Why Benjamin Graham is the most successful stock picker.

"Who is the most successful stock picker?" might be a trick question by @MillionaireTigersince the technically correct answer would be Warren Buffet since he made the most money from the stock he picked. But do you know that in many interviews, Buffet mentioned that "making money did not motivate Graham" and also the fact that Graham donated most of his money away (instead of reinvesting it and generating more money). In other word, if he wanted to, Graham could be the "most successful stock picker" based on money made.

Success also has the "leaving a legacy" attached to it. One of his legacy would be the book he wrote "The Intelligent Investor". Although Warrent Buffett popularized value investing, Benjamin Graham was the father of value investing. That book has massive influence on successful trader back then till now, to the point that Buffet mentioned that Benjamin Graham is the second most influential person in his life (first being his father).

So, how did he pick his stock using value investing method? By deriving the intrinsic value of a common stock independent of its market price. By using a company’s factors such as its assets, earnings, and dividend payouts, the intrinsic value of a stock can be found and compared to its market value. If the intrinsic value is more than the current price, the investor should buy and hold until a mean reversion occurs.

A mean reversion is the theory that over time, the market price and intrinsic price will converge towards each other until the stock price reflects its true value. By buying an undervalued stock, the investor is, in effect, paying less for it and should sell when the price is trading at its intrinsic worth. This effect of price convergence is only bound to happen in an efficient market.

Graham was a strong proponent of efficient markets. If markets were not efficient, then the point of value investing will be pointless as the fundamental principle of value investments lies in the ability of the markets to eventually correct to their intrinsic values. Common stocks are not going to remain inflated or bottomed-out forever despite the irrationality of investors in the market.

Benjamin Graham noted that due to the irrationality of investors, including other factors such as the inability to predict the future and the fluctuations of the stock market, buying undervalued or out-of-favor stocks is sure to provide a margin of safety, i.e. room for human error, for the investor.

Also, investors can achieve a margin of safety by purchasing stocks in companies with high dividend yields and low debt-to-equity ratios, and diversifying their portfolios. In the event that a company goes bankrupt, the margin of safety would mitigate the losses that the investor would have. Graham normally bought stocks trading at two-thirds their net-net value as his margin of safety cushion.

Although Benjamin Graham died in 1976, his work lives on and is still widely used in the twenty-first century by value investors and financial analysts running fundamentals on a company’s prospect for value and growth. Benjamin Graham indeed is the most successful stock picker in my opinion!