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Rupert Hargreaves
Rupert Hargreaves
Articles (950)  | Author's Website |

Rare Benjamin Graham Lecture Notes Give Insight Into His Process

A look back at the work of the dean of value investing

September 13, 2019

Benjamin Graham is widely considered to be the father of value investing and, in some respects, the father of fundamental investing as well.

He wrote two of the most famous investment books in history, which have educated generations of investors and introduced them to the concept of value investing. Graham wrote "Security Analysis" in 1934 with David Dodd and "The Intelligent Investor" in 1949.

As well as being an author and investor, Graham was also an academic. He taught value investing at Columbia University and the University of California in Los Angeles later in his career.

Graham's process

Some of the most fantastic resources we have on Graham are his lecture notes from when he was teaching at Columbia. If you've not read these, I highly recommend seeking them out online. They provide a great insight into the way this Wall Street legend approached valuation. The notes date from 1946, more than a decade after his first book was published and a few years before the second was released. 

The notes show us Graham was a highly methodical man who concentrated on the numbers and liked to show students his process by comparing businesses.

In one lecture, he compared the fortunes of two companies, Transue Williams and Buda Company. Graham told his students that in this situation:

"Both sold at the same high price, namely $33 1/2 a share; and in studying the companies' record, I could see that buyers could easily have been misled by the ordinary procedure of looking at the reported earnings per share as they appear, let us say, in Standard Statistics reports."

The dean of value investing then went on to explain why the two companies had been misleading shareholders. Specifically, he said with regards to Transue:

"In the case of Transue Williams, the final stock equity was $2,979,000, of which $60,000 had come from the sale of stock so that the adjusted equity would be $2,919,000. The indicated earnings were $430,000, or $3.17 a share. The transfer to a per share basis can be made at any convenient time that you wish. Dividends added back of $9.15 give you earnings per balance sheet of $12.32. But if you look at the figures that I have in the Standard Statistics reports, you would see that they add up to $14.73 for the ten years, so that the company actually lost $2.41 somewhere along the line."

For Buda, the opposite was true. The company "did $5.17 better than it showed."
Graham went on to explain the difference in the figures could be explained by the treatment of reserve items on the balance sheet:

"The Transue & Williams Company reported earnings after allowances for reserves, chiefly for renegotiation, each year...and then almost every year they charged their actual payments on account of renegotiation to the reserves. It turned out that the amounts to be charged were greater than the amounts which they provided."

This is just one example of the numerous case studies contained in the lecture notes. I wanted to highlight it because it shows Graham's methodical approach to valuing businesses.


Graham's investing strategy is often oversimplified. Some people believe all he did was pick stocks because they looked cheap, but that is not the case. Graham didn't just pick stocks because they looked cheap; he was genuinely fascinated by a company's financials and wanted to know everything about these businesses. That's why he took such a detailed approach to analyzing balance sheets and income statements.

After losing nearly everything in the crash of 1929, Graham was focused on finding not just undervalued securities, but stable securities as well. This part of his process is often overlooked, but it shouldn't be.

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About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

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