Ben Graham’s criteria, Greg Speicher’s investing ideas and Books list

a) Once in a while it is good to go back and read up what the Gurus have said. Especially Graham. Did I say ‘once in a while’? Scratch that. I think it should be all the time for value investors. Ben Graham in his last days proposed 10 criteria which he said ”seemed to be practically a foolproof way of getting results out of common stock investments with a minimum of work.”

Here are the 10 criteria that make up the new Ben Graham Formula.

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.
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.

Now, now – 10 criteria. ‘Too tough. I am already switching off and moving along my internet surfing exercise’, eh?. Hold on. Read on for a while. According to the Gurufocus article “The Investment Methods of Benjamin Graham”, the first five criteria in the new Graham formula were related to reward and the second five to mitigating risk of loss of capital. One needs to select a stock with at least one from the reward and one from the risk mitigation section. Very few if any stocks will pass all 10 critieria.

Interesting. This is getting slightly easier. Just (atleast) one from the top 5 and another one from the bottom 5. Very nice. If only some researcher/investor did some analysis to tell me which criteria should I pick in each category so that my investment becomes multi-fold?

Good news! Someone has already done it. (Ok, I will stop it. I am sounding like someone on the TV shopping network commercial). In a “Test of Ben Graham’s Stock selection Criteria,” Henry Oppenheimer studied whether or not a set of Ben Graham’s investing criteria actually worked. Oppenheimer discovered that two of the Ben Graham criteria, number 1 and number 6, produced exceptional returns. Oppenheimer found that the mean return during the time studied (1974-1981) was 38% vs. the S & P 500’s 14%. A remarkable out-performance.  He also found that using criteria 3 and 6 would have achieved mean annual return of  26%.

Nice. So, I’ll pick criteria 1, criteria 6, I will add my own criteria on return ratios and earnings growth etc., and ta-da, I have my list of stocks, no? Good thought process. Now think about – ‘what will happen if this list consists of only one stock?’, ‘what will happen if this list consists of 94 stocks?’. Would you invest in just one? Would you invest in 94? How would you segregate? Let me know your thought process.

Of course, Graham criteria was tested only on the US market and the results are dependent on the time period chosen. I am not aware of any such study done on the Indian markets though. If only some researcher/investor….. 🙂

b) Terrific list of 115 learnings, investing ideas and investment wisdom from the brilliant Greg Speicher (as always). A must read (and his blog is a must follow). Link here

c) I wanted to compile a list of good investment books I have read and a list I want to read this year in this post (I should probably make a tab to keep track). Please feel free to add to the list in the comments.

Already Read

i) The Intelligent Investor and Security Analysis – Ben Graham

ii) You can be a Stock Market Genius – Joel Greenblatt

iii) Common Stocks and Uncommon Profits – Phil Fisher

iv) One up on Wall Street – Peter Lynch

v) Stocks for the Long Run – Jeremy Siegel

vi) Margin of Safety – Seth Klarman

vii) Reminiscences of a stock operator – Edwin Lefevre

viii) Black Swan and Fooled by Randomness – Taleb

ix) Thinking, Fast and Sl0w – Daniel Kahnemann

x) Predictably Irrational – Dan Ariely

xi) Extraordinary popular delusions and madness of crowds

Want to read (in no particular order)

1) Essays of Warren Buffett – Lesssons for corporate america

2) The five rules for successful stock investing – Pat Dorsey

3) Influence by Robert Cialdini

4) In an uncertain world – Robert Rubin

5) Against the Gods – The remarkable story of risk

6) Seeking Wisdom by Peter Bevelin (Munger’s ideas explained)

7) Financial Shenanigans – Howard Schilit

8) Behavioral Finance and Wealth Management

9) It’s when you sell that counts – Don Cassidy

10) The Richest man in Babylon

11) Contrarian Investment Strategies – David Dreman

12) The Little book of value investing – Christopher Browne

13) Where are the customers’ yachts – Fred Schwed

14) A short history of Financial Euphoria – JK Galbriath

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  1. #1 by rajapanda on February 14, 2012 - 1:09 AM

    Nice post. Do let me know if you need the soft copy of the “The five rules for successful stock investing– Pat Dorsey”.

    Am still trying to come to terms with Graham’s style of investing. As you have rightly pointed out, it needs diversification which means more research on so many different companies. Also it runs the risk of having to do the capital allocation over and over and over again.

    And i feel Buffet (arguably Graham’s best protege) and Charlie have grown over these kind of investments. When someone wants to hold for lifelong(anywhere closer), Graham’s formula don’t provide any framework. Not that it’s any easy to find such companies worthwhile of holding for long term.

    I feel graham’s formula has the ability to keep one busy, very busy in the investment activity. While the long term investing has the prospect to provide equally stellar returns without the fun of so much activity.

    Tough to decide…. Still reading and learning.

  2. #2 by sagar on February 14, 2012 - 11:06 AM

    Hi Rajapanda.. “The five rules for successful stock investing– Pat Dorsey”.
    is one of the best books..could you pls share softcopy on sagarpowar@gmail.com

  3. #3 by Mayur on February 14, 2012 - 11:38 AM

    In the list of 94 stocks, we can segregate companies which has insider buying, business which doesn’t require capital from external markets and most importantly which has an economic moat.

  4. #4 by bemoneyaware on February 14, 2012 - 2:36 PM

    A very interesting list of books. Found more focused on stock markets. I usually focus on personal finance books.

    The soft copy of richest man at Babylon is available at pdf of Richest man
    The important learnings from it in my article Parents & Us:Changes in the Way We Earn,Spend,Invest

    I would also recommend Parag Parikh’s book on Behavioral finance: Stocks to Riches

  5. #5 by Abhishek on February 14, 2012 - 8:23 PM

    Great article. You should look at all the 10 factors. Even if the company does not meet all of them, it is still going to provide a better understanding of the company and provide a very important perspective.

    I feel happy when I look at the list of books (both the read and to-be-read category). I have read all of them except two – “Thinking, Fast and Slow” and “In an uncertain world” 🙂

    I can also suggest a few more:-
    1. Security Analysis – Graham & Dodd
    2. Value Investing Today – Charles Brandes
    3. Margin of Safety – Seth Klarman
    4. Buffet’s Partnership letters from 1957-1970 (it is not a book and you can get it on the internet)

    Also, looking forward for a review on “Thinking, Fast and Slow” .

  6. #6 by Arjun on February 14, 2012 - 10:22 PM

    check out the results of this study in outlook profit in 2008…the article starts from pg.41, the results of back testing have been tabulated….i think criteria 1 has been tested here apart from back tests on net nets and cash bargains. link given below:

    http://books.google.co.in/books?id=lDIEAAAAMBAJ&pg=PT48&lpg=PT48&dq=outlook+profit,+benjamin+graham&source=bl&ots=eU3JgPODWI&sig=7SAB2GYFrvVjLw60IziepY5itW8&hl=en&sa=X&ei=bF46T4XfOMWqrAexhomrCA&ved=0CCYQ6AEwAQ#v=onepage&q=outlook%20profit%2C%20benjamin%20graham&f=false

  7. #7 by Kiran on February 15, 2012 - 3:34 AM

    @rajapanda – I agree partly with your perspective. However, as Abhishek in comments validly pointed out, if we look at all 10 factors, it will give a better sense of company than before.
    If we do decide to go the pure Graham way, we need to diversify into 50-75 stocks (with very little research – that’s the best part of Graham – in fact, he might be the pioneer in quant investing). Do we want to buy 50-75 stocks? Depends from person to person.

    @Mayur – Good pointers. Economic moat though requires a lot more analysis than just looking at return ratios. But a good starting point. Thanks for dropping by.

    @Abhishek – Great perspective, and I think all 10 factors, as you rightly pointed out should be part of our checklist for investing in any company.
    Wow! You’ve read all those books. Pretty awesome (and I think definitely a factor in your crystal clear investing funda as enumerated in your brilliant blog!). I missed posting Security Analysis, already posted Margin of safety. Yep, Buffett’s partnership letters (have read only some of them – btw, what do you think of reading ‘Essays of Warren Buffett’ as a close substitute?) should be right up there. Never heard of Charles Brandes’s book. Will add to the list. Thanks 🙂

    @Arjun – Awesome man! Thanks so much! Great find. This strategy seems to beat the pants out of Sensex returns over a very well selected period 1998-2008 (two bear, two bull markets constitute a great time period to test out any strategy). Thanks for sharing. Will dig.

  8. #8 by Arjun on February 15, 2012 - 11:45 AM

    you can also add the following books:

    dhandho investor – mohnish pabrai
    books by michael maubossin – expectations investing, more than you know
    quality of earnings – thornton o’glove

  9. #9 by Jagadeeswaran (@eeswardev) on February 15, 2012 - 12:15 PM

    Thanks for Greg Speicher terrific list of 115 learnings. Good list of books. Apart from the above i liked 2 other books which are very enjoyable

    1. John Neff on investing: Biographical account of John Neff who served as fund manager for Vanguard’s Windsor fund for 31 years with excellent track record beating S&P handsomely. He calls his investing style as low p/e investing with contrarian blend. On any given day i think it pays to read real practitioner account. (There is a good review about this book here – http://can-turtles-fly.blogspot.com/2007/11/book-summary-john-neff-on-investing.html)

    2. Manias, Panics and crashes: A history of financial crises by Charles P.Kindleberger – This book details the common theme running behind the boom and bust cycle. Pretty much covers most of the financial crises took place. Enjoyable read. This is one of three books prof recommended for his behavioral psychology class (other 2 were Influence and Extraordinary popular delusions)

  10. #10 by Kiran on February 15, 2012 - 1:55 PM

    @Arjun – Thanks for the list. I didn’t like Dhandho. I will check out the other two books (I’ve read quite a few MM’s articles – let’s see how the books go).

    @Eeswar – Awesome. Thanks for the additions. My list to read is growing day by day 🙂 I need to push my reading ambition to 2013 I think 🙂

  11. #11 by Kiran on February 15, 2012 - 8:38 PM

    @bemoneyaware – Thanks for the pdf link and your blog post. You summarized it very well. I will check out the Parag Parikh’s book.

  12. #12 by LudicrousLady on June 29, 2012 - 4:20 PM

    hey dont fear please spread truth about war on terror LIE george bush LIE 9/11 = BIG LIE !!!!!!!!!

  13. #13 by Angel on April 23, 2013 - 7:30 AM

    It’s really very difficult in this active life to listen news on Television, thus I only use internet for that reason, and take the hottest news.

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