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Screen with Ben Graham's Lost Magic Formula in 1976

In July 2007 our columnist Lonnie J Rush wrote an excellent article Benjamin Graham’s Lost Magic Formula in 1976? Lonnie wrote that in the interviews Ben Graham graciously did just before he died September 21, 1976:

While reading these interviews he did between age 79 and 82, I got the feeling that Graham was enthusiastic as he described a new mechanical formula he had nearly finished testing. He believed his formula was the simplest way for both seasoned analysts and layman investors to find undervalued stocks and outperform the Dow (the performance metric used during his time).

His formula went through two iterations. He introduced the first formula at age 79 and concluded from his results that one would have performed quite well from 1961-1976 by buying stocks with the lowest values of these three criteria:

1. A low multiple (e.g.,10) of the preceding year’s earnings;

2. A price equal to half the previous market high (“to indicate that there has been considerable shrinkage”);

3. Net Asset Value. (I presume this is the lowest price relative to book value)

In his next interview published in Medical Economics, September 20, 1976 titled “The Simplest Way to Select Bargain Stocks” Graham, then 82, proposed a simpler, more refined formula that consisted of:

1. PE Ratio of 7x-10x or less (Based on 2x current AAA bond rates);

2. Equity/Asset Ratio of .5 or more (e.g. Debt/Equity less than 1).

Graham back tested the period from 1926-1976 with his refined formula and concluded that such a program would have earned 15% or more, not including dividends, and would have beaten the Dow by twice as much. He was so excited by the study results that he contemplated including them in the 5th edition of Security Analysis.

We have created a Ben Graham Lost Formula Screener with our All-In-One Screener. You can go here to check it out. In this screener we have limited market cap to at least $1 billion. But you can easily unselect it to screen for any size of companies you like. As of today, this screener 9 stocks. Among these 9 stocks, 5 are oil companies. They are Chevron Corp (NYSE:CVX), HollyFrontier Corp (NYSE:HFC), TC Pipelines LP (NYSE:TCP), Oiltanking Partners LP (OILT), C&J Energy Services Inc (CJES).

Again try out Ben Graham Lost Formula Screener here.

Rating: 2.1/5 (24 votes)



CarolPeaches - 6 years ago    Report SPAM

These stocks have already run up a great deal. When did this scan provide a buy signal?

TFC premium member - 5 years ago

In addition Graham stipulated the following:

> Minimum of a 25 stock portfolio

> Holding period of 2.5yrs max or a 50% rise in price which ever comes first

> 5yr workout period

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