Benjamin Graham Investing Rules: Value Investing

Value investing is more a habit than a process of investment.
Value investing focuses on market price of a stock which is lower than the “intrinsic value of the underlying business”.  Few stalwarts of Value investing like Warren Buffett, John Burr and Philip Fisher have made the concept of value investment (Benjamin Graham investing technique) popular. They believed that it is very important to know the “intrinsic value of business” before buying any stock. If the value of a business is more (by a multiplying factor) than the current market price of its stock then it automatically becomes a good-buy. Benjamin Graham investing methods brought forward the concept of value investing which later was made more popular by Warren Buffett. In line with Benjamin Graham investing ways, we will discuss three principals of value investing:

(1) Maintain a Margin of Safety.

This is the rule one of Benjamin Graham investing techniques. Value investors make sure before buying any stocks that its current market price is substantially below its ‘intrinsic value’. As per Benjamin Graham investing rules a, the market price of a stock should be 2/3 of its calculated intrinsic value (or else book value). But it must be told here that book value is not the actual value of a business, it does not take care of other non-tangible values of business. A true follower of Benjamin Graham investing rules will have their own set of rules defined to calculate the intrinsic value of business.

(2) Estimating Intrinsic Value.

As margin of safety principal is the backbone of Benjamin Graham investing rule (value investing), calculating intrinsic value gives the toughness to that backbone.  Intrinsic value principal is based on one theory which says “a dollar in hand today is worth more than a dollar paid in future”. This happens not only because of inflation of money but also because if one has dollars in hand today then he can invest it in deposits and earn extra interest on these dollars. According to Benjamin Graham investing rule, an estimate of intrinsic value of a company is calculated by estimating the future cash flow of company.

(3) Evaluate Long term prospects

Value investors think almost opposite of traders. Benjamin Graham investing rules actually are opposite to the concepts of traders. Traders are more focused on short term prospects of particular stocks, whereas Benjamin Graham investing techniques asks investors to think long term. Traders analysis of stocks is based on historical behavior of stock prices (called technical analysis). But Benjamin Graham investing rules forces value investors to focuses on long-term prospects of stocks. Value investors buy stocks with no immediate objective of selling. Long term business stocks are characterized by showing inclination towards customer focus, brand name, huge market capture and above all high quality managers managing the business.  Benjamin Graham investing allows value investors to buys stocks with objective of holding it forever.

Warren Buffett is live example among league of excellent investors who follows the Benjamin Graham investing rules more popularly known as value investing to buy business and stocks.

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