Confronted with a challenge to distil the secret of sound investment into three words, we venture the motto, Margin of Safety.

Benjamin Graham
The Intelligent Investor (1949)

To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may, in fact, be better off knowing nothing of these. That, of course, is not the prevailing view at most business schools, whose finance curriculum tends to be dominated by such subjects. In our view, though, investment students need only two well-taught courses – How to Value a Business, and How to Think About Market Prices.

Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, you will find only a few companies that meet these standards – so when you see one that qualifies, you should buy a meaningful amount of stock. You must also resist the temptation to stray from your guidelines: if you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio’s market value.

Warren Buffett
Letter to Berkshire Hathaway Shareholders (1996)

Benjamin Graham (1894-1976), author of Security Analysis (1934) and The Intelligent Investor (1949), was a principal of Graham-Newman Corp. (1926-1955). He is also regarded as a (and perhaps the primary) founder of modern financial analysis. Leithner & Co. is a Graham-style value investor.

Graham’s key insight is that “investment is most successful when it is most businesslike. An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return.” Operations not meeting these requirements are speculative. Value investors recognise that price is what is paid and that value is what is received; observe that over time price and value gravitate towards one another but that at any given point in time may diverge (sometimes by a wide margin); and lament that most people rarely recognise – and more than a few wilfully ignore – the fundamental distinction between value and price. Graham’s followers emphatically reject the prevailing view that the price and value of a security (i.e., stock, bond, title to real estate) necessarily coincide at all times.

In order better to appreciate the distinction between price and value, Graham urged market participants to ignore “the market” and to focus upon the individual business which issues a security such as a stock. The investor regards a stock as a share in the ownership of a business, and its value will over time correspond to that of the entire enterprise. From this insight follow two others:

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