Timeless ideas forged through tough times.

Benjamin Graham was born in 1894 in London and moved to New York at age one. When Ben was nine, his father died, resulting in the family drifting into poverty. The situation went from bad to worse, as the stock market crash of 1907 saw his family’s savings wiped out completely.

Fortunately, Graham was a brilliant student, and after graduating he began working on Wall Street, first as a runner, then clerk, then analyst, and finally in 1926 as a partner of the Graham-Newman investment firm. During this time, he began to develop the investment principles that would later be included in his two classic books Security Analysis and The Intelligent Investor.

Despite some early investing success, the 1929 stock market crash hit Graham hard, with his fund falling by almost 70%. Graham realised that despite his safety-first approach, he had been caught up in ‘a bad case of hubris’.

The crash led to a time of reflection, where he sought to identify the mistakes, he had made. He concluded that investors had turned themselves into speculators, believing in future earnings that never materialised. He also believed that investors should place a greater emphasis on thoroughly analysing a business’s fundamentals.

Picking up the pieces from the crash, Graham thrived in its aftermath, buying stocks that were selling cheaply. His investment success continued for decades, giving him one of the best long-term investing records of all time.

Graham was an original thinker and above all was interested in logical reasoning. He realised that it’s not easy to think clearly in the investment world without feeling the emotions that come with it, such as fear and greed.

Despite his economic brilliance, Graham wasn’t interested in riches. His mantra was that each day he would seek to do ‘something foolish, something creative and something generous’. One way that he was generous, was in the giving of his time to his students, which included Warren Buffett and Sir John Templeton.

Though some of Benjamin Graham’s ideas have been superseded with time, most of his ideas are still as relevant as ever. Here are three of his biggest ideas:

Mr Market

Mr Market is a metaphor created by Benjamin Graham to show that markets can become irrational. When they do, we shouldn’t be surprised by it or get caught up in it, however we may want to take advantage of it.

Graham describes Mr Market as a usually temperate and reasonable fellow, but on some days is gripped with irrational fear or greed. He is identified as occasionally having manic-depressive characteristics, being emotional, euphoric, moody, and often irrational.

When Mr Market gets really enthused, you should sell to him, and when he gets really depressed you should buy from him.

Margin of Safety

A key principle of value investing is to only buy a stock when its market price is well below its intrinsic value. The difference between the two, is the margin of safety, and the bigger it is the better.

If an investor’s projections are wrong or too optimistic, the margin of safety will help prevent substantial loss. Warren Buffett said that the three most important words in investing are ‘Margin of Safety’.

The intrinsic value is the perceived ‘true value’ of a company based on qualitative and quantitative factors. Though the calculation of intrinsic value can be quite subjective, the concept is nonetheless integral to value investing.

A stock is a piece of a business

Graham emphasised that stocks are a piece of a business, and not just lottery tickets that can be traded on an exchange.

When someone owns a piece of a business, they effectively own that same proportion of the company’s equity, and its profits. As a part owner, one also gets to vote with that same proportion of votes at company meetings.

Thinking of a stock as a piece of a business, helps a person to think about the fundamentals and health of the business. It helps one to think like a ‘part owner’, as that is quite literally what that person is.

Through investing in an InvestSMART Professionally Managed Account (PMA) you will own hundreds of businesses, diversified across industry, asset class and the globe. Through this approach we diversify away from the risks of a single business but this doesn't mean the portfolios are immune to Graham's Mr Market character. Instead of being fearful, we can take advantage of Mr Market's traits.

The PMA platform makes it easy for investors to add funds in times when he's depressed and to take profit as well, all online.