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.
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