buffett continue to apply this investment philosophy, proving its effectiveness even in modern markets.

Myth 2: The strategy only works in bear markets

While it's true that undervalued stocks might be more prevalent during bear markets, the Benjamin Graham Investment Strategy can be applied in any market condition. The key is to remain patient and disciplined as a defensive investor, continually searching for stocks that meet your criteria, regardless of the broader market trends.

Tip: Focus on the long-term, and don't let short-term market fluctuations dictate your investment decisions. Stick to your value-driven approach, and you'll be well-positioned to capitalize on opportunities that arise in any market environment, even during periods of market volatility.

Challenge 1: Difficulty in finding undervalued stocks

In today's information-driven world, it can be tough to find undervalued stocks that have been overlooked by the market. As more investors have access to sophisticated tools and data, the competition to identify hidden gems has increased.

Tip: To find value stocks, focus on low P/E and P/B ratios and high dividend yields. Look for companies with strong competitive advantages, competent management teams, and a solid dividend record. Next, analyze financial health by examining balance sheets, debt levels, and cash flow. Finally, stay informed about industry trends and be patient in your search. By casting a wide net and maintaining a comprehensive watchlist, you'll increase your chances of finding undervalued stocks.

Related: How to Compare and Analyze Stocks in Excel

Challenge 2: The time-consuming nature of fundamental analysis

Thorough fundamental analysis can be time-consuming, requiring you to dig deep into a company's financials, management, and industry trends. This can deter individual investors, especially those with limited time to devote to their investments.

Tip: Prioritize your analysis by first focusing on the most critical factors, such as the company's financial health and competitive advantage. Use tools like Wisesheets to save time and automate data collection, allowing you to spend more time on high-level analysis and decision-making.

To achieve long-term investing success as a defensive investor, you must address these misconceptions and overcome the challenges associated with the Benjamin Graham Investment Strategy. This will equip you better to implement this approach. Remember, the key is to remain patient, disciplined and focused on the fundamentals.

How to Use The Benjamin Graham Investment Strategy

Now that you know the Benjamin Graham Investment Strategy, let's explore how to apply it to your investing journey.

Unearthing Hidden Gems: How to Find Undervalued Stocks

As an intelligent investor, the first step in the Benjamin Graham Investment Strategy is to search for those rare undervalued stocks. These are companies with solid fundamentals, trading below their true worth. While it may seem daunting, don't worry! There are many tools and resources available to help you discover these hidden opportunities:

  • Wisesheets: This convenient Excel and Google Sheets add-on is a lifesaver, saving you time and effort by delivering all the essential stock data directly to your spreadsheet, eliminating the need for manual copying and pasting. From getting live stock data and one-click uploading historical statements to building custom models to cherrypick data, it can be your go-to stock analysis tool for value investing. Keep this tool in mind while reading through the stock-finding tips below.
Horizontal analysis template
  • Financial news websites: Stay informed with market trends and company developments, as they can help you identify potentially undervalued stocks.
  • Screeners: Use stock screeners or build your own with Wisesheets data to filter stocks based on specific criteria, such as low price-to-earnings (P/E) ratios, low price-to-book (P/B) ratios, or high dividend yields. When evaluating an organization's size, the three most commonly used metrics are market capitalization (number of shares outstanding times market price), sales revenue, and total assets. This can help narrow down your search for undervalued stocks.
Adding spreadsheet formulas or conditional formatting

Related: Stock Metrics Every Smart Investor Should Know

  • Follow the leaders: Keep an eye on well-respected value investors and fund managers. Their stock picks and portfolio changes can give you insights into potentially undervalued stocks.
  • Look for "unloved" sectors: Sometimes, entire industries or sectors are out of favor with the market, leading to undervalued stocks. By researching these sectors, you may discover hidden gems with solid fundamentals.
  • Research company announcements and earnings calls: Pay attention to company announcements, such as earnings releases and conference calls, which can provide insights into a company's performance and future prospects.
  • Examine insider trading activity: Monitor insider buying and selling, which can provide clues about a company's prospects. For example, if you notice a pattern of insiders purchasing shares, it might indicate that they believe the stock is undervalued.
  • Value investment forums and communities: Join online investment forums or social media groups dedicated to value investing. These platforms can provide valuable insights, stock recommendations, and discussions on undervalued stocks.

The Art of Research: Mastering Fundamental Analysis for the Defensive Investor

Armed with a list of potential candidates, it's time to channel your inner detective and delve into fundamental analysis. If you want to successfully analyze a stock, the process involves examining a company's financial health, assessing its management team, and researching its industry to determine its true value. Meticulous research helps you differentiate promising investments from poor ones. Here are some best practices:

  • Analyze financial statements: Explore a company's balance sheet, income statement, and cash flow statement to evaluate its financial strength and stability. Again, Wisesheets can instantly import historical financial data, offering a comprehensive view of the company's performance in a spreadsheet. This includes highly specific SEC as reported data
SEC financials Excel

Related: How To Do Trend Analysis Of Financial Statements

  • Evaluate management: Investigate the company's leadership team to measure their competence, track record, and commitment to shareholder value.
  • Study industry trends: Keep current with the latest developments and growth prospects in the company's industry to ensure you're investing in a promising sector.

Related: How to Value Stocks: A Guide for Beginners

Timing is Everything: Buy Low and Sell High

With your newfound knowledge, you're ready to begin purchasing stocks. The goal of the Benjamin Graham Investment Strategy is to buy low and sell high, so you must patiently wait for the right opportunities and resist the urge to follow the latest market trends. By remaining disciplined and adhering to your strategy, you'll be on the path to success with value investing.

Related: Time in the Market Vs. Timing the Market: Which is Better?

Optimize your timing with these tips:

  • Be patient: Finding undervalued stocks and waiting for them to appreciate takes time, so don't rush the process.
  • Keep emotions in check: Don't get carried away by market hysteria or panic-sell during a downturn. Instead, trust your research and analysis to guide your decisions.
  • Revisit your analysis: Periodically review your investments to ensure they still meet your criteria and are on track to achieve their true value.
  • Stay disciplined: Commit to your Benjamin Graham Investment Strategy, even when it's challenging or contrary to popular opinion.

By adhering to these guidelines and utilizing tools like Wisesheets, you'll be well-equipped to navigate the world of value investing with the Benjamin Graham Investment Strategy. So, prepare to uncover the stock market's hidden potential!

Incorporating the Benjamin Method in Your Investment Strategy

So, how does the Benjamin Method come into play when using the Benjamin Graham Investment Strategy? The Benjamin Method is a formula developed by Graham himself to help individual investors estimate the intrinsic value of a stock. By calculating this value, you can better determine whether a stock is undervalued or overpriced.

Graham believed in using the original Benjamin Method formula as follows:

V = EPS × (8.5 + 2g)

Where:

  • V = intrinsic value
  • EPS = trailing 12-month earnings per share (EPS) of the company
  • 8.5 = P/E ratio of a zero-growth stock
  • g = long-term growth rate of the company

In 1974, the formula was revised to include both a risk-free rate of 4.4% and the current yield on AAA corporate bonds (Y):

V = EPS × (8.5 + 2g) × 4.4 / Y

Now, let's take a look at an example using the Benjamin Method:

Suppose you're contemplating investing in one of two companies: the well-known Springfield Tech Company and the lesser-known Shelbyville Innovations. Springfield Tech Company's stock is trading at $80 per share, with an annual profit of $8. On the other hand, Shelbyville Innovations' stock is trading at $25 per share, with an annual profit of $3.

Applying the Benjamin Method, you can conduct a fundamental analysis of both companies to determine which one is a more attractive investment. The price-to-earnings (P/E) ratio for Springfield Tech Company is 10, whereas Shelbyville Innovations' P/E ratio is 8.3. Based on these figures, a follower of the Benjamin Graham Investment Strategy would deduce that Springfield Tech Company is overvalued, primarily due to its prominence in the market and larger market capitalization. In contrast, Shelbyville Innovations appears to be a better investment opportunity with a more appealing dividend record.

Creating a Graham Number Stock Screener in Excel or Google Sheets

Now that you know how to use the Graham number to find value stocks, you can create a Graham number stock screener in Excel or Google Sheets. To do this you will need the following:

  1. A spreadsheet program (such as Excel or Google Sheets)
  2. Current financial data for the stocks you want to screen (we recommend using Wisesheets)
  3. The Graham number formula (see above)

You can check out the entire tutorial post here. However, the image below shows the final result.

Graham number stock screener

As can see, using this strategy, you can more easily find valuable stocks to invest in right from your spreadsheet. The best part about this method is that you can customize what metrics you would like to analyze and build your screener around those.

Real-life examples of successful value investors

  1. Warren Buffett: One of the most famous value investors, Buffett follows Benjamin Graham's teachings and applies them to Berkshire Hathaway's investments, including those in mutual funds. With a focus on undervalued companies with strong business fundamentals, he has become one of the wealthiest people in the world.
  2. Michael Lee-Chin: A Jamaican-born Canadian billionaire who built his wealth using Benjamin Graham-inspired strategies. He's known for his five laws of wealth creation that helped him create a diverse and successful investment portfolio across Caribbean and North American businesses.
  3. Tom Gayner: As co-CEO of Markel Corporation, Tom is responsible for the company's investing activities. He emphasizes good management and large-cap global ventures, which has contributed to Markel's total assets growing from $57 million to $42 billion.
  4. Mohnish Pabrai: A devoted value investor who famously spent $650,000 for a lunch with Warren Buffett. Mohnish focuses on India and emerging markets, managing to turn a $100,000 investment into $1.8 million between 1999 and 2018.
  5. David Abrams: The founder of Boston-based Abrams Capital Management, David is a value investor who maintains a concentrated portfolio. His investment acumen has led to an impressive 15% annualized net return for investors over 15 years.
  6. Allan Mecham: He is a college dropout who founded Arlington Value Capital Management. Allan is celebrated for his value investing strategy. He achieved an impressive 30.7% compound annual growth rate over 8.5 years by holding a small number of stocks and diligently analyzing companies' annual reports.

Read more: The Most Famous Value Investors and How You Can Learn From Them

Use Wisesheets to become a true intelligent investor

All in all, the value investing approach inspired by Benjamin Graham has proven to be a successful strategy for many notable investors, including Warren Buffett, Michael Lee-Chin, David Abrams, Mohnish Pabrai, Allan Mecham, and Tom Gayner. 

While the Benjamin Graham Investment Strategy can be a profitable and rewarding investment method, it takes time and effort to analyze stocks properly. However, with the help of Wisesheets, you can streamline your stock analysis process and make better-informed decisions in less time.

You can try it for free here. Good luck, and happy investing!

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FAQs: Your Burning Questions Answered

How does the Benjamin Graham Investment Strategy differ from other strategies?

The Benjamin Graham Investment Strategy sets itself apart by focusing on finding undervalued stocks based on their fundamentals, rather than chasing market trends or relying on technical analysis. This long-term, value-driven approach has proven to be a successful strategy for many defensive investors over the years.

Can I use this strategy in today's market?

Absolutely! While the market has certainly evolved since Graham's time, the principles behind the Benjamin Graham Investment Strategy remain relevant today. By focusing on finding undervalued stocks and holding onto them for the long haul, you can still achieve success in the modern market.

What are the risks involved in using the Benjamin Graham Investment Strategy?

As with any investment strategy, there are risks involved. However, the primary risk with the Benjamin Graham Investment Strategy is the possibility of investing in a stock that remains undervalued or even declines in value. This is why conducting a thorough fundamental analysis and diversifying your portfolio is crucial to minimize your risk exposure.

Guillermo Valles

Guillermo Valles

Hello! I'm a finance enthusiast who fell in love with the world of finance at 15, devouring Warren Buffet's books and streaming Berkshire Hathaway meetings like a true fan.

I started my career in the industry at one of Canada's largest REITs, where I honed my skills analyzing deals and learning the ropes.

My passion led me to the stock market, but I quickly found myself spending more time gathering data than analyzing companies. That's when my team and I created Wisesheets, a tool designed to automate the stock data gathering process, with the ultimate goal of helping anyone quickly find good investment opportunities.

Today, I juggle improving Wisesheets and tending to my stock portfolio, which I like to think of as a garden of assets and dividends. My journey from a finance-loving teenager to a tech entrepreneur has been a thrilling ride, full of surprises and lessons.

I'm excited for what's next and look forward to sharing my passion for finance and investing with others!

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