Buffett credits Graham with grounding him with a sound intellectual investment framework and describes him as the second most influential person in his life, after his own father.
In fact, Graham had such an overwhelming influence on his students that two of them, Warren Buffett and Irving Kahn, named their sons, Howard Graham Buffett and Thomas Graham Kahn, after him.
In his preface to Graham's book, "The Intelligent Investor," Buffett calls it "by far the best book about investing ever written."
Graham's Defensive-Grade Criteria:
Graham actually recommended three different grades of stocks, and the now-popular Graham Number actually covers only two of the seven criteria required by the first grade.
This highest grade of stocks is what Graham called the "defensive" grade. There are seven unique financial criteria that a stock has to meet before it can be used for defensive investment (the Graham Number covers only the last two):
Summarized from chapter 14 of "The Intelligent Investor" - Stock Selection for the Defensive Investor:A Few Defensive Grade Stocks:
1. Not less than $100 million of annual sales.
[Serenity note: This comes to $500 million today based on the difference in CPI/Inflation from 1973]
2. (A) Current assets should be at least twice current liabilities.
2. (B) Long-term debt should not exceed the net current assets.
3. Some earnings for the common stock in each of the past ten years.
4. Uninterrupted payments for at least the past 20 years.
5. A minimum increase of at least one-third in per-share earnings in the past ten years.
6. Current price should not be more than 15 times average earnings.
7. Current price should not be more than 1-1⁄2 times the book value.
As a rule of thumb we suggest that the product of the multiplier times the ratio of price to book value should not exceed 22.5.
Given below is a unique list of stocks meeting all of Graham's seven defensive criteria today, along with their values for each of the criteria.
*All figures except prices and percentages are in $Millions
|Company||Symbol||Annual sales||Current assets||Current liabilities||Long term debt||Earnings growth||Dividend record||Graham Number||Current price|
|Murphy Oil Corp||MUR||27,750.00||14,140.00||5,360.00||249.55||101.94%||100.00%||$63.45||$58.39|
|Baker Hughes Inc||BHI||19,830.00||24,850.00||9,100.00||3,850.00||101.76%||100.00%||$57.46||$44.65|
|Marathon Oil Corp||MRO||15,280.00||31,370.00||14,220.00||4,670.00||101.63%||100.00%||$36.53||$29.30|
|Molson Coors Brewing Co B||TAP||3,520.00||12,420.00||4,780.00||1,910.00||100.89%||100.00%||$59.32||$44.31|
|Helmerich & Payne Inc||HP||2,540.00||5,000.00||1,730.00||235.00||100.72%||100.00%||$54.87||$48.26|
The criteria are being checked against values adjusted for increases due to inflation for more accurate results.
For example, $500 million has been used as the minimum required sales figure instead of the $100 million recommended by Graham. This corresponds to a CPI growth of 5x since 1973.
Defensive stocks are also the only grade of Graham stocks in which the Graham Price is equal to the Graham Number.
The Graham Number is essentially the highest price recommended by Graham for defensive stocks. The recommended price for enterprising-grade and NCAV-grade stocks use different calculations and are much lower than the Graham Number.
The S&P Total Market Index includes all common equities listed on the New York Stock Exchange (including NYSE Arca), the NYSE Amex, the NASDAQ Global Select Market, the NASDAQ Global Market and the NASDAQ Capital Market.
The free comprehensive Benjamin Graham screener screens all 4,000 stocks in the S&P Total Market Index
— using 40 data points each — to show the complete list of stocks that meet all of Graham's three grades of selection criteria.
The screening system includes complete checks for defensive and enterprising stocks with inflation adjustments, as well as the usually omitted checks for recent net losses for NCAV or net-net stocks.
Disclaimer: The lists of stocks were arrived at by automated quantitative analysis and were not verified individually. Check for any recent changes in the data used before making an investment decision, especially for any recent stock splits.