Benjamin Graham and the Power of Growth Stocks: Lost Growth Stock Strategies from the Father of Value Investing (PROFESSIONAL FINANCE & INVESTM) - Hardcover

MARTIN

Hardcover

ISBN 10: 0071753893 ISBN 13: 9780071753890

Verlag: McGraw Hill, 2011

Inhaltsangabe

Use a master’s lost secret to pick growth companies bound for success

In 1948, legendary Columbia University professor Benjamin Graham bought a major stake in the Government Employees Insurance Corporation. In a time when no one trusted the stock market, he championed value investing and helped introduce the world to intrinsic value. He had a powerful valuation formula.

Now, in this groundbreaking book, long-term investing expert Fred Martin shows you how to use value-investing principles to analyze and pick winning growth-stock companies―just like Graham did when he acquired GEICO.

Benjamin Graham and the Power of Growth Stocks is an advanced, hands-on guide for investors and executives who want to find the best growth stocks, develop a solid portfolio strategy, and execute trades for maximum profitability and limited risk. Through conversational explanations, real-world case studies, and pragmatic formulas, it shows you step-by-step how this enlightened trading philosophy is successful. The secret lies in Graham’s valuation formula, which has been out of print since 1962―until now. By calculating the proper data, you can gain clarity of focus on an investment by putting on blinders to variables that are alluring but irrelevant.

This one-stop guide to growing wealth shows you how to:

• Liberate your money from the needs of mutual funds and brokers
• Build a reasonable seven-year forecast for every company considered for your portfolio
• Estimate a company’s future value in four easy steps
• Ensure long-term profits with an unblinking buy-and-hold strategy

This complete guide shows you why Graham’s game-changing formula works and how to use it to build a profitable portfolio. Additionally, you learn tips and proven techniques for unlocking the formula’s full potential with disciplined research and emotional control to stick by your decisions through long periods of inactive trading. But even if your trading approach includes profiting from short-term volatility, you can still benefit from the valuation formula and process inside by using them to gain an advantageous perspective on stock prices.

Find the companies that will grow you a fortune with Benjamin Graham and the Power of Growth Stocks.

Über diesen Titel

Über die Autorin bzw. den Autor

Frederick K. Martin is the president and chief investment officer of Disciplined Growth Investors, which currently manages more than $2.5 billion of assets for institutions and individuals.

Von der hinteren Coverseite

Benjamin Graham is the father of value investing, but his greatest investment success came from one growth stock that increased his net worth more than all his other investments combined. Benjamin Graham and the Power of Growth Stocks helps you rediscover the legendary economist’s forgotten growth-investing strategy through a cutting-edge approach to capturing profits in today’s volatile markets.

Inside, leading investment manager Fred Martin shares the investing approach that was founded on Graham’s long-lost valuation formula. Martin’s method lets you accurately and confidently value growth companies for a buy-and-hold strategy that mitigates risk and positions your portfolio for superior long-term returns. Benjamin Graham and the Power of Growth Stocks puts everything you need at your fingertips, including:

• Effective guidance and techniques for zeroing in on the critical factors of making good investment decisions
• The three key rules for creating a margin of safety when investing in growth companies
• Tips for identifying the hidden “barriers” and “handcuffs” that signal doom for a company’s growth
• Insightful best practices and pitfalls to avoid from the author’s personal experience
• Graham’s most useful and straightforward treatise on growth-stock investing—in its entirety—for the first time since 1962

If you want your wealth to serve you—not your broker and mutual funds—start acquiring the dream-team companies for your portfolio today withBenjamin Graham and the Power of Growth Stocks.

Auszug. © Genehmigter Nachdruck. Alle Rechte vorbehalten.

BENJAMIN GRAHAM AND THE POWER OF GROWTH STOCKS

LOST GROWTH STOCK STRATEGIES FROM THE FATHER OF VALUE INVESTING

By Frederick K. Martin, Nick Hansen, Scott Link, Rob Nicoski

The McGraw-Hill Companies, Inc.

Copyright © 2012 The McGraw-Hill Companies, Inc.
All rights reserved.

ISBN: 978-0-07-175389-0

Contents

Foreword by Craig R. Weflen
Acknowledgments
1. Benjamin Graham and the Evolution of Value Investing
2. Value versus Growth
3. Graham's Valuation Formula (Includes Chapter 39 from 1962 edition of 
Security Analysis)
4. The Power of the Purchase Decision
5. Building a Margin of Safety for Growth Stocks
6. Characteristics of a "Great" Growth Company: Identifying Sustainable 
Competitive Advantage
7. Down in the Trenches: Putting the Principles into Action
8. The Few, the Proud: Why So Few Investors Use Ben Graham's Principles 
and Methodology
9. Getting the Most from This Book
Appendix. Renting Out Your Money
Index

Excerpt

CHAPTER 1

Benjamin Graham and the Evolution of Value Investing

During an investment career that spanned more than half a century, BenjaminGraham had a greater influence over the way stocks are analyzed, bought, andsold than any other investor in the history of the stock market. Grahampracticed his trade during an era in which the stock market evolved from aninvestment that was utilized almost exclusively by the very wealthy to apervasive investment that was used by almost everyone with a job and aretirement savings account. As a professor, author, and stock market trader,Graham turned stock market investing from a frenzied, speculative practice basedon intuition, emotion, and momentum to a precise science that relied on strictformulas, meticulous analysis, and methodical timing.

Graham, who died in 1976 at the age of 82, has been referred to as the "Dean ofWall Street," the "Father of Security Analysis," and the "Father of ValueInvesting." As an author, he expounded on his methodology in two of the mostsuccessful investment books ever published: Security Analysis, which hewrote in 1934 with David Dodd, and The Intelligent Investor, which hewrote in 1949. Both books have been periodically updated and still sell brisklytoday.

To understand Graham's impact on the financial world, all you really need toknow is that he was Warren Buffett's mentor for more than two decades beforeBuffett struck out on his own.

Graham is probably most widely recognized for his contribution to valueinvesting, a methodology that relies on strict analysis and timing to acquireundervalued stocks when they're trading at a discount to their intrinsic valueand sell them once they've earned a suitable return.

But until now, one of Graham's most brilliant revelations has been all but lostto the investing public. Although his name is nearly synonymous with valueinvesting, Graham also began to see the value of growth stock investing late inhis career. He even developed a formula and a methodology for growth stockinvesting that he introduced in the 1962 edition of Security Analysis ina chapter entitled "Newer Methods for Valuing Growth Stocks." Unfortunately,although Security Analysis was reissued in 1988, 1996, and 2009, thischapter was omitted from all the subsequent editions.

There's no real explanation for why this chapter was removed—a decision,oddly enough, that was made long after Graham's death in 1976. (The chapter isreprinted in Chapter 3 of this book.) Regardless of the reasons for theomission, investors who have read the newer editions of Graham's book over thepast two decades have been denied one of the most significant investmentinsights ever offered by Graham.

The primary objective of this book is to unlock Graham's lost formula andmethodology so that investors—both individual and professional— cantake advantage of his insights on analyzing and buying growth stocks. I considermyself one of the fortunate few investment managers to have come across Graham'sformula early in my career, and I have used it with great success ever since.

THE MAN AND HIS METHODOLOGY

Graham's investment philosophy was rooted in two important premises: that asecurity should be analyzed independently of its price, and that the futureperformance of any security is uncertain. He suggested that intelligentinvestors should aim to purchase a security at a discount to its assessed valuein order to provide a margin of safety that can protect their investment againstloss. Both the risk and the return of the investment are dependent on thequality of the analysis and this "margin of safety."

Graham did not stop there. With these principles firmly in hand, he laid out acomprehensive series of treatises on successful investing for the professionaland lay investor alike. In Security Analysis, he focused primarily onthe proper emphases and techniques to apply in the selection of investmentsecurities. In The Intelligent Investor, which is widely considered hismost influential work, Graham turned his attention to the investors themselvesand laid out his philosophy of investment.

If the power of Graham's work was due to the simple truth at its foundation, itstimelessness has been due to the quality of the craft Graham built upon it. Hedidn't construct a philosophy of investment in an academic vacuum; he derived itfrom long years of hard experience.

Graham was born in England in 1894 and moved with his parents to America thenext year, where his father opened an import business. But the business failed,and his father died while Ben was still a child. In 1907, an economic crisiswiped out what little was still left of his mother's savings. But Grahamexcelled as a student and was able to get into Columbia University, where hegraduated as class salutatorian at the age of 20. Columbia offered him a jobteaching mathematics, English, or Greek and Latin philosophy, but he declinedthe offer to seek his fortune on Wall Street. He began working there forNewburger, Henderson & Loeb in 1914, and rose quickly in the firm. Within fiveyears, he was making more than half a million dollars a year—a vast sumfor a 25-year-old in 1919.

But that fortune didn't last. Graham and Jerome Henderson, who became Graham'sbusiness partner in the 1920s, nearly lost their business in the crash of 1929.But with the help of friends and the sale of most of their personal assets,Graham and Henderson were able to retain their business and rebuild it from theground up. The lessons Graham learned from his early mistakes shaped hisinvestment philosophy for the rest of his life.

Graham worked until the 1950s and continued writing into the 1970s, and duringthis period, he endured some of the greatest price dislocations and economicupheavals in modern history. Throughout, he refined his understanding andinsight in subsequent editions of his published work. He was a successfulpractitioner and brilliant thinker living through extraordinary times, and heleft us one of the most important bodies of work on investing ever written.

Not only was Graham a groundbreaking investment manager and prolific author, buthe also taught evening classes in finance at Columbia from 1928 to 1955. One ofhis students was Warren Buffett, who managed to persuade Graham to hire him athis investment firm after he graduated from Columbia. It was there that Buffettlearned the principles of investing that ultimately led him to become perhapsthe most famous and successful stock market investor in America. Buffettsubsequently built upon Graham's work over the course of his career. In fact,Buffett claims that Graham was the inspiration behind his widely read annualletters to shareholders that he writes for the Berkshire Hathaway annual report.In these letters, not only does Buffett provide readily accessible insight, buthe does so in a fashion that is consistently both intellectually honest andhumorous.

GRAHAM AS A GROWTH INVESTOR

To say the least, describing Graham as a growth investor is highly controversialand almost heretical among his many value investing disciples. The twostrategies are considered almost polar opposites. Value investing focuses onpaying a lower price for current assets or earnings in order to risk lesscapital against an uncertain future, while growth investing is traditionallycharacterized by the willingness of investors to pay a higher price for acompany's current assets or earnings in the expectation that the future growthof the company will stimulate a rising stock price.

To support this assertion concerning Graham, then, we must refashion thetraditional understanding of growth and value investing. In its simplest sense,"value" represents a purchasing style, not an investing style. The relationshipbetween the two terms growth and value is confused. We believethat, thanks to Graham and Buffett, a "value" mindset has actually become acritical component of the growth investing process.

To make our case, it will be helpful to review the works of Graham and Buffettand speculate on their inspiration and development.

In his first job out of college at Newburger, Henderson & Loeb, Graham began asa junior bond salesman and was quickly elevated to a statistician. It was inthat role that he refined his understanding of and appreciation for the rawnumbers underlying each investment. But it was only after his fortune and hisbusiness were nearly wiped out that Graham truly began to put together theinvestment philosophy that was to form the foundation for his complex approachto security analysis. Graham's misfortunes were brought on by liquidity issueson margin calls, overly optimistic investments in "hot" stocks, and the GreatDepression itself. Simultaneously, he continued to make money by purchasingsecurities with substantial non-operating assets, significant yields, andgenerally undervalued, unrecognized, or unpopular assets. These experiences wereto guide his views on price, value, and conservatism, which would permeate thebody of his written work.

It was the market's crash from 1929 to 1932 that spurred Graham to write inorder to supplement his income. In addition to Security Analysis andThe Intelligent Investor, Graham wrote several other books, articles,and papers.

The key to understanding the evolution of Graham's thinking lies in recognizingthe source of his knowledge. While he had trained in the classics in school,Graham already had 20 years of practical experience in the field by the time hepublished the first edition of Security Analysis. Further editionsbenefited even more from his ongoing professional experience and his commitmentto empiricism. Graham did not seek to create a mathematically pure or cohesivetheory of investment; he brought a dynamic, bottom-up perspective to thedevelopment of his ideas. His philosophy reflects this origin.

Any investment, and the subsequent return on that investment, depends first andforemost on the price paid for that investment. That price—the vote takenby the market on value—can be an almost irresistible argument for acompany's worth. Graham resisted this argument: between his own family'stravails and the extreme vacillation of the market during the boom of the 1920s,the crash of 1929, and the subsequent recovery and bull run of the late 1940sand 1950s, Graham came to recognize the frequently irrational nature of marketprices and the psychological effects of the consequent vacillations in wealth.This experience probably formed the genesis of his "Mr. Market" metaphor, inwhich he describes the stock market as a bipolar business partner that arrivesdaily without fail to quote you a price at which he will buy or sell portions ofthe partnership from or to you, and is sure to return again, unfazed, if youdecline his offers. It also probably underlies his frequent admonitions toinvestors themselves: "The investor's chief problem—and even his worstenemy—is likely to be himself." Graham knew that separating value fromprice was easier said than done, and he provided practical advice to supplementthe principle.

Graham disregarded price as an indicator of value and sought to develop alogically rigorous and more stringent methodology for evaluating an investment.His chief insight, encapsulated in his own words as the most important principleof investment, was a "margin of safety." He stressed that regardless of thequality and breadth of your information and analysis, the future of any stock isfundamentally uncertain. As a result, you must always account for yourinevitable errors in forecasting and valuation by purchasing an investment at asignificant discount to its assessed value. Graham pointed out that you are lesslikely to lose money if you have paid less money in the first place: you cannotcontrol the future of the investment, but you can control the price paid.

The margin of safety implicitly reiterates that one can effectively assess thevalue of a security independently of the rest of the market. Graham's experiencewith wildly gyrating expectations for the future led him to initially appreciatemore stable evidence of value, such as marketable nonoperating oroff–balance sheet assets, over less tangible or less reliable sources ofworth, such as future earnings growth. In his earlier writings, he repeatedlyemphasized the valuation of the assets of the business. Only later in his careerdid he begin to focus on evaluating the long-term earnings potential of acompany.

As with all aspects of his philosophy, Graham's appreciation of the power ofgrowth was the consequence of experience. As his career progressed, he developedan appreciation for the long-term power of growth, which he first brought tolight in his chapter "Newer Methods for Valuing Growth Stocks" in the 1962edition of Security Analysis. In a later edition of The IntelligentInvestor, Graham explained, "The risk of paying too high a price forgood-quality stocks—while a real one—is not the chief hazardconfronting the average buyer of securities ... the chief losses to investorscome from the purchase of low-quality securities at times of favorablebusiness conditions."

The most powerful argument for growth in Graham's experience came later in hiscareer, when he purchased a major stake in GEICO. That single transaction, whichaccounted for about a quarter of his assets at the time, ultimately yielded moreprofit than all his other investments combined. He paid $27 per share for GEICOstock and watched it rise over the ensuing years to the equivalent of $54,000per share. Ironically, although Graham is universally associated withvalue investing, his greatest profit came from a growth company. In theconcluding chapter of the final edition of The Intelligent Investor, hestated:

The philosophy of investment in growth stocks parallels in part and in partcontravenes the margin-of-safety principle. The growth-stock buyer relies on anexpected earnings power that is greater than the average shown in the past. Thushe may be said to substitute these expected earnings for the past record incalculating his margin of safety. In investment theory there is no reason whycarefully estimated future earnings should be a less reliable guide than thebare record of the past; in fact, security analysis is coming more and more toprefer a competently executed evaluation of the future. Thus the growth-stockapproach may supply as dependable a margin of safety as is found in the ordinaryinvestment—provided the calculation of the future is conservatively made,and provided it shows a satisfactory margin in relation to price paid.

While he never exclusively endorsed growth stock investing, Graham, over thecourse of his career, began to appreciate the power of that approach. And whereGraham left off, Warren Buffett picked up.

BUFFETT AND GRAHAM

After working for Graham in New York, Buffett moved back to Omaha in 1956 andfounded a limited partnership, Buffett Associates. Ultimately, Buffett meldedthat firm with several other partnerships and mostly liquidated it in 1969. Hedistributed the remaining shares of Berkshire and Diversified Retailing to thepartners, observing that he was "unable to find any bargains in the currentmarket." He then proceeded to take control of Berkshire and make severalacquisitions, building the investment conglomerate that today is known asBerkshire Hathaway. In the first 10 years of his original partnership, Buffett'sinvestments grew by 1,156 percent versus just a 123 percent rise in the DowJones Industrial Average. Berkshire Hathaway's success has been similarlyincredible, registering a total gain of 434,057 percent from 1965 to 2009 versusa total return on the S&P 500 of 5,430 percent. That translates into a 20.3percent compounded annual growth rate, versus 9.3 percent for the S&P 500.

However, Buffett did not totally buy into Graham's perspective on investing. Heinitially focused more on traditional value investing, but over time, he came toappreciate the value of growth companies. The fact is, the largest and mostprofitable positions in Buffett's portfolio have not been typical "value"stocks, but rather companies such as Coca-Cola, GEICO, Procter & Gamble,American Express, and Walmart—companies that have all profited immenselyfrom long-term earnings growth. He definitely did not get rich by investing inthe original business of Berkshire.

So while Buffett cleaved closely to Graham's emphasis on a margin of safety andan independent analysis of the true value of underlying assets, he began tofocus more closely on the underlying earnings power, the value of competentmanagement, and intangibles, such as brand and other competitive advantages.These focuses did not contradict Graham's principles, but were permutations ofthem. They represented a growing understanding of the nature of the value of acompany and its ability to hold that value in the future.

Buffett's contribution to Graham's philosophy, similarly derived from decades ofactual experience in the field, was a more refined sense of the ingredients ofvalue in a business. Buffett, having benefited deeply from Graham's"intellectual generosity," was free to develop an understanding of valuationthat went beyond the balance sheet. Buffett emphasized a conservative approachto this strategy. Whereas Graham was reluctant to attribute value to assets thathe could not quantify, Buffett was suspicious of investing in companies whosebusiness model or product he could not comprehend.

(Continues...)

(Continues...)

Excerpted from BENJAMIN GRAHAM AND THE POWER OF GROWTH STOCKS by Frederick K. Martin. Copyright © 2012 by The McGraw-Hill Companies, Inc.. Excerpted by permission of The McGraw-Hill Companies, Inc..
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

Details zur Ausgabe

• Verlag: McGraw Hill
• Erscheinungsdatum: 2011
• Sprache: Englisch
• ISBN 10: 0071753893
• ISBN 13: 9780071753890
• Einband: Tapa dura
• Anzahl der Seiten: 305
• Kontakt zum Hersteller: Nicht verfügbar
• Verantwortliche Person: Nicht verfügbar