As discussed on other pages in this section, the value investing rules of Ben Graham were the basis of stock analysis. As time passed, his thoughts, techniques and writings became legend.
In reality, much of his work would be difficult to apply to the modern stock market world. The average stock exchange index would have very few companies which fit his criteria for investment. Those that do would probably not be appealing to many new investors as they are possibly on the verge of bankruptcy.
His system was well validated in the United States market and so does have the benefit of proof backing it up. However, the results are now very dated. His most successful writing was 'The Intelligent Investor' which was first published in 1949. The book is well wort a read, even if you have no intention of using the ideas. It is worth a read because a) every other investor on earth has read it, so why fall behind? and b) it contains some ideas which every investor should take on board. As discussed on other pages in this section, the value investing rules of Ben Graham were the basis of stock analysis. As time passed, his thoughts, techniques and writings became legend.
In reality, much of his work would be difficult to apply to the modern stock market world. The average stock exchange index would have very few companies which fit his criteria for investment. Those that do would probably not be appealing to many new investors as they are possibly on the verge of bankruptcy.
His system was well validated in the United States market and so does have the benefit of proof backing it up. However, the results are now very dated. His most successful writing was 'The Intelligent Investor' which was first published in 1949. The book is well wort a read, even if you have no intention of using the ideas. It is worth a read because a) every other investor on earth has read it, so why fall behind? and b) it contains some ideas which every investor should take on board.
In 1977, the value investing rules of Ben Graham which he used through the later part of his life were published posthumously. These will probably be of more use to the modern day investor.
These rules included:
The Adjusted Net Assets Rule
Buy if the total market cap of a company is two-thirds or less of it's net quick assets. This means net assets minus stock - as it may be unsaleable - but also deducting from the assets any assets that are not cash or debtors. This means that property, goodwill, plant and equipment have no value. As you might be thinking, this rule is so harsh that almost any modern quoted company could not qualify.
Sell when the market cap has reached 100% of the value as calculated above. If an investor manages this in the modern world, you can rest assured that you made an amazing 50%! Between 1945 and 1976, Graham tested this theory and it returned almost 20% compound return.
The Earnings Yield Rule
The earnings yield is the reciprocal of the price earnings ratio. His rule was that if a company's total debt does not exceed it's tangible net worth, it is right to invest if the earnings yield is at least double the yield on top quality bonds. Did you get all that? It should be remembered that a company should pass both of these tests!
The Dividend Yield Rule
The company's dividend yield must be at least two thirds of the high quality bond yield.
Ben Graham proposed that a company bought under the above rules should be sold if one or more of the following occured:
1) the share value rose by 50% or more
2) the dividend was passed and therefore the annual yield fell to 0%
3) if neither of the above had happened then after a time frame of two years - his thinking was that if the market had not spotted the underpriced value during a period of two years, it may never be spotted and thus the money could be more profitably applied elsewhere.
What Is Value Investing?
What Are The Value Investing Basics?
Problems With The Value Investing Approach
The Good And Bad Of A Value Investing Strategy
What Is Asset Stripping?
Value Investing With Warren Buffett
Value Versus Growth Investing