Still relevant! It's amazing, after so many years. No wonder people call Graham "Father of Security Analysis". A brief philosophy is categorized in following paragraphs.
Graham’s Defensive Seven Investment Criteria
Graham discussed seven historic investment criteria. They vary from a minimum size criteria to a price to assets ratio criteria.
The first is an adequate size of the enterprise: According to Graham the size of the firm is an indirect measure of safety. A smaller company is generally subject to wider fluctuations in earnings. In 1970 Graham recommended that an industrial company should have at least $100 million of annual sales, and a public utility company should have no less than $50 million in total assets. Adjusted for inflation, the numbers in 2000 would work out to approximately $465 million and $232 million respectively. Financial firms are not considered.
The next is a sufficiently strong financial condition. A stock should have a current ratio of at least two and long-term debt should not exceed working capital. For utilities, the debt should not exceed twice the stock equity at book value. This should act as a strong buffer against the possibility of bankruptcy or default.
Then is an earnings stability criteria. The company should not have reported a loss over the past 10 years. Companies that maintain at least some level of earnings are, on the whole, more stable.
There is a dividend record criteria. Company should have a history of paying dividends on its common stock for at least the past 20 years. This should provide some assurance that future dividends are likely to be paid.
Graham discussed seven historic investment criteria. They vary from a minimum size criteria to a price to assets ratio criteria.
The first is an adequate size of the enterprise: According to Graham the size of the firm is an indirect measure of safety. A smaller company is generally subject to wider fluctuations in earnings. In 1970 Graham recommended that an industrial company should have at least $100 million of annual sales, and a public utility company should have no less than $50 million in total assets. Adjusted for inflation, the numbers in 2000 would work out to approximately $465 million and $232 million respectively. Financial firms are not considered.
The next is a sufficiently strong financial condition. A stock should have a current ratio of at least two and long-term debt should not exceed working capital. For utilities, the debt should not exceed twice the stock equity at book value. This should act as a strong buffer against the possibility of bankruptcy or default.
Then is an earnings stability criteria. The company should not have reported a loss over the past 10 years. Companies that maintain at least some level of earnings are, on the whole, more stable.
There is a dividend record criteria. Company should have a history of paying dividends on its common stock for at least the past 20 years. This should provide some assurance that future dividends are likely to be paid.
Related to the dividend criteria is an earnings growth criteria. To help ensure a company's
profits keep pace with inflation, net income should have increased by one-third or greater on a
per-share basis over course of the past 10 years using three-year averages at the beginning and
end.
There is also a price to earnings ratio criteria. For inclusion into a conservative buy and hold portfolio, the current price of a stock should not exceed fifteen times its average earnings for the past three years. This acts as a safeguard against overpaying for a security.
The last criteria is the Ratio of Price to Assets. According to this criteria current price should not be more than 1 1/2 times the book value last reported. However, a multiplier of earnings below 15 could justify a correspondingly higher multiplier of assets. As a rule of thumb the product of the multiplier times the ratio of price to book value should not exceed 22.5 (this corresponds to 15 times earnings and 1 1/2 times book value. It would admit an issue selling at only 9 times earnings and 2.5 times asset value, etc.)
There is also a price to earnings ratio criteria. For inclusion into a conservative buy and hold portfolio, the current price of a stock should not exceed fifteen times its average earnings for the past three years. This acts as a safeguard against overpaying for a security.
The last criteria is the Ratio of Price to Assets. According to this criteria current price should not be more than 1 1/2 times the book value last reported. However, a multiplier of earnings below 15 could justify a correspondingly higher multiplier of assets. As a rule of thumb the product of the multiplier times the ratio of price to book value should not exceed 22.5 (this corresponds to 15 times earnings and 1 1/2 times book value. It would admit an issue selling at only 9 times earnings and 2.5 times asset value, etc.)
