Course 506: Great Investors: Benjamin Graham
Seek a Margin of Safety
In this course
1 Introduction
2 Seek a Margin of Safety
3 Favor Big Companies with Strong Sales
4 Seek Dividends
5 Choose Companies That Are in Good Financial Shape
6 Look for Companies with Sustainable Earnings Growth
7 Pay Attention to Price Multiples

A lecturer at the Columbia School of Business during the 1930s, Graham detailed his investment philosophy in two classic books: Security Analysis (co-authored with David Dodd in 1934) and The Intelligent Investor (first published in 1949). These books expand on Graham's definition of a cheap company, which is based on a principle he calls margin of safety. Margin of safety simply means buying companies that are cheap relative to their intrinsic worth, or what the company would be worth if the entire business were sold. The thinking is that if the company doesn't rebound, you can cut your losses with minimal harm. Graham bought businesses that were so cheap, so battered, and so neglected, that they sold for less than the value of their working capital, which is current assets minus current liabilities. Graham's argument was that even with the best research, investors can never know all there is to know about a company. More importantly, investors can't always predict the negative surprises that can zap a stock price. So Graham championed this idea of margin of safety.

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