What does Benjamin Graham look for?

Benjamin Graham was the first proponent of value investing and was the teacher of Warren Buffett. The way Graham looks at stocks is solely by quantitative analysis. He has 10 rules and they are:

  1. An earnings-to-price yield at least twice the AAA bond yield.
  2. A price-earnings ratio less than 40 percent of the highest price-earnings ratio the stock had over the past five years.
  3. A dividend yield of at least two-thirds the AAA bond yield.
  4. Stock price below two-thirds of tangible book value per share.
  5. Stock price two-thirds “net current asset value.” (Net current asset value is the current assets of a company less all its liabilities)
  6. Total debt less than book value.
  7. Current ratio greater than two.
  8. Total debt less than twice “net current asset value.”
  9. Earnings growth of prior ten years at least 7 percent on an annual basis.
  10. Stability of growth of earnings in that no more than two declines of 5 percent or more in the prior 10 years.

Warren Buffett has employed Graham’s techniques (not all of them) and Philip Fisher’s quantitative analysis technique. He says he is “85% Graham and 15% Fisher”. More posts on Philip Fisher and quantitative analysis to come up in the future.

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7 thoughts on “What does Benjamin Graham look for?

  1. Hi!

    Nice website and blog you have here, one of the few value investing ones around. May I check with you on what’s in your portfolio now? Just Kingsmen Creatives and TMC? I like your detailed analysis with spreadsheets, that’s the way I do my analysis as well.

    Keep up the good work!

  2. Wah nice! So your focus is more on yield? I guess KC, TMC and Super Group will be more on growth and capital gains coupled with decent yield while the REITS should be more “pure” yield plays. Sounds like a balanced portfolio, kudos! :)

  3. Actually my focus is on both yields and capital gains. The REITS and ETF are to balance off the stocks. Nonetheless, the stocks are fundamentally very strong so I have the REITS for yield mostly. I choose undervalued companies with good yields.

    For the STI ETF, I feel STI is undervalued as the P/E is around 12 and I’ve believe that Singapore is poised for more sustained growth in times to come.

    Cheers!

  4. Your focus is very much the same as mine. Of the stocks you have, I have TMC and First Reits. Super is also on my radar.

    Back to your topic, I believe many have read Graham’s The Intelligent Investor. The other good book is Philip Fisher’s Common Stocks Uncommon Profits.

    IMHO, Common Stocks Uncommon Profits is easier to understand ie more layman or should I said more common sense?

    Anyway both are a must read for value investors.

  5. Hi axt,

    High five!

    Do u happen to have a blog?

    I’ve not read Common Stocks Uncommon Profits but I have already planned to buy it this weekend as I heard lot of good reviews of it! Just nice, you are confirming my intention. Seems like I REALLY need to read this book now. Haha. Thanks for the reminder!

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