Understanding Ben Graham's Investment Philosophy

Margin of Safety"To have a true investment, there must be a true margin of safety. And a true margin of safety is one that can be demonstrated by figures, by persuasive reasoning, and by reference to a body of actual experience" - Benjamin Graham
Graham looks for what he calls a "Margin of Safety" when investing in stocks. This is defined by how much a stock is trading below its intrinsic value which is what the business would be worth if it were sold today.Graham was most insistent that any security purchased should represent good value. He felt stocks should be bought like groceries, not like perfume, and he distilled his investment philosophy down to just three words, "MARGIN OF SAFETY". By margin of safety, he meant that any stock bought should be worth considerably more than it costs. He sometimes suggested at least 50 percent more. Stocks bought with a margin of safety give some assurance that one has invested wisely. And stocks bought with a margin of safety should be low risk, high return investments.
Investment Versus Speculation
The distinction between investment and speculation is central to Graham's investment philosophy. He defined these terms thusly: "An investment operation is one which, upon thorough analysis promises safety of principal and adequate return. Operations not meeting these requirements are speculative.
Buying and Selling points - Mr. Market Theory
Stocks will fluctuate substantially in value. For a true investor, the only significant meaning of price fluctuations is that they offer ". . . an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal."
Using his famous Mr. Market parable, Graham suggests the attitude one should adopt toward fluctuations in prices.
Graham's favourite allegory is that of Mr. Market, an obliging fellow who turns up every day at the shareholder's door offering to buy or sell his shares at a different price. Often, the price quoted by Mr. Market seems plausible, but sometimes it is ridiculous. The investor is free to either agree with his quoted price and trade with him, or to ignore him completely. Mr. Market doesn't mind this, and will be back the following day to quote another price. The point is that the investor should not regard the whims of Mr. Market as determining the value of the shares that the investor owns. He should profit from market folly rather than participate in it. The investor is advised to concentrate on the real life performance of his companies and receiving dividends, rather than be too concerned with Mr. Market's often irrational behaviour.
Select Low Price/Book Value Stocks
Graham felt rather strongly that an investor should not pay much more than book value for a stock. In his word, "Strangely enough we shall suggest as one of our chief requirements . . . that our readers limit themselves to issues selling not far above their tangible-asset value."
Selecting Unpopular Stocks If an investor is to do better than average, Graham argued that his or her investment policies should not be popular. He believed that most Wall Street professionals tend to seek out stocks with the best growth prospects and to ignore other stocks. This bias causes unpopular stocks to become undervalued and good buys.