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- On March 13, 2017
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- Benjamin Graham, Futures Index Trading, IndexTrader Advanced, learn to trade, Stockmarket, Stockmarket for Beginners, trading, Trading Mentors
Do you want to learn how to invest – the Benjamin Graham way? You can now follow his strategy in a few easy steps:
- Current ratio greater than two.
- Dividend yield of at least two-thirds that if the AAA bond.
- Earnings growth of at least 7 percent a year, over the preceding ten years.
- Earnings-to-price yield of at least twice yield offered by the best AA bond.
- P/E ratio less than 40 per cent of the highest P/E ratio the stock had traded at over the past five years.
- Share price of less than two-thirds of book value per share.
- Stability of growth of earnings; no more than two annual falls of 5 per cent or more in profit in the preceding ten years.
- Total debt less than book value.
- Total debt less than twice net current asset value.
Benjamin Graham, who died in 1976 was known to those on Wall St. as the father of value investing. Cowriting (with David Dodd) the 1931 classic Security Analysis, the objective of Graham’s strategy was to identify unappreciated stocks and find undervalued stocks that meet certain criteria for quality and quantity. That is, stocks that are poised for stellar price appreciation.
Following up Security Analysis was The Intelligent Investor, published in 1949 which first set out the concept of value investing. That is, buying stocks that are trading at a low price relative to the company’s net worth per share (its value if it were to be sold off tomorrow). According to Graham, this is the stocks intrinsic value which he used to compare to the current market price to determine a share’s true value.
In terms of lasting greatness, Graham’s investment firm posted annualized returns of about 20% from 1936 to 1956, far outpacing the 12.2% average return for the broader market over that time. But the success of Graham’s approach goes far beyond even that lengthy period. Over the last decade and using the “Defensive Investor” criteria that Graham laid out in The Intelligent Investor, a share portfolio (using the Defensive criteria) would have returned 224.3% (13.3% annualized) vs. 43.0% (3.9% annualized) for the S&P 500.
Graham, who mentored other trading greats such as Warren Buffett described his criteria as ‘practically a foolproof way of getting good results out of common stock investments with a minimum of work’.