Investment Horizons | the value investing theory of "Wall Street Godfather" Benjamin ▪ Graham

Benjamin Graham is known as the "Godfather of Wall Street", the "Father of Modern Securities Analysis", the founder of value investment theory, and its position in the investment community is equivalent to Einstein in physics and Darwin in biology. He has been investing for nearly 42 years, mainly in U.S. stocks, bonds, etc., and the Graham Newman company he founded has an average annualized return of 21%.

The core of Benjamin Graham's investment strategy is value investing, which can be summarized as: investment is the process of value regression or value discovery, which requires investors to find undervalued stocks through financial analysis and hold them, and then patiently wait until the time when the value is discovered, when the stock price returns to its due value, investors can sell profits.

1. Intrinsic value

Invest based on the intrinsic value of the company, not on the volatility of the market. Shares represent partial ownership of a company and should not be proof of day-to-day price movements. The stock market is a "voting machine" in the short term and a "weighing machine" in the long run. In The Smart Investor, Graham gives the formula for calculating the intrinsic value of growth stocks: value = profit for the current period * (8.5 + twice the expected annual growth rate), which contains the most important laws and secrets of the stock market, and its calculation results are very close to more complex mathematical calculations.

2. Margin of safety

The investor should maintain a large spread between the price he is willing to pay and the value of the stock he estimates, which is called the margin of safety, and the larger the margin of safety, the lower the risk of the investment and the greater the expected return. For example, if the intrinsic value of a stock is $1 per share, we won't spend $2 to buy it, we're willing to spend less than $1 to buy it, and the lower the better.

3. Diversification

Diversification is an important prerequisite for Graham's investment system, and he distributes his investments in a number of companies in various industries, including investment in treasury bonds, thereby reducing risk. Graham himself often holds more than 75 individual stocks, and his advice to the average person is to keep investing in at least 30 or more individual stocks. Moreover, these 30 or 75 stocks are not arbitrarily chosen, but should be chosen with a stock price significantly lower than the intrinsic value, that is, the "margin of safety" described above.