3 Main Principles of Benjamin Graham

3 Main Principles of Benjamin Graham

3 Main Principles of Benjamin Graham also known as the Father of Value Investing and the teacher of Warren Buffett.

Benjamin Graham is one of the most reputed investors of all time. Warren Buffett is a great admirer of Graham he used to worship Graham because of his systems of analyzing businesses and how to value them and at what price to buy them.

Warren Buffett also took away these 3 Main Principles of Benjamin Graham from his class when he was studying from him in the University of Columbia.

These 3 Main Principles are as follows:

A Stock is the right to own a little piece of business. A stock is worth a certain fraction of what you would be willing to pay for the whole.

As Warren Buffet earlier use to think about stocks as a piece of paper that is being traded but after attending the class of Benjamin Graham he learned this first main principle of Benjamin Graham that every stock is the right to own a little piece of business and not just the mere piece of paper to own for a price.

Use a margin of safety. Investing is built on estimates and uncertainty. A wide margin of safety ensures that the effects of good decisions are not wiped out by errors. The way to advance, above all, is by not retreating.

This important concept that was discussed by Benjamin Graham in his book The Intelligent Investor, Margin of Safety helps in giving some room for errors as while calculating the intrinsic value of any business there is a possibility of errors in any calculation therefor Graham suggested through this principle that we must use a margin of safety as enough room for our errors.

Mr. Market is your servant, not your master. Graham postulated a moody character called Mr. Market, who offers to buy and sell stocks every day often at prices that don’t make sense. Mr. Market’s moods should not influence your view of price. However, from time to time he does offer the chance to buy low and sell high.

Benjamin Graham suggested about controlling behavior and emotions in investing way back with the help of a character that he postulated as Mr. Market. He further, suggested that Mr. Market is your servant, not your master. That he will always offer the chance to buy low and sell high you just need to wait for the right time and right price.

Also, See: Benjamin Graham’s Checklist for Investing