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Value Investing like Benjamin Graham

Benjamin Graham is the father of value investing. Why do we call him that? Well, he is the mentor behind the greatest investor of all time, Warren Buffet. If you have read “The Intelligent Investor“, you would realize that Mr. Graham has some fairly strict criteria when choosing “value” stocks. The great thing though about his strategy is that it’s fairly easy to screen stocks to find Graham’ish stocks.

Graham Criteria

This how The Stingy Investor approximates the Graham formula as:

TABLE 2: GRAHAM-INSPIRED RULES
1. P/E Ratio less than 15
2. P/Book Ratio less than 1.5
3. Book Value more than 0.01
4. Current Ratio more than 2
5. Annual EPS Growth (5-Yr Avg) more than 3%
6. 5-Year Dividend Growth more than 0%
7. 5-Year P/E Low more than 0.01
8. 1-Year Revenue more than $400 Million

In addition to the above, Graham recommends to sell the stock after 1 year or when it appreciates 50%.  Whichever comes first.

Past track record

The Stingy Investor has been using their Graham strategy for years with great results. Here are their returns since 2000.

TABLE 1: PERFORMANCE OF PAST GRAHAM STOCKS
Year*GrahamS&P500+/-
2000 – 200120.4%-22.2%42.6
2001 – 200228.2%-15.1%43.3
2002 – 200356.8%16.5%40.3
2003 – 200432.2%9.4%22.8
2004 – 200546.6%12.8%33.8
2005 – 2006-3.8%10.7%-14.5
2006 – 200734.4%16.1%18.3
Overall506.6%22.0%
* Indicates the time between articles and not calendar years.

How do you screen for Graham stocks?

In my opinion, the best stock screener on the web is the deluxe MSN Stock Screener. Unfortunately, it only covers the some of the US market at the current time, but does a great job with the markets that they do cover.

To access the screener, a plugin to your browser may need to be installed.

  • Simply go to MSN Stock Screener with Internet Explorer.
  • Click on the link on the bottom right “Deluxe Stock Screener
  • You will be prompted to install an ActiveX plugin for your browser which is required.

Use the criteria above and you’ll get the results below. Note that the MSN stock screener works best with Internet Explorer.

Current Picks

During extreme bull markets, top notch Graham picks are few and far between. However, during bear markets like these days, the results are plentiful.

Here are some of the results that I came up with on the NYSE (oct 14).  Click on the image to enlarge.

Since we now have a record of the stock price, perhaps i’ll do a semi-annual checkup to see how these stocks are performing.

As of Oct 14, 2008, we have:

  1. Textron Inc (TXT): $22.47
  2. Carlisle Companies Inc (CSL): $24.70
  3. Timken Co (TKR): $23.17
  4. Movado Group Inc (MOV): $17.50
  5. HB Fuller Co (FUL): $16.36
  6. Cascade Corp (CAE): $38.19

Conclusions

As always, this article is not meant to give you stock picks but to give you a primer on how value investing works. Even though the stock screener spits out various “value” stocks, due diligence is required as to “why” they are being sold off as aggressively as they are. Provided the fundamentals of the company hasn’t changed, then it could possibly be a winner!

Any value investors out there?

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FT About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 21 comments… add one }
  • David V October 20, 2008, 10:08 am

    My concern with these picks (not specifically) is that you’re buying in the US. If you think that the CND dollar has been beaten down by resource sales, and you think that the price of oil and natural gas is likely to increase by 20% in the next year, that likely means the CND dollar will increase and may be close to parity.

    Also: For those trying to view the website with Firefox, you don’t get the option for Deluxe Screener. So you really do need IE. You’d think that MSN is owned by Microsoft! :-)

    This will obviously have a huge impact on the actual results of these stocks.

  • Dividend Growth Investor October 20, 2008, 10:26 am

    FT,

    Thanks for posting these picks. Two nice value investing sites are http://www.thediv-net.com and http://www.fatpitchfinancials.com

    My only concerns for the screen above is that the minimum market cap has to be 400million, which is a lot.

    Value Investing is not confined to only buying undervalued stocks, it also involves arbitrage, special situations, control situations etc.

    This is another “classic” Graham screen, where you find stocks which sell for less than the amount of their current assets minus total liabilities. In other words if you were to purchase these businesses at the market price you are essentially getting a bargain. If you liquidate the business you are almost 100% guaranteed to make a profit.
    http://www.grahaminvestor.com/screens/grahams_result

  • The Financial Blogger October 20, 2008, 12:28 pm

    Thx for this post FT!
    I’ll definitely try the stock screener and see how it goes.
    Any stats on how this method does so far in 2008?
    Still showing impressive results in 2000,01 and 02!

  • Sam L October 20, 2008, 2:04 pm

    Great post, I really enjoyed going through the method.

  • MultifolDream$ October 20, 2008, 2:42 pm

    Very good post with how to start!
    Thanks

  • Ray October 20, 2008, 8:27 pm

    Thanks for the post! Great stock screener too you recommended. A nice succinct refresher of value investing.

  • JN October 20, 2008, 10:02 pm

    David,
    Copy the link from IE into firefox ;-)

    http://moneycentral.msn.com/investor/controls/finderpro.asp

  • Donny Gamble October 21, 2008, 12:35 am

    Benjamin Graham is the greatest investor that ever lived. He taught Warren Buffett most of what he knows and defied the laws of ethics when he creating a system that could be duplicated with precise precision to create millions

  • Market Flavor October 21, 2008, 2:05 am

    That’s a great stock screen tool that has helped me out a ton. Now that we are in this bear market, there are some great values out there!

  • Big T October 21, 2008, 6:47 pm

    Why does this provide different companies every day that this is run?
    I ran it yesterday and came up with different results today.

  • FT FrugalTrader October 21, 2008, 7:06 pm

    Big T, this would be most likely due to fluctuating stock prices which can push the P/E ratio over the prescribed limit.

  • Ed Rempel October 22, 2008, 1:08 am

    HI FT,

    Great article. Most of the best investors of all time use Graham’s style, and yet there has been no major increase in investors using his style. Check out Warren Buffett’s famous and amazing article about the “Super-investors of Graham-and-Doddsville”: http://www.tilsonfunds.com/superinvestors.html in which he chats about a few guys he bumped into that all had returns far higher than their indexes. Since that article, the few of those investors still active have all continued to beat their indexes by wide margins over long periods.

    It’s amazing that in the last 80 years, there are essentially no investors with Graham’s wisdom. Could it be that all the tons if info available to investors today is a huge disadvantage?

    I read Graham’s first book “Security Analysis” (okay, I listened to the book on CD) and was shocked to find that he wrote it in 1934 – just after an 83% market crash. That is when he was recommending stocks for the long run!

    Ed

  • Gates VP October 22, 2008, 5:58 pm

    Ed: Could it be that all the tons if info available to investors today is a huge disadvantage?

    I’m reading a book called Super-Crunchers right now. The book talks extensively about people who crunch lots of numbers and follow the data. But he also talks about the value of “intuition” in knowing what numbers to pull from within the sea of data.

    As a guy who works at a company pushing 2 terabytes of data / week, I can tell you that more data is useless if you don’t know what you’re looking for. It’s worse when you’re working with a growing system b/c you have to evaluate things like data quality and data timeliness.

    I wouldn’t say that having tons of data is really a disadvantage. If anything the sheer accessibility opens the doors for people who were previously uncompetitive b/c of “hard-to-find” data.

    At the end of the day, it still comes down to knowing how to interpret data and pick out facts from Red Herrings. Whether across 2 pages or 20.

  • MyInvestorsPlace October 28, 2008, 3:31 pm

    Value Investing is referred as successful means of investment. Decision making capability will enable us to taste the success as Benjamin did.. Provided illustration helps a lot in investment initiative.

  • Brad Castro October 30, 2008, 5:39 pm

    Good post.

    True, Graham was Warren Buffett’s teacher and mentor. But Buffett’s value investing style developed into something markedly different than Graham’s. His biggest evolution has been his willingness to pay a fair price for a truly superior company. I think it was Buffett who said something to the effect that it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

    To me, value investing is the smartest, safest, and, in the end, most lucrative approach to investing in the stock market. But it’s also important to realize that there will never be a single definition of value investing. The great value investors–Graham, Buffett, John Neff, Wilber Ross, and even Bill Miller–all have/had their own unique approach to value investing.

    Likewise, it’s also up to individual value investors to discover their own approach to the subject. The idea is to acquire valuable assets for less than their true value. How you go about that has to mesh with your own analytical abilities and psychological make up. I actually use certain option trading techniques as a way to be a better value investor.

  • stock investing November 2, 2008, 3:39 pm

    Bill Miller has just been killed lately, a lot of those big guys still holding are losing money.

  • cfe November 23, 2008, 10:35 am

    Isn’t the P/E pretty high for Graham? Unless i am mistaken i thought Graham’s P/E threshold was around 8. Still there are plenty of stocks now trading in or around 8. Toyota, Honda, some of the big Can banks are a little more around 9. Anyways, good post and if you can make it through it The Intelligent Investor is a great book.

  • Blogging Banks July 17, 2009, 7:19 am

    I wonder how this screen performed in 2008 and 2009 amidst the worst bear market in decades?

  • Mike Graf November 18, 2010, 4:35 pm

    Timing is everything, and yet something we cant do. Of the 5 stocks you listed above here are the results:
    CAE -77%
    FUL +9.9%
    MOV -24.5%
    TKR -6.57%
    CSL +27%
    Equal weighted average = -14%

    Versus VTI = +24%

    Indexing FTW.

  • Steven @ Wealthy Education April 24, 2016, 4:48 am

    Interesting article on Ben Graham’s investing approach. I was just wondering if these criteria work when there is a bear market.

  • Gav November 18, 2016, 11:41 am

    Nice article!

    If only people would stick to what’s been tried and tested by the two greatest investors in the world, Graham and Buffet, rather than try every other get rich quick scheme in the world, we’d have a much more stable economy and a richer world.

    I’m about to start reading Tap Dancing to Work. Very excited.

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