Benjamin Graham's strategy to pick a stock (Part 1)
Benjamin Graham himself did not escape the great depression in 1929, which led to the investment funds it manages customer be dragged along with other investors. Departure from where Benjamin Graham started laying the foundations of conservative investment philosophy and aims to protect the security of capital. The fact proves that Benjamin Graham only takes five
years to recoup its customers while the DJIA took 25 years to return to the level before the great depression occurred. Of course this makes Benjamin Graham's name and get more glowing tribute to his integrity as a fund manager. One of his students are even able to far exceed the track record is none other than Warren Buffett, who is the second richest man in the world as a result of the investment. Therefore, it certainly would be very interesting to try to implement the investment strategy of Benjamin Graham. Although to be able to accurately apply it takes time and considerable effort, but the basic concepts on how to do stock screening and valuation of Graham we can implement as it is quite simple.
years to recoup its customers while the DJIA took 25 years to return to the level before the great depression occurred. Of course this makes Benjamin Graham's name and get more glowing tribute to his integrity as a fund manager. One of his students are even able to far exceed the track record is none other than Warren Buffett, who is the second richest man in the world as a result of the investment. Therefore, it certainly would be very interesting to try to implement the investment strategy of Benjamin Graham. Although to be able to accurately apply it takes time and considerable effort, but the basic concepts on how to do stock screening and valuation of Graham we can implement as it is quite simple.
This paper will be split into two parts. The first part will discuss about the strategy for screening stocks that deserve to be our investment vehicle. The definition of screening is like a 'filter'. We will try to filter out stocks that meet the investment criteria of Benjamin Graham. Of course, screening aims to find stocks that have strong fundamental that our investment will not be speculative. Writing in the second part will discuss how to do a valuation of shares. If in the previous article has described how to determine the fair price of a la Buffett's stock, so this time we will try to do a valuation using the method of his teacher, the Benjamin Graham. The principles of Ben Graham's investment is poured on the second book is legendary, the Intelligent Investor and Security Analysis. Graham screening concept itself has been summarized very well by John P. Reese and Jack M. Forehand in his book: 'The Guru Investor'. Summary will be presented at the first part of this paper.
Benjamin Graham Strategies in Selecting Stocks
Sector.
Benjamin Graham personally do not invest in technology stocks. Therefore, our first criteria is as follows:Sector All shares unless the shares of technology ≥ Select
Sector.
Benjamin Graham personally do not invest in technology stocks. Therefore, our first criteria is as follows:Sector All shares unless the shares of technology ≥ Select
Technology stocks 15 → Remove
P / BV Ratio (Price to Book Ratio).
Another ratio used to compare the price of the stock with a fair market price is P / BV ratio. Benjamin Graham argues that the multiplication between the P / BV ratio with a P / E ratio should not exceed 22. Thus:
Another ratio used to compare the price of the stock with a fair market price is P / BV ratio. Benjamin Graham argues that the multiplication between the P / BV ratio with a P / E ratio should not exceed 22. Thus:
P / BV Ratio
P / BV x P / E ≤ 22 → Select
P / BV x P / E> 22 → Remove
Total D / E Ratio (Debt to Equity Ratio).
In general, the total corporate debt both short and long term may not exceed the value of its equity. For utility companies, telecommunications, and roads that need attention are the Long Term Debt to Equity Ratio is only because of the earning power. Then:
Total D / E Ratio (Debt to Equity Ratio).
In general, the total corporate debt both short and long term may not exceed the value of its equity. For utility companies, telecommunications, and roads that need attention are the Long Term Debt to Equity Ratio is only because of the earning power. Then:
Total D / E Ratio
D / E ratio ≤ 100% → Select
Utility companies, telecommunications, or highway LTD / E ≤ 100% → Select
D / E ratio> 100% → Remove
Utility companies, telecommunications, or highway LTD / E> 100% → Remove
Consistency of Dividend Payment.
Benjamin Graham liked companies that pay dividends continuously for 20 years regardless of the amount.
Benjamin Graham liked companies that pay dividends continuously for 20 years regardless of the amount.
Comments:
There is now very rare companies that pay dividends very consistent. The Company may not provide dividends but use the profits for expansion or its stock buyback. Therefore I personally do not make these criteria as a necessity.
There is now very rare companies that pay dividends very consistent. The Company may not provide dividends but use the profits for expansion or its stock buyback. Therefore I personally do not make these criteria as a necessity.
The nine criteria is Benjamin Graham's strategy to pick a stock. Of course for the next stage we also need to know the fair price of a stock. The way to find out is to do the valuation.
In the second part of this paper ((Benjamin Graham's strategy to pick a stock (Part 2)) will be presented how to Graham to do a valuation of shares. We will also try to conduct case studies on several stocks, both screening and valuation.
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