Graham & Dodd Value Investing Principles
The concept of Value Investing was developed in the 1930s by Benjamin Graham and David Dodd at Columbia Business School. Their core idea: stocks should not be viewed as speculative instruments, but rather as ownership stakes in real businesses with measurable intrinsic value. In their groundbreaking work Security Analysis, they laid the foundation for a rational, long-term investment approach based on fundamental analysis and margin of safety.
Graham & Dodd influenced an entire generation of investors – including Warren Buffett, who is considered their most famous disciple. To this day, Value Investing remains one of the most sustainable and successful investment strategies. At its core the assessment of a company is based on economic reality – not on short term market movements or prevailing sentiment.
A particularly vivid example of the power of Value Investing was provided by Warren Buffett in 1984 with his essay “The Superinvestors of Graham-and-Doddsville”. He demonstrated how various investors, who independently followed the principles of Graham & Dodd over long periods of time, achieved exceptional returns without relying on market forecasts or luck. Our method is a modern interpretation of this core idea.
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The following principles form the foundation of Graham & Dodd’s Value Investing approach
Understandable Business Model
A company should operate in an industry that is easy to understand. This means that its products, services, and revenue streams must be clearly comprehensible. Complex business models with many hard-to-grasp factors often hide risks. Investors should only invest in companies whose operations they fully understand. Warren Buffett calls this the "Circle of Competence" principle: those who invest only in areas they know can make better decisions. Companies with a clear and stable business model are often more predictable and resilient to economic fluctuations. For example, a company selling everyday products such as food or household goods is easier to evaluate than a complex biotech firm with uncertain research outcomes. An understandable business model is a fundamental requirement for sound analysis and long-term investment success.
Long-Term Competitive Advantages
A company should have strong and sustainable competitive advantages protecting it from competitors. These so-called "economic moats" can take various forms: strong brands, patents, exclusive technologies or an efficient production process. High barriers to entry are another key element which prevent new competitors from easily entering the market and displacing existing businesses. Industries with high investment costs, strict regulations or specialized networks are often difficult for new entrants to access. The greater the competitive advantage, the more stable the company’s long term revenue and profit will be. Companies like Coca Cola or Microsoft benefit from strong brands and patents, making it nearly impossible for other firms to challenge their market position. A sustainable competitive advantage is essential for long-term stability and growth.
High Margin of Safety
The margin of safety means that a stock should be purchased at a significant discount to its intrinsic value. This intrinsic value is estimated based on fundamentals such as earnings, book value, or future cash flows. Since there are always uncertainties, the purchase price should be low enough to absorb valuation errors or unexpected negative events. The larger the discount, the lower the risk. Benjamin Graham, the founder of Value Investing, recommended buying companies only when they trade well below their fair value. For example, if a company’s estimated intrinsic value is €100 per share, a buying opportunity would arise if the stock trades at €70 or less. The margin of safety protects investors from market fluctuations and ensures that even conservative estimates can generate attractive long term returns.
Competent Management
A company’s management should act for the long term and in the best interests of shareholders. Good leadership is reflected in smart investment decisions, effective capital allocation, and transparent corporate strategies. It is also crucial for the management to adhere to ethical standards and following a long term vision rather than prioritizing short term profits. One key aspect is capital allocation: competent managers reinvest profits wisely, pay dividends, or use excess capital for share buybacks instead of engaging in unprofitable projects. Investors should also check whether the management itself owns shares in the company—a sign of long term commitment. Companies with strong leadership are more resilient in times of crisis and create sustainable value for investors. Examples of great managers include Warren Buffett (Berkshire Hathaway) and Jeff Bezos (Amazon), who focused on long term growth over short term profits.
Strong Balance Sheet
A financially strong company has a solid balance sheet. This means it can survive without relying on debt while achieving high returns on invested capital. Low debt levels and stable cash flows are crucial for long-term stability. Companies with high debt are more vulnerable to interest rate hikes or economic downturns. A strong equity base and healthy liquidity ensure that a company can withstand tough economic conditions. Particularly important is the return on equity (ROE) or return on invested capital (ROIC), which indicates how efficiently a company uses its capital. Companies with strong balance sheets can grow independently without constantly taking on new debt. Such companies are more resilient in the long run and pose lower risks for investors.
Limit uncontrollable External Risks
A company should be minimally exposed to external, unpredictable risks. Examples of such risks include commodity prices, government regulations, or geopolitical uncertainties. Companies highly dependent on factors like oil or gold prices are difficult to predict since their profits can fluctuate significantly. A classic example is gold mining: the price of gold is highly volatile, which can drastically impact business performance. Similarly, businesses heavily influenced by political decisions or government regulations carry substantial risks. Investors should focus on companies controlling their own operations rather than those driven by external factors. Businesses with stable revenue sources and predictable cost structures are more resilient and provide a better foundation for consistent returns.