Principles of Value Investing
Background and Challenges:
In 1894, Benjamin Graham was born in London, England as Benjamin Grossbaum. His family moved to New York City when Benjamin was one. He grew up in poverty living in New York, but he used this experience to propel him to become a great student and lifelong learner. Benjamin’s hard work and study habits helped him win a scholarship to the prestigious Columbia University in New York City. It was also around this time that Benjamin Grossbaum changed his name to Benjamin Graham so that he would fit with the Wall Street community in which he would eventually dominate.
In 1914, around the time that Henry Ford’s Model T was becoming a main transport for the American family, Benjamin graduated from Columbia University second in his class at the age of 20. Benjamin was invited to teach at Columbia but because of his father’s death and the families financial constraints he decided to go work on Wall Street to obtain a larger income to support his family. His first job with a Wall Street firm paid him $12 a week.
In 1923, Benjamin started his own investment firm, Graham-Newman and five years later he accepted a position at his alma mater, Columbia University, teaching investment classes. One of his star pupils was Warren Buffett, the great investment mogul of our time. In 1934, Benjamin compiled the many lessons he had taught from his investment class and along with the student, David Dobb, wrote his first book, “Security Analysis.” His second book, “The Intelligent Investor,” was published in 1949. It was this thesis that placed Benjamin Graham on the investment map as "The Father of Value Investing."
What can we learn from Mr. Graham about Project Portfolio Investing?
- Focus on Intelligent Business Investing. A core principle that we can apply to portfolio management is to always target a low risk long-term return on corporate investments. The payback period for these investments should be considered along with its profitability, sustainability and potential revenue growth. We should balance our portfolios based on the projects we are investing into as well as determine whether the projects are growing the business, transforming the business, or running the business investment categories.
- Develop and Establish a Sound Investment Framework Using AHP and Efficiency Frontier. Analytical Hierarchy Processing (AHP) is a powerful decision support methodology that was developed in 1970 by Thomas L. Saaty. AHP leverages our brain's intuitive process based on how we make decisions both qualitatively and quantitatively. The Efficiency Frontier is a fundamental economic method that visually summarizes the trade-offs between the value promised and the investment's risk exposure. The Efficiency Frontier answers three critical questions:
- Are the projects that make up our portfolio the best possible choices based on our available budget and organizational capabilities?
- Are we getting the best return from our selected investments?
- Which areas or investment categories are we overinvesting in?
- Spend Time Analyzing The Investments Using Empirical Data. To analyze your project portfolio using empirical data, each project must be mapped to the strategic business drivers of the organization and its accompanying key performance indicators or benefits statements. Once all projects have been identified, the projects should be filtered through the portfolio selection process. Upon weeding out project investments that are not aligned to the organization's strategic goals and objectives, the projects should be further analyzed against the organization's budget, benefits, and resource constraints. Projects should also be analyzed based on implementation risk, strategic value, difficulty to execute, and architectural alignment.
Website References:
- http://www.cabot.net/benjamin-graham/benjamin-graham-a-short-biography
- http://en.wikipedia.org/wiki/Benjamin_Graham
Key Concepts:
- Benjamin Graham
- Principles of Value Investing
- Intelligent Investor
- Project Portfolio Investing
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