Skip to main content
  • rainbow over text: 'thank you NHS'
  • Register
  • Help
  • Contact us
  • Log out of your HL account

Invest like the best – Benjamin Graham and the Intelligent Investor

Benjamin Graham is considered by many to be the father of value investing. We look at some of the lessons you could learn and how you could follow in his footsteps to help grow your own wealth.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Born in London in 1894, Graham taught at Columbia Business School during the Great Depression, counting one Warren Buffet among his students. He also ran his own investment partnership, reportedly achieving an average annual return of over 20%.

While the world has changed a great deal since Graham’s time, his book “The Intelligent Investor” is still in print and considered something of a bible by many value investors. At 500+ pages and having last been updated in the early 70’s it’s not a light read – so we’ve outlined below the bits we think are most useful for investors today.*

This article is not personal advice, if you’re unsure you should seek advice.

Mr Market

To understand how Graham thought about investing in individual companies you need to understand how he thought about the stock market.

Imagine owning a small stake in a private business. You have a significant business partner called Mr Market. Every day Mr Market gives you a price for what he thinks your stake is worth. Sometimes his estimates are sensible, but sometimes he “lets his enthusiasm or his fears run away with him” and the price he quotes seems remarkably high or laughably low. This, Graham argues, is much the same position that small investors in stock market listed companies find themselves.

Viewing the stock market through the lens of Mr Market has some important consequences:

  1. Market movements don’t mean anything in and of themselves
  2. There is a difference between the price of shares and the value of shares

To some extent any investor who doesn’t simply own a tracker fund has to believe the above is true. Investors look to sell Mr Market expensive stocks when his prices are high, and buy cheap stocks when prices are low.

It follows that it’s possible to buy stocks on the stock market for less than they’re intrinsically worth.

However, when Graham’s talking about what stocks are intrinsically worth he’s not really talking about its future growth prospects. In fact he’s not that interested in the higher end of financial analysis at all. He argues that investors can, and should, buy stocks at a price below what they’re tangibly worth today, not what they might be worth in the future.

Margin of safety

The “Central Concept of Investment” is, according to Graham, the margin of safety. And that’s all about minimising risk.

Graham argues that instead of looking at a share you think is slightly under-priced you look for something that’s hugely so. Those opportunities will be less common, but they’re also far less risky.

Take the example below:

Stock A Stock B
Market Cap £50m £50m
Estimated Value £52m £90m

If we’re correct about our estimation of the value of company A we might make a 4% return. Great. But there are so many ways in which we could be wrong about the value of A. Perhaps some key employees leave, or the economy goes into recession. If we’re out by as little as a few percentage points we could end up losing money. Even if we’re right in our estimation of company A’s valuation there’s no guarantee the market will ever recognise it.

Risking our initial investment for a relatively measly 4% return doesn’t seem too smart.

By comparison B looks like a much safer bet. We can be out on our estimation of the true value of stock B by 20% and still make a healthy 40%+ return. This is what Graham means by having a margin of safety. It’s a buffer against being wrong.

The above is a simple example. As always it’s important to remember that all investments can fall as well as rise in value so you could get back less than you invest.

Graham's investment criteria

Graham was a big believer in diversification. His is not a recipe for guaranteed success with every investment. However, he believed that his approach would deliver positive results over the long run and a range of investments. He also believed that all investors needed a combination of bonds and stocks & shares in their portfolio.

Graham is probably best known for what he called “Bargain Issues” - although he suggested that only a certain type of investor consider these investments. These companies could be bought for less than their net-current asset value. They’re essentially companies whose market value is lower than the cash and inventory they have on hand.

These companies are what is sometimes known as ‘deep value’. They’re few and far between, are often very risky and usually unloved for a reason. But, if you invested in enough of this type of business Graham believed you would outperform over the long run.

Graham today

Today it’s perhaps easier to say what Graham definitely wouldn’t own than what he would.

Graham had a critical view of overvalued ‘growth’ stocks. Not because these companies can never deliver a good investment return, many do, but because if anything goes wrong the risk to the money you initially invested is substantial. He would probably be staying clear of the big tech stocks and the ‘steady eddie’ consumer goods companies.

But nor would he be rushing to buy every stock which has seen its share price battered by coronavirus and the oil crash. For Graham the intelligent investor takes advantage of Mr Market only when he think there’s value to be had.

Any lessons you choose to consider from Graham’s approach will depend on your personal goals, circumstances and attitude to risk.

In the next and final article of this series on experts we’ll be looking at Peter Lynch and his investing principles.

For now, find out how to build an investment portfolio


*For investors who can get hold of a copy and don’t have the stomach for the whole book Chapters 1, 8, 14, 15 and 20 will give you a good overview of Graham's key ideas.



What did you think of this article?


Editor's choice: our weekly email

Sign up to receive the week’s top investment stories from Hargreaves Lansdown

Please correct the following errors before you continue:

    Existing client? Please log in to your account to automatically fill in the details below.

    Loading

    Your postcode ends:

    Not your postcode? Enter your full address.

    Loading

    Hargreaves Lansdown PLC group companies will usually send you further information by post and/or email about our products and services. If you would prefer not to receive this, please do let us know. We will not sell or trade your personal data.

    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

    Editor's choice – our weekly email

    Sign up to receive the week's top investment stories from Hargreaves Lansdown. Including:

    • Latest comment on economies and markets
    • Expert investment research
    • Financial planning tips
    Sign up

    Related articles

    Category: Investing and saving

    5 tips to navigate market storms

    We give you our top five investment tips to help you steer through this market storm.

    Nadeem Umar

    09 Apr 2020 5 min read

    Category: Investing and saving

    Invest like the best – how Peter Lynch beat the city

    Peter Lynch was a legendary fund manager. We look at his key principles, and how you can apply them to picking investments.

    Nadeem Umar

    26 May 2020 4 min read

    Category: Essentials

    How a balanced portfolio can help you weather the storm

    We take a look at the importance of rebalancing and how it can help you steer through the market storms.

    Nadeem Umar

    26 May 2020 min read

    Category: Investing and saving

    Invest like the best – how you could invest like Warren Buffett

    Warren Buffett is probably the world’s most famous investor. We look at a few ways you could follow his principles to help grow your own wealth.

    Ben Brettell

    22 May 2020 3 min read