I found this idea in Tweedy Browne’s What Has Worked in Investing. And after a little more research I have included it in my Value Investing Series. In a “Test of Ben Graham’s Stock selection Criteria,” Henry Oppenheimer studied whether or not a set of Ben Graham’s investing criteria actually worked. Toward the end of Graham’s life he espoused a different, although related criteria to what he espoused in his master works Security Analysis and the Intelligent Investor. He laid out 10 criteria which he said,”seemed to be practically a foolproof way of getting results out of common stock investments with a minimum of work.” It was these 10 criteria that Oppenheimer based his  study on. The was a new Graham formula.

For followers of this site you will understand why this is doubly interesting to me.

First, it follows a value based approach to investing.

Second, it fits into the 80/20 style of investing.

Before I get to the interesting results, here are the 10 criteria that make up the new Ben Graham Formula.

1. An earnings-to-price yield at least twice the AAA bond yield.
2. A price-earnings ratio less than 40 percent of the highest price-earnings ratio the stock had over the past five years.
3. A dividend yield of at least two-thirds the AAA bond yield.
4. Stock price below two-thirds of tangible book value per share.
5. Stock price two-thirds “net current asset value.”
6. Total debt less than book value.
7. Current ratio greater than two.
8. Total debt less than twice “net current asset value.”
9. Earnings growth of prior ten years at least 7 percent on an annual basis.
10. Stability of growth of earnings in that no more than two declines of 5 percent or more in the prior 10 years.

According to the Gurufocus article The Investment Methods of Benjamin Graham. The first five criteria in the new Graham formula were related to reward and the second five to mitigating risk of loss of capital. One needs to select a stock with at least one from the reward and one from the risk mitigation section. Very few if any stocks will pass all 10 critieria.

Oppenheimer discovered that two of the Ben Graham criteria, number 1 and number 6, produced exceptional returns.

Oppenheimer found that the mean return during the time studied (1974-1981) was 38% vs. the S & P 500’s 14%. A remarkable out-performance.  He also found that using criteria 3 and 6 would have achieved mean annual return of  26%.

How do you use this criteria? Old Ben said to hold the stock for two years or 50% appreciation, whichever came first.

I wonder if this study has been updated or researched for a longer period of time. If it is still true, why would anyone try anything else. This may be the highest substantiated automatic formula I have ever heard of, and yet it gets strangely little coverage from Tweedy Browne.

3 Responses to “Ben Graham’s Stock Selection Criteria – Value Investing Series”

1. Ethan Thompson
   September 9th, 2010 @ 9:51 am

   investing could earn you lots of money if you properly invest your money,.`

2. John
   December 17th, 2011 @ 9:23 pm

   Yes it still works. It works very well. All I do is this, spin-offs, and sometimes merger arb with leverage. I have stopped telling people what my returns have been over the last 10 years because inevitably I end up being called a liar.

   Why Tweedy Browne barely mentions it, I think they gave it two paragraphs, I don’t know. It never ceases to amaze me how people have to make the simple into something complicated.

3. chroma
   December 19th, 2011 @ 8:37 am

   John,

   Thanks for coming by. Do you want to share your secrets?

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