Benjamin Graham, the father of value investing, was the first stock analyst to institutionalise fundamental research. His focus on value stocks by analysing their balance sheets, income statements and financial ratios became the foundation of value investing
Graham was an investor and investing mentor. He is generally considered to be the father of security analysis and value investing. His ideas and methods on investing are well documented in his books Security Analysis (1934) and The Intelligent Investor (1949), which are two of the most famous investing books. Graham's main investing principle revolved around the margin of safety.
The margin of safety is the principle of buying a security at a significant discount to its intrinsic value, which is thought to not only provide high-return opportunities but also minimise the downside risk of an investment. In simple terms, Graham's goal was to buy assets worth $1 for 50 cents. He did this very, very well.
According to him, investors should analyse a company's financials and come up with the intrinsic value and then buy the stock only when it traded at a discount to this intrinsic value. His favourite margin of safety stocks were companies that were trading at two-thirds of their net current assets. The Great Depression of the late 1920s and 30s brought many such stocks up but this type of stocks has mostly vanished since.
Safety also showed up in Graham's approach in other ways, such as his reluctance to invest in stocks of companies that he found too risky. Graham's basic ideas are timeless and essential for long-term success. He turned the margin of safety into a science, which can be seen in the filters he used, at a time when almost all investors viewed stocks as speculative. He was indeed a pioneer and a trend-setter.
Graham based his studies on the earnings yield (inverse of the P/E ratio) and the ratio of stockholders' equity. The margin of safety, another concept, played a big role. The margin of safety means that the investor should analyse a company's financials and come up with the intrinsic value. He should buy only when the stock traded at a discount to this intrinsic value. Graham called this the margin of safety. It's like buying a dollar for 50 cents.