Wednesday, December 14, 2016

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

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:

Chubb Ltd. (CB) , a specialty insurer (formerly Ace Ltd.), provides commercial insurance and reinsurance coverage and expanded its personal lines presence following its January 14, 2016 acquisition of Chubb Corp. for $28.3 billion in cash and stock. The company has paid a cash dividend to shareholders every year since 1993 and has increased its dividend payments for 28 consecutive years.
Yield: 2.1% | Graham Number: $117.58

Norfolk Southern Corp. (NSC) operates 20,000 route miles serving 22 eastern states, the District of Columbia, and Ontario, Canada. The company has paid a cash dividend to shareholders every year since 1901 and has increased its dividend payments for 15 consecutive years.
Yield: 2.2% | Graham Number: $69.63

Aflac Incorporated (AFL) provides supplemental health and life insurance in Japan and the U.S. Products are marketed at work sites and help fill gaps in primary coverage. The company has paid a cash dividend to shareholders every year since 1973 and has increased its dividend payments for 34 consecutive years.
Yield: 2.5% | Graham Number: $74.80

Wells Fargo & Company (WFC), with March 31 assets of $1.85 trillion, is the fourth largest U.S. bank, by global assets, but has the largest U.S. lending footprint. The company has paid a cash dividend to shareholders every year since 1939 and has increased its dividend payments for 6 consecutive years.
Yield: 2.7% | Graham Number: $50.10

Old Republic Intl (ORI) is an insurance holding company that engages mainly in the general (property and liability), title, and mortgage guaranty and consumer credit indemnity run-off businesses.
Yield: 4.1% | Graham Number: $20.97

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 AFL and ORI. See a list of all my Dividend Growth Portfolio holdings here.

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