What are the strategies of Benjamin Graham?

BENJAMIN GRAHAM

To illustrate Graham’s methods, let us look at the following set of standards developed by him for stock selection by the defensive investor in his book The Intelligent Investor.

1. Adequate Size of the Enterprise : A companyshould not have less than $100 million of annual sales if it is an industrial company or less than $50 million total assets if it is a public utility.

2. A Sufficiently Strong Financial Condition : For an industrial company, the current ratio should be at least two and the long term debt should not be greater than the net current assets. For a public utility, the debt-equity ratio (at book value) should not exceed 2.

3. Earnings Stability : Equityearnings must be positive in each of the past ten years.

4. Dividend Record : The Company must have a record of paying uninterrupted dividends for at least the past twenty years.

5. Earnings Growth : Earnings per share must have increased by at least one-third in the past ten years, using three-year averages at the beginning and end.

6. Moderate Price / Earning Ratio : The current price should not exceed 15 times average earnings for the past three years.

7. Moderate Ratio of Price to Assets : The current price should not exceed1½ times the last reported book value. However, a price-earnings multiplier of less than 15 may justify a higher price-to-book value approach. As a rule of thumb, the product of the price-earnings multiplier and the price-to-book value ratio should not be more than 22.5.