The methods of Ben Graham

[wayneL]

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.

Below is a brief overview of Benjamin Graham's Investing philosophy…

Graham argued that even with the best research, investors will never know all there is to know about a company. They also can't predict the negative surprises that often send individual stocks sharply lower.

Look for a "Margin of Safety"
One key concept taught by Graham and still referred to today by Warren Buffett, among others, is "Margin of Safety". The basic meaning of this term is that investors should only purchase a security when it is available at a discount to its underlying intrinsic value -- what the business would be worth if it were sold today. In order to do this, of course, the investor must be able to accurately estimate what the intrinsic value of any given company might be. Along those lines, Graham offered some guidelines as to how to calculate this intrinsic value.

The key point for investors to remember is that they should only invest in a company when its stock is trading below what the firm would sell for in the open market. Those investors who ignore valuation concerns and overpay for their investments are operating with zero margin of safety. Even if their underlying companies do well, these investors can still get burned.

Graham made his fortune by buying businesses that were so battered and neglected that they sold for less than the value of their working capital (calculated as current assets minus current liabilities). He developed a Net Current Asset Value (NCAV) model to determine if the company was worth its market price. The NCAV formula subtracts all liabilities, including short-term debt and preferred stock, from a company's current asset balance. Graham's contention was that by buying stocks that were trading below their NCAV, investors could manage to pay essentially nothing for a firm's fixed assets.

Opt for Big Companies with Strong Sales
According to Graham, larger firms pose much less risk. Graham's rationale was that small companies have far more trouble dealing with economic downturns, so it is best to invest in larger companies.

Graham was an active investor during the Great Depression, where he saw hundreds of once-thriving small firms go belly-up. Based on his observations, he concluded that companies with more diverse customer bases and greater revenues had a better chance of surviving any sort of economic downturn.

Choose Companies that are Paying Dividends
Graham was adamant about investing in companies that pay dividends. He believed that conservative investors should only consider companies that have paid a dividend every year for at least the last 20 years. He argued that dividends are a sign that a company is profitable (dividends are paid from profits, after all) and that they also offer investors a return even if the company's stock does not perform well.

Seek Out Companies That Are in Strong Financial Shape
Always mindful of liquidity, Graham looked for companies whose current assets exceeded the sum of their current and long-term debt. Companies with ample access to cash (liquidity) are generally not as risky as those with low cash balances and heavy debt loads..

Seek Companies with Sustainable Earnings Growth
Graham looked for companies with steady, rising earnings trends. He believed that steadily improving earnings would lead to improved share price performance.

Keep an Eye on Price Multiples
Graham sought companies with price/earnings ratios that were below their historical average. He also took a careful look at price/book values. In fact, he wouldn't purchase a stock unless it was trading for less than 1.2 times its book value (total assets minus total liabilities) per share. Example: A company with $1 billion in assets and $700 million in debt has a book value of $300 million. If the company has 10 million outstanding shares of stock, then its per-share book value is $30. Graham would not pay more than $36 per share (1.2 times the book value per share) for this particular stock.

 

[Tysonboss1]

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.

 

[wayneL]

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?

 

[noie]

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

 

[sinner]

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.

 

[noie]

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)

 

[sinner]

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.

 

[wayneL]

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

 

[noie]

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.

 

[robusta]

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

 

[noie]

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

 

[Tysonboss1]

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

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

 

[Intense_jono]

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

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

 

[Tysonboss1]

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.

 

[alphaman]

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.

 

[robusta]

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

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/

 

[Tysonboss1]

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

Well even better,

 

[Wysiwyg]

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.

 

[Wysiwyg]

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

 

[Value Collector]

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.