FOOL'S SCHOOL DAILY Q&A
Who Was Benjamin Graham?
The father of value investing

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By Selena Maranjian (TMF Selena)
March 14, 2002

Q. Who was Benjamin Graham? I hear his name now and then, but am not familiar with him.

A. Many investors hold Warren Buffett, arguably America's greatest investor, in the highest esteem. But, whom might you find on Warren's own pedestal? Probably a guy named Benjamin Graham, under whose tutelage Warren worked many moons ago. Although Graham's record doesn't beat Buffett's, he was no slouch. Between 1929 and 1956, a time period spanning the Great Depression and several major wars, Graham's investments grew an average of about 17% per year.

Ben Graham is known as the father of value investing. Value, or "defensive," investors quietly seek out bargains among underpriced companies, buy into them, and then patiently wait for their fair value to be realized. Growth investors are more aggressive. They aim to buy businesses that are booming, often due to high demand for their products. While growth investors will buy a dollar hoping for it to become two dollars, value investors will try to buy a dollar for fifty cents. Both approaches have their merits, and Warren Buffett's current approach combines the two.

Graham was a pioneer in driving home to investors the importance of crunching numbers. After experiencing the devastation of the 1929 crash, he sought to develop resilient techniques that could be used by any investor. He popularized the examination of price-to-earnings (P/E) ratios, debt-to-equity ratios, dividend records, net current assets, book values, and earnings growth. (Thanks, Ben!) Graham knew what he was looking for and demanded high quality on every count.

Graham's focus was on objective numbers rather than more subjective things such as management, trends, brand names, and new products. The data he tapped was publicly available, via corporate financial statements and the Standard & Poor's Stock Guide (available for free from many brokerages).

In 1934, Graham co-authored with David Dodd a hefty textbook called Security Analysis. Nearly seven decades later, it's still widely used in business schools. Since it's not the easiest read, we recommend his more concise work, The Intelligent Investor. Warren Buffett himself has referred to The Intelligent Investor as "by far the best book about investing ever written." Pick up a copy at your local library and check it out. You can also get a Fool's take on security analysis in our Fool's School.

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This question and answer is adapted from The Motley Fool Money Guide: Answers to Your Questions About Saving, Spending and Investing. For answers to this and 499 other common money questions, check it out -- it's a handy resource.