How to pick stocks the Benjamin Graham way | Value Research Besides authoring seminal books in the field of investing, Benjamin Graham was a successful investor and a teacher to many legends of the game.
Stockwire

How to pick stocks the Benjamin Graham way

Besides authoring seminal books in the field of investing, Benjamin Graham was a successful investor and a teacher to many legends of the game.

Benjamin Graham was the guru of legendary investor Warren Buffett, who also worked under him. A firm believer in value investing, Graham was widely known as the father of value investing. Following his graduation, he started his career on Wall Street where he later founded the Graham-Newman Partnership. Throughout his career, Graham focused on investing in value stocks and his ideas and methodology have been well documented in his books 'Security Analysis' (1934) and 'The Intelligent Investor' (1949). In his first book, Graham shed light on the difference between an investment and speculation. His second book was regarded as "the best book ever written" by Warren Buffett.

Benjamin Graham's investing wisdom

His investment philosophy revolves around purchasing stocks that are trading far below their intrinsic value. According to Graham, a stock's intrinsic value is the real value of that stock. Although there is no direct formula to derive a stock's intrinsic value, Graham recommended digging deep into the financial statements of companies. He believed that it would be possible to minimise the downside risk by investing in companies that were trading below their liquidation value. This was his way of establishing the 'margin of safety,' thereby paving the way for high-return opportunities with very limited downside risks.

The net-net principle is another value-investing technique developed by Graham. This technique focuses on investing in stocks where liquid assets, such as cash and cash equivalents net of all debts, are more than the total market cap, which means investors buy the business for practically nothing.

Benjamin Graham's investment wisdom

Many of his investment techniques are timeless in nature. Although it may not be easy to spot good value companies trading far below their intrinsic value, his ideology certainly helps differentiate the good ones from the rest. During the investment journey, Graham also criticised companies that used irregular methods of financial reporting. To highlight this issue, he also wrote a book 'The Interpretation of Financial Statements'.

Methodology
In order to get a list of Benjamin Graham-type companies, we have applied the following quantitative filters:

  • Earnings yield more than 10.5 per cent
  • Debt to equity between 0 to 1
  • Current ratio greater than 2
  • Total debt less than 2 times net current asset value (NCAV)
  • 5Y earnings growth rate of at least 10 per cent p.a.
  • Current and average 5Y ROE of more than 12 per cent

To find out the companies that pass these filters, head over to our Benjamin Graham Stock Screener page.

Also in the series:

How to pick stocks the Buffett & Munger way


Recommended Stories

Other Categories