Want to Invest like Ben Graham? Read On


As the father of value investing, Benjamin Graham brought a new school of thought to the investing world. This new school of thought called value investing brought Ben Graham to the Pinnacle of the investing world and brought him legions of followers. Many investors Ben Graham directly influenced are top hedge fund managers and billionaires today and this includes Warren Buffet, Walter J Schloss, Irving Khan, David Dodd and Seth Klarman to name a few.

warren buffet on Ben Graham

With value investing, Ben Graham revolutionised the concept of investing and brought discipline to the speculative nature of Wall Street. The Value Investing paradigm has led to many people gaining extra ordinary returns from the stock market. Most of this work on Value Investing can be found in Grahams two books Security Analysis and Intelligent Investor. Warren Buffet describes The Intelligent Investor as “the best book about investing ever written.”
In short, the 11 rules for Ben Graham style value investing are as follows:

  1. Market Capitalisation > $100 million
  2. PE > 5 and < 15                                  (PE = Price to earnings Ratio)
  3. PEG < 1                                               (PEG = Price/Earnings to growth)
  4. Price-to-sales > 0.1 and < 4
  5. 5 Year EPS Growth > 10%                (EPS = Earnings Per Share)
  6. Dividend Yield > 2% and <7%
  7. Return On Equity  > 5%
  8. Current Ratio > 1
  9. Net Profit Margin >5%
  10. Lowest PE over last 12 months > 5
  11. Net Margin over last 5 years > 3%
Key:
  • > Greater Than
  • < Less than

Apart from the above, Ben Graham taught his investors to ask two important investing questions:

  1. On What Terms ? -The terms of any contract or investment you enter into are important.  What if you were offered a new car for £100 but the terms stated that you couldn’t drive it, lease it, or resell the parts?  What if you were promised a 20,000% return on your money but you wouldn’t get the payoff for 200 years?  With the first case, the price for the car is a bargain but the fact you can’t drive or liquidate the car means it has no value to you so even $1 is overpriced.  In the second scenario, 200 years from now, you will be dead and thus it would be ignorant of you to enter into an agreement.
  2. At What Price ?  -The price you pay for an investment is one of the most important factor in the ultimate return you earn on your money.  Imagine you are bidding on a property that generates £10,000 in profit each year.  If you pay £100,000, your return is 10%.  If you pay £500,00, your return is 20%.  The same property.  The same tenants.  The same county,and address.  Yet, the lower price will result in much faster wealth accumulation and a much higher standard of living for you and your family.  The only difference is the price you paid!

 

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