Abbott Labs Shares Are Good Buy Using Investment Guru’s System

Feb 27, 2010
Howard Bryan Bonham

Even though he has been dead over 35 years, his stock valuation model of 1962 is still widely used, as though a financial Rosetta stone.

Who was this investment paragon whom Chartered Financial Analysts today consider the father of securities analysis? He was Benjamin Graham, perhaps the first completely rational maven on Wall Street.

Ben Graham Arrived in America to Become a Breadwinner for his Family

When he was a year old, his family emigrated from London to New York City. There, after the family import business failed, he worked at menial jobs to help support his impoverished relatives. Even with that extra load, in high school he proved an outstanding student in math, classical language and philosophy.

Pursuing liberal arts, he won a full scholarship to Columbia University, where he was an exemplary student and attained Phi Beta Kappa distinction on his path to graduating at age 20 as class salutatorian . The university offered him teaching positions; but he was drawn to the most alluring siren of the Roaring Twenties – Wall Street.

That is where this pragmatic scholar made his mark. He established a model for investing that gave new meaning to the Crash of 1929, envisioned by him as a period of great opportunities.

After Graduation from Columbia He Began His Investing and Teaching Careers

He persuaded a Wall Street lion to hire him as a fledgling in the bond department, in the early 1920′s. His inquiring mind immediately went to work at finding under-priced bonds for the firm to buy.

He actually visited railroads, then big bond borrowers, to get more information on their finances. Such initiative was unheard of then, for Wall Street was a gentleman’s club that played the markets by hunches – “Bourbon kings,” he called them.

He Pioneered In-depth Financial Research to Discover Stock Values

Soon he became a rising star, showing his firm how by assiduous study of financial statements, and direct inquiries to management, undervalued securities could be discovered and bought cheaply; and overpriced ones could be spotted and sold profitably. On the clunky mechanical calculators of his time, the work was arduous. It was most likely a labor of love, for young Ben Graham on fire.

According to observers, making money was not his passion. Rather, using his intellect to reveal anomalies in securities prices that could be used to make money energized him. Seemingly, it was the challenge he loved.

Early in his career, he made both profitable and unprofitable decisions. But he improved his methodology rapidly, especially after adding a “margin of safety” to his conclusions.

In 1934 first of His Two Best-selling Investment Books Came Out

Two important pursuits accelerated for him during the 1930′s: first, he made money for his own firm during the Great Depression; and secondly, he began planning the contents of his future two best-selling books – “Security Analysis” and “The Intelligent Investor.”

In the latter he invented a fiction called “Mr. Market,” to personify the misanthropic typical investor who chases the crowd into “market madness.” The books laid foundations for his concept of a stock’s intrinsic value, which codifies how every stock has a long-term worth, based on its real business assets and circumstances – irrespective of what Mr. Market’s fickle opinion is momentarily.

He returned to Columbia in the 1930′s to teach investment courses in its graduate school of business, an association that lasted thirty years, followed by a decade of teaching at UCLA.

Warren Buffet Became Ben Graham’s Prize Student

During the 1950′s, Warren Buffet became his student at Columbia and absorbed his concepts like a starved connoisseur at a banquet. So proficient was he that Ben Graham gave him the only A+ he ever bestowed. Warren Buffet named his son after him, in admiration.

Although some observers say he was really an assimilator of many investment ideas, in his heyday Ben Graham was an intellectual mover and shaker, who introduced simplified models to determine stock values. His formulas were devoid of the squiggly Greek mathematical notation that such models often employ.

Ironically, however, perhaps he laid the groundwork for those mind-numbing equations that keep super computers crunching numbers for hedge funds.

His Intrinsic Value Formula of 1962 Finds Abbott Labs at Realistic Price Today

He introduced and publicized the equation that got Wall Street focused on a better way to price stocks, in “The Intelligent Investor” of 1962. As the exhibit to this article shows, applying his equation recently to Abbott Labs (ABT) common stock produced an intrinsic value of $56.16 per share, and made the stock’s market price of $53.93 a discount.

This would suggest to Ben Graham value investors that serious consideration toward buying the stock was in order. Their belief in such fundamental analysis is deep-seated, in spite of claims by random walkers that neither fundamentalists nor technical chartists do better at stock selection than random choices over time.

How Would Ben Graham Fit into the Modern Investment Scene?

In the “new normal” of today, super computers hum and beep, exploiting trading anomalies to make minute atoms of money per share of stock. But, in those multimillion share Godzilla portfolios, the profits can be an atomic explosion.

How would the ingenious Ben Graham perform presently? Who can say? But his many disciples, like Warren Buffet, John C. Bogle and Irving Kahn, have tweaked his formula and excelled.

On the other hand, today the disciplined master of value might be writing software that tells traders exactly the moment a stock passes through its intrinsic value, and signals a buy or sell action.

*The writer is a Chartered Financial Analyst (CFA).