Some Value Investing History
By
J. Royden Ward, Editor of
Cabot Benjamin Graham Value LetterFrom Cabot Wealth Advisory 2/26/09
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Benjamin Graham, the father of value investing, taught an investment class at the Columbia University business school for 28 years. Students in Graham's classes were taught from the textbook, "Security Analysis," written by Benjamin Graham and David Dodd. Several of Mr. Graham's students became top-notch investors, including the Oracle of Omaha, Warren Buffett. Mr. Buffett not only studied under Ben Graham, but later worked for Graham as an apprentice.
In 1984, Buffett returned to Columbia to give a speech commemorating the 50th anniversary of the publication of "Security Analysis." During his speech, Buffett presented his own investment performance record as well as those of Bill Ruane, Tom Knapp and Walter Schloss. Each of these men, including Buffett, posted investment results that far exceeded the returns of the stock market indexes. Buffett noted that each of their portfolios varied significantly in the number and type of stocks, but every manager adhered to Benjamin Graham's investment principles.
The investment principles taught by Graham at Columbia University became legend in the field of professional stock analysis. Fortunately, Benjamin Graham made his principles easily accessible to all investors by writing the classic book, "The Intelligent Investor," which Warren Buffett described as "by far the best book on investing ever written."
All of the principles that I use in the Cabot Benjamin Graham Value Letter were taught to me at Babson College by Dr. Wilson Payne, another of Mr. Graham's students at Columbia.
In "The Intelligent Investor," Graham set forth the principles that form the foundation of value investing. Value investors seek to purchase undervalued stocks at prices that are clearly below the true or "intrinsic value" of a company.
One quick (but not totally accurate) measure of a company's intrinsic value is book value: companies with stock price to book value (P/BV) ratios of less than 1.00 are considered to be undervalued. In addition, price to earnings (P/E) ratios should be no greater than 9.00. The P/BV and P/E ratios together with Graham's other tests for quality and value provide a methodology which all value investors can follow to achieve stock market success.
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