Benjamin Graham's 10 Criteria for Stock Selection

by: New Low Observer
A reader asked, "On Friday May 21, 2010 post, you mentioned 10 criteria that Ben Graham used for investing. How do I find them?" You can find Graham's criteria from a research paper titled "A Test of Ben Graham's Stock Selection Criteria".

Here are the 10 criteria:

  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.

The intelligent investor: the classic text on value investing  [Book]How well do these criterion work? I have yet to test this method myself, so I can only reference them to someone who has. This article highlight some of the findings. We urge anyone who is not familiar with the Ben Graham approach to value investing to pick up these two books, The Intelligent Investor and Security Analysis. We will attempt to use some of these criteria and apply them to our watch list.

  • Klerck WG and Maritz AC, 1997, "A test of Graham's stock selection criteria on industrial shares traded on the JSE," Investment Analysts Journal, 45:25-33.

  • Graham M and Uliana E, 2001, "Evidence of a Value-Growth Phenomenon on the Johannesburg Stock Exchange," Investment Analysts Journal, 53:7-18.

Disclosure: No positions