Wednesday, December 26, 2012

Who is Ben Grossbaum and Why Should We Listen to Him?

Note: I am taking some time off this week to spend with my family. Below is one of my timeless articles that originally ran on June 8, 2008, updated with new select companies. Hope you enjoy reading it. - D4L

Ben Grossbaum was born on May 8, 1894 in London and moved to New York with his family when he was one year old. Young Ben was motivated by the death of his father and the humiliation of poverty. Wanting a better life, he became a model student, graduating as the class salutatorian from Columbia University at the age of 20.

Upon graduation, Ben received an invitation for employment as an instructor in English, Mathematics, and Philosophy, but instead he chose a job on Wall Street. Ben was a student of investing, spending great time studying and analyzing the financial state of companies. He was critical of the corporations for obfuscated and irregular financial reporting making it difficult for investors to discern the true state of the business's finances. Many of convictions such as returning a portion of the company's earnings to shareholders through dividend payments and not relying on future growth to justify a high price are still widely held beliefs by many today.

In 1928, Ben accepted a position teaching at the Columbia Business School and wrote several books. Along the way he spawned several well-known disciples such as Jean-Marie Eveillard, William J. Ruane, Irving Kahn, Walter J. Schloss, and Charles Brandes.

You make think that you have never heard of Ben Grossbaum, but I suspect you have. During World War II German-sounding names were regarded with suspicion, so Ben's father changed the family name from Grossbaum to Graham. Today we know Ben Grossbaum as Benjamin Graham, the father of Value Investing.

There was one other student that I failed to mention above, Warren Buffet. Behind only his father, Buffet describes Graham as the second most influential person in his life. Buffett, credits Graham as grounding him with a sound intellectual investment framework. "The best book on investing ever written," is how Buffet describes Graham's book The Intelligent Investor. According to Warren Buffett, Benjamin Graham said that he wished every day to do something foolish, something creative, and something generous. Buffett said that Graham excelled most at the last.

In my stock analyses, one of the fair-value metrics I look at is the Graham Number, obviously developed by Benjamin Graham. Here are a few stocks trading below their Graham Numbers (as of 12/21/2012):

ConocoPhillips Co. (COP) is one of the largest independent oil and gas exploration and production (E&P) companies in the world. COP spun off its downstream assets in May 2012.
Yield: 4.5% | Graham Number: $83.29

Chevron Corporation (CVX) is a global integrated oil company (formerly ChevronTexaco) with interests in exploration, production, refining and marketing, and petrochemicals.
Chevron Corporation is a global integrated oil company (formerly ChevronTexaco) with interests in exploration, production, refining and marketing, and petrochemicals.
Yield: 3.3% | Graham Number: $112.00

Northwest Natural Gas (NWN) Co. is a natural gas utility that provides service to some 611,000 residential, 62,000 commercial and 1,000 industrial customers in Oregon and southwestern Washington.
Yield: 4.1% | Graham Number: $45.25

Southside Bancshares Inc. (SBSI) owns Southside Bank, which primarily provides financial services to individuals, businesses, municipal entities, and non-profit organizations.
Yield: 3.8% | Graham Number: $21.21

Nacco Industries, Inc. (NC) conducts business in the areas of lift trucks, housewares, and mining in the Americas, Europe, and the Asia-Pacific.
Yield: 1.7% | Graham Number: $59.37

The Graham Number is calculated by taking the square root of 22.5 times the tangible book value per share times EPS (lower of trailing twelve months or average last 3 years). Benjamin Graham developed rules for the defensively screening stocks. This formula uses his principles to calculate the "maximum" price one should pay for the stock.

Full Disclosure: Long COP, CVX, NWN in my Dividend Growth Portfolio. See a list of all my dividend growth holdings here.

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Tags: [COP] [CVX] [NWN] [SBSI] [NC]