# The methods of Ben Graham



## wayneL (15 August 2006)

I wonder how many purported Graham style investors follow these guidelines?



> Benjamin Graham is considered by many to be the father of financial analysis and value investing. He revolutionized investment philosophy by introducing the concept of security analysis, fundamental analysis and value-investing theories. More than 20 years after his death, he continues to have one of the largest and most loyal followings of any investment philosopher.
> 
> Graham put into practice a fundamental analytical process that has been adopted by a generation of stellar money managers.  By using his methods, many of these managers have been able to consistently beat the market averages. Graham influenced investing superstars such as: Warren Buffett, Mario Gabelli, Michael Price, John Bogle and John Neff.  Simply put, Graham turned speculating into investing. By devising sound principles for analyzing a company's fundamentals and its future prospects, he enabled stock pickers to be analysts - not gamblers. He espoused many of these value-oriented principles in two timeless investing books - Security Analysis and The Intelligent Investor. These best-selling books explain how investors can arrive at a stock or bond's true intrinsic value through extensive fundamental research and financial statement analysis.
> 
> ...


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## Tysonboss1 (16 September 2010)

wayneL said:


> I wonder how many purported Graham style investors follow these guidelines?




I follow the Graham/Buffett style. While I must say I consider my self a student and not a master.

Have you any thoughts on the subject wayne.


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## wayneL (16 September 2010)

Jesus Tyson! Breathing life into a stillborn thread that died 4 years ago! This must be a record LOL. 

My thoughts are that we should try to identify stocks that fit these guidelines, expose them and pick the eyes out of them for potential.

Any starters?


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## noie (16 September 2010)

how about 
ValueLine: Better than blue-chips
A Roger Montgomery selection.

Quality selection
Company            ASX -MQR (Montgomery quality rating)
Monadelphous	MND-A1
Forge Group	FGE-A1
Carsales	        CRZ-A1
DWS Advanced	DWS-A1
CSL	                CSL-A2
SMS Management	SMX-A1
The Reject Shop	TRS-A2
Dominos Pizza	DMP-A2
Credit Corp	        CCP-A2
Slater & Gordon	SGH-A2
Navitas	        NVT-A1
JB Hi Fi	        JBH-A1
Cochlear	        COH-A1
Matrix C & E	MCE-A1
Ross Human Directions	RHD-A1
Commonwealth Bank	CBA-A2
Oakton	        OKN-A2
ITX Group	        ITX-A2
News Corp	        NWS-A2
West Australian Newspapers WAN-A2
Computershare	CPU-A2
Lycopodium	        LYL-A1
REA Group	        REA-A1
Fleewtood	        FWD-A1
Blackmores	        BKL-A1
Thorn Group	TGA-A1
Webjet	        WEB-A1
Fiducian Portfolio Services	FPS-A1


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## sinner (16 September 2010)

WayneL, I tried to make those parameters into a simple stock scan and came up with less than 20 stocks:
(EDIT: I tried to include the link to the scan, but it fails, so you have to look at the parameters below and input them yourself if you want to replicate)

I am not sure if the scan parameters are exactly correct, and there are some Ben Graham parameters that you can't easily scan for. But you get the gist, and it is a scan which certainly cuts out a lot of crap :



Those stocks with high "Current Ratio" and low debt/assets ratio, with relatively low earnings multiples (make sure you check the P/E ratio against the stocks historical avg P/E as well as the sectors historical avg P/E and total market avg historical P/E) like PLPC and SAY are probably the best picks.


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## noie (16 September 2010)

Thats a nice scan to start researching more, but you need to be careful with Google as sometimes the financial data is over a year old.
(July 2009)


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## sinner (16 September 2010)

noie said:


> Thats a nice scan to start researching more, but you need to be careful with Google as sometimes the financial data is over a year old.
> (July 2009)




Certainly hope nobody is using the above scan as a decision making tool, Google Finance isn't exactly Bloomberg grade data. I was just curious (late in the workday on a Thursday  ) what sort of stocks would come up with those sort of parameters plugged in. Some of them seem reasonable.


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## wayneL (16 September 2010)

These types of Graham/Buffet scans certainly don't yield very many "sexy" stocks do they.


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## noie (16 September 2010)

wayneL said:


> These types of Graham/Buffet scans certainly don't yield very many "sexy" stocks do they.




Well that is the truth , but all the sexy girls from my school have 3-4 kids and are now overweight.. amazing what 10 years does to sexy.


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## robusta (16 September 2010)

The methods of Ben Graham are well worth studying. The main one I think that needs updating is the concept of only buying a company at a discount to it's book value. This concept ignores many valueable companies trading at multiples of book value with a high ROE.
My advice for anyone interested in investing would be to read The Intelligent Investor by Benjamin Graham and then read Valueable by Roger Montgomery


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## noie (16 September 2010)

No offence to Roger, but in my opinion stick to the intelligent investor.

The base is all in there, then find your fundamentals and practice, or pay a company to do it for you.

if people are happy to read it in PDF , i can "lend" you a copy, like lending a book from my bookshelf, nothing illegal there.

pm me


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## Tysonboss1 (16 September 2010)

wayneL said:


> These types of Graham/Buffet scans certainly don't yield very many "sexy" stocks do they.




I bought a few HGL ltd, (HNG) recently.


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## Intense_jono (16 September 2010)

noie said:


> No offence to Roger, but in my opinion stick to the intelligent investor.
> 
> The base is all in there, then find your fundamentals and practice, or pay a company to do it for you.
> 
> ...




Hey mate

I'm a bit of a lurker and have been reading much of this forum but haven't actually made any posts !! So that means I can't send a PM.  Do you mind lending me the .pdf ? you can shoot me an email at intense_jono at hotmail.com

Thanks


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## Tysonboss1 (17 September 2010)

Intense_jono said:


> Hey mate
> 
> I'm a bit of a lurker and have been reading much of this forum but haven't actually made any posts !! So that means I can't send a PM.  Do you mind lending me the .pdf ? you can shoot me an email at intense_jono at hotmail.com
> 
> Thanks




You can pick up the book for $50 at borders, I would suggest buying it in hard copy because it is onw that you will want to keep on the shelf.


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## alphaman (17 September 2010)

Tysonboss1 said:


> You can pick up the book for $50 at borders, I would suggest buying it in hard copy because it is onw that you will want to keep on the shelf.



No wonder Borders sales are down. The book is only $15 at Book Depository.


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## robusta (17 September 2010)

noie said:


> No offence to Roger, but in my opinion stick to the intelligent investor.
> 
> The base is all in there, then find your fundamentals and practice, or pay a company to do it for you.
> 
> ...




Started a long reply then realised this link covers it all in my opinion

http://blog.rogermontgomery.com/should-a-value-investor-imitate-ben-graham/


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## Tysonboss1 (17 September 2010)

alphaman said:


> No wonder Borders sales are down. The book is only $15 at Book Depository.




Well even better,


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## Wysiwyg (8 June 2014)

If I were to buy a 'business trading at a discount to net current asset value', what amount of discount would that be? For example, if Commonwealth Bank has a 'net current asset value' of $60 would I buy next day when the price crossed below $60? If the price continued lower to $50 do I still hold this stock at a "discount"?

GFC was an example where great companies were at discount prices but was anyone to know how much discount there was to be? No.


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## Wysiwyg (8 June 2014)

Here are five stocks quoted as --



> Below you will find a table of stocks Forbes recently identified *based on the Benjamin Graham screen* of the American Association of Individual Investors






This article was posted 23/02/2009, one month before GFC low 

Spartan Motors
SPAR was: Close = 2.28 (peaked at 11.75 a few months later after GFC bottom bounce)
SPAR now: Close = 5.15

Euroseas
ESEA was: Close = 4.26 (peaked at 6.31 a few months later after GFC bottom bounce) 
ESEA now: Close = 1.18

Signet Jewelers
SIG was: Close = 7.40 (still peaking)
SIG now: Close = 107.69

Ternium S.A.
TX was: Close = 6.57 (peaked 43.52 in April 2010)
TX now: Close = 27.70

United States Steel
X was: Close = 19.67 (peaked at 70.95 in April 2010)
X now: Close = 24.09


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## Value Collector (10 June 2014)

Wysiwyg said:


> If I were to buy a 'business trading at a discount to net current asset value', what amount of discount would that be? For example, if Commonwealth Bank has a 'net current asset value' of $60 would I buy next day when the price crossed below $60? If the price continued lower to $50 do I still hold this stock at a "discount"?
> 
> GFC was an example where great companies were at discount prices but was anyone to know how much discount there was to be? No.




Ben Grahams value investing formula is not designed to help you pick bottoms in the market, Its designed to help you avoid substantial permanent loss, and provide you with a return that over time is better than the market average while also being low risk.

If you look at Warren Buffet who says he is 85% Ben Graham / 15% Phil Fisher, he spends his time finding above average companies based on quality metrics, he then uses Ben grahams Valuation principles to make sure doesn't over pay for the company, and hence is able to get high returns on the money he allocates into the investment.


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## luutzu (10 June 2014)

Wysiwyg said:


> If I were to buy a 'business trading at a discount to net current asset value', what amount of discount would that be? For example, if Commonwealth Bank has a 'net current asset value' of $60 would I buy next day when the price crossed below $60? If the price continued lower to $50 do I still hold this stock at a "discount"?
> 
> GFC was an example where great companies were at discount prices but was anyone to know how much discount there was to be? No.




I'm pretty sure you will always find a good bank to always have a negative net working capital (net current assets. ie. Current Assets minus Current Liabilities). I haven't look at any banks so i could be wrong here, but since NWC is found by subtracting current liabilities from current assets, and deposits or deposits at bank are, i'm pretty sure, considered liabilities... a good bank ought to have a lot of that kind of liabilities.

But more to the point, i don't think people ought to make decisions based on one or two single formula. In recommending a stock selling below its NWC, Graham was referring to industrial, utilities or railroad kind of enterprises (see Graham and Meredith - interpretation of financial statements).

Since in these heavy industries, if, and assuming its debt level or at or below its equity... if a stock is selling at or below the net current assets, chances are it is selling at below its book value. That is, you could buy it at the assets it currently have at the banks or due to it within a year, and get all the other assets for free.

If you could find that kind of opportunities, chances are you're going to do OK.

And if the company isn't going to roll over and would actually earn money as a business would, it's going to be more than OK for the investor to get in at below current, net, asset backing price.


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## luutzu (10 June 2014)

robusta said:


> Started a long reply then realised this link covers it all in my opinion
> 
> http://blog.rogermontgomery.com/should-a-value-investor-imitate-ben-graham/




Monty haven't read Graham properly. 

E.g. He, and a lot of people it seem, thinks that Graham's model of 'intrinsic value' is something like looking for NWC, assets, book value and ignore growth or future earnings or quality of earnings and business position etc.

but here:

"*We must recognize, however, that intrinsic value is an elusive concept*.
In general terms it is understood to be that value which is justified
by the facts, e.g., the assets, earnings, dividends, definite prospects,
as distinct, let us say, from market quotations established by artificial
manipulation or distorted by psychological excesses. *But it is a great
mistake to imagine that intrinsic value is as definite and as determinable
as is the market price.*

Some time ago intrinsic value (in the case of a
common stock) was thought to be about the same thing as “book value,”
i.e., it was equal to the net assets of the business, fairly priced. This view of intrinsic value was quite definite, but it proved almost worthless
as a practical matter because neither the average earnings nor
the average market price evinced any tendency to be governed by the
book value."   
--- Security Analysis, 2nd ed. pp. 22-23

*Intrinsic Value and Earning Power:*
Seems to imply that an average of previous earnings, or a trend indicating growth or decline... could be useful in predicting the future, but history has shown it has not... hence "...the concept of “earning
power,” expressed as a definite figure, and the derived concept of intrinsic
value, as something equally definite and ascertainable, cannot be safely
accepted as a general premise of security analysis."   - p. 23


That is, if you had somehow come to definitive figure as to a company's value, Graham: Hence any figure of
“real” or intrinsic value derived from this average must be characterized as equally accidental or artificial.

User of Intrinsic Value:
"The essential point is that security analysis does not
seek to determine exactly what is the intrinsic value of a given security.
It needs only to establish either that the value is adequate””e.g., to protect
a bond or to justify a stock purchase””or else that the value is considerably
higher or considerably lower than the market price. For such
purposes an indefinite and approximate measure of the intrinsic value
may be sufficient." p.24.


Flexibility of the Concept of Intrinsic Value:
"Our notion of the intrinsic value may be more or less distinct, depending
on the particular case. The degree of indistinctness may be expressed
by a very hypothetical “range of approximate value,” which would grow
wider as the uncertainty of the picture increased..." p.25

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All that from the first 25 pages, and i've skipped the other 22 pages.

I haven't read Graham closely but each time I thought i read something new from other authors, I now and then turn back to Graham and found he already knew about it.

So while Graham might have actually only buy stocks where he could see its current assets, pay no attention to brand or position etc... That's more due to his conservative nature and not from his not seeing the value of the intangibles.

I mean, even if that's what Graham did, from memory he actually did earn over 22% gains per year for his investors over his career... so whatever he's doing, it's not bad.


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