Leithner & Co Pty Ltd - Graham-Style Investing: Ten Principles

Leithner & Co. is a Graham-style “value” investor. Benjamin Graham (1894-1976), author of the classic books Security Analysis (1934) and The Intelligent Investor (1949), was a principal of Graham-Newman Corp. (1926-1955). He is also regarded as the founder of financial analysis. Graham’s key insight is the premise 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. Graham held that price is what is paid and that value is what is received; observed that over time price and value gravitate towards one another but that at any given point in time they may diverge (sometimes by a wide margin); and lamented that most people rarely recognise – and more than a few wilfully ignore – the fundamental distinction between value and price. Value investors, as practitioners of Graham’s approach are often called, thus 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’ as a whole and to focus upon the individual business which issues a stock certificate or bond. The Graham-style value investor regards a stock as a share of a business whose value, over time, corresponds to the value of the entire enterprise. From this principle follow two others. First, under certain conditions a security may be purchased at a price less than its value, and the greater this disparity the greater the investment’s ‘margin of safety.’ Second, to obscure the relationship of value to price – for example, to buy a security on the basis of its current popularity and in the hope that its price, reflecting this popularity, will shortly rise – is to forsake investment and embrace speculation. Indeed, from the perspective of a Graham-style value investor the vast majority of transactions occurring in financial markets are speculations rather than investments. Prominent value investors, such as Mr Graham’s one-time students and employees Warren Buffett, Thomas Knapp and Walter Schloss, thus regard themselves not as traders of pieces of paper but rather as part-owners of tangible businesses. As such, they seek to:

allocate investment capital on the basis of justifiable premises, valid logic and hard evidence – not popularity or emotion;reduce the risk of permanent loss of capital (as opposed to short-term quotational loss); be cautious when others are confident, calm when others are fearful and deliberate at all times;
focus upon the intrinsic value (as opposed to the quoted market prices) of the securities which they own and seek to own.

This philosophy implies ten principles which underlie Leithner & Co.’s operations: