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:
- An earnings-to-price yield at least twice the AAA bond yield.
- A price-earnings ratio less than 40 percent of the highest price-earnings ratio the stock had over the past five years.
- A dividend yield of at least two-thirds the AAA bond yield.
- Stock price below two-thirds of tangible book value per share.
- Stock price two-thirds “net current asset value.” (Net current asset value is the current assets of a company less all its liabilities)
- Total debt less than book value.
- Current ratio greater than two.
- Total debt less than twice “net current asset value.”
- Earnings growth of prior ten years at least 7 percent on an annual basis.
- 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.