Benjamin Graham’s The Intelligent Investor

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The Intelligent Investor is an everlasting investment classic by Benjamin Graham, the father of value investing.  The first edition was released in 1949 and its thesis has withstood the test of time.  While time changes and markets ebb and flow, the literature is as relevant today as it is in its times.

The followings are the 2 stock selection strategies quoted from the investment book (the 4th revised edition).  Comments by me are in red.

Basically, he recommends cheap and safe stocks – cheap as in the prices of the stocks are low compared to the earnings and equities of the companies, and safe as in the companies are financially sound and are low in liabilities.  To a certain extent, he also seeks stability and growth, though the criteria he stipulates is not particularly stringent.

Good investments policy should not change from decade to decade, so even though this book is already more than 40 year old, the techniques are as realistic and useful as new.  I expect to make use of the principals lay down for my own investments over my lifetime.  Thanks Benjamin, the cost of the book has already paid for itself several times over from the profits I’ve made.

Stock selection for the defensive investor

1.  Adequate Size of the Enterprise
All our minimum figures must be arbitrary and especially in the matter of size required.  Our idea is to exclude small companies which may be subject to more than average vicissitudes especially in the industrial field.  (There are often good possibilities in such enterprises but we do not consider them suited to the needs of the defensive investor.)  Let us use round amounts: not less than $100 million of annual sales for an industrial company and, not less than $50 million of total assets for a public utility.  (The figures are plucked out in the 1970’s.  Today’s figure will be much higher given the inflation and growth in the capital markets, perhaps at least 1 billion USD?).

2.  A Sufficiently Strong Financial Condition
For industrial companies current assets should be at least twice current liabilities – a so-called two-to-one current ratio.  Also, long-term debt should not exceed the net current assets (or “working capital”).  For public utilities the debt should not exceed twice the stock equity (at book value).  (When I read the literature, I’ve the impression that when Mr Graham said book value, he really meant net tangible assets, i.e. excluding intangible assets and goodwill).

3.  Earning Stability
Some earnings for the common stock in each of the past ten years.

4.  Dividend Record
Uninterrupted payments for at least the past 20 years.

5.  Earnings Growth
A minimum increase of at least one-third in per-share earnings in the past ten years using three-year averages at the beginning and end.

6.  Moderate Price/Earnings Ratio
Current price should not be more than 15 times average earnings of the past three years.

7.  Moderate Ratio of Price to Assets
Current price should not be more than 1.5 times the book value last reported.  However, a multiplier of earnings below 15 could justify a correspondingly higher multiplier of assets.  As a rule of thumb we suggest that the product of the multiplier times the ratio of price to book value should not exceed 22.5.  (This figure corresponds to 15 times earnings and 1.5 times book value.  It would admit an issue selling at only 9 times earnings and 2.5 times asset value, etc.)

Stock selection for the enterprising investor

…Let’s make a preliminary list of stocks that sold at a multiple of nine or less…

In addition:
1.  Financial condition: (a) Current assets at least 1.5 times current liabilities, and (b) debt not more than 110% of net current assets (for industrial companies).

2.  Earning stability: No deficit in the last five years covered in the Stock Guide. (The Stock Guide is a periodical by Standard & Poor’s covering information such as listed-stocks prices and fundamental data of companies).

3.  Dividend record: Some current dividend.

4.  Earnings growth:  Last year’s earnings more than those of 1966. (This particular book’s edition is copyrighted in 1973, so Mr Graham probably meant we should take 5 years earning growth).

5.  Price: Less than 120% net tangible assets.

One thought on “Benjamin Graham’s The Intelligent Investor”

  1. Benjamin Graham was Warren Buffett’s professor and mentor at Columbia Business School. Graham had such an overwhelming influence on his students that two of them, Warren Buffett and Irving Kahn, named their sons after him.

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