Benjamin Graham’s Rules, Principles and Idea Excerpts for Stock Selection
Benjamin Graham’s 10 Rules for Stock Selection
1. An earnings-to-price yield at least twice the AAA bond rate (the reciprocal of the P/E ratio).
2. Price Earnings (P/E) ratio less than 40% of the highest P/E ratio the stock had over the past 5 years.
3. Dividend yield of at least 2/3 the AAA bond yield.
4. Stock price below 2/3 of tangible book value per share.
5. Stock price below 2/3 on Net Current Asset Value.
6. Total debt less than book value.
7. Current assets/Current debts ratio greater than 2.
8. Total debt less than two times Net Current Asset Value.
9. Earnings growth of prior 10 years at least at a seven percent annual compound rate.
10. Stability of growth of earnings, meaning that no more than two declines of five percent on year-end earnings in the prior ten years are permissible.
NOTE: It is unlikely that you will find many stocks that meet all the rules. However, Henry Oppenheimer, a professor, found rules 1, 3 and 6 resulted in good returns. Use as many rules as possible that are a good fit to gain good returns with reasonable risks.
Benjamin Graham’s Three Timeless Principles
1. Always Invest With a Margin of Safety ~
BUY A STOCK SUBSTANTIALLY BELOW ITS INTRINSIC VALUE.
2. Expect Volatility and Profit From It ~
GREET DOWNTURNS AS OPPORTUNITIES TO FIND GREAT VALUES; UNDERSTAND MR. MARKET.
3. Know What Kind of Investor You Are ~
ARE YOU AN ACTIVE-ENTERPRISING INVESTOR OR ARE YOU A PASSIVE-DEFENSIVE INVESTOR?
Excerpts of Ben Graham’s Ideas
“…there is one advantage in reading Security Analysis. The investor will be cleansed of any notion that there is much new on Wall Street. It soon becomes clear that scams, frauds, misrepresentations and clever approaches to salesmanship simply get dressed up in new clothes for subsequent generations of investors. The underlying ruses have not changed much.”
“At the very least, reliable dividends provide a foundation for share price.”
“…the market is not a “weighing machine” on which the value of each issue is recorded by an exact and impersonal mechanism…. Rather, it should be said that the market is a voting machine, whereon countless individuals register choices which are the product partly of reason and partly of emotion.”
“The disciplined, rational investor neither follows popular choice nor plays market swings.
Rather, he searches for stocks selling at a price below intrinsic value and waits for the market to recognize and correct its error (price goes up). When the price has risen to the actual value of the company, it is time to take profits, which then are reinvested in a new undervalued security.”
“I think we can do it (invest) successfully with a few techniques and simple principles.” (See Graham’s rules above.)
“Investing in a market where people believe in efficiency,”
Speaking for Graham, Buffett scoffed and said, “it is like playing bridge with someone who’s been told it doesn’t do any good to at
look at the cards.”