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Warren Buffett says the first rule of investing is not losing money, and the second rule of investing is not forgetting the first rule. His mentor and professor at Columbia University, Benjamin Graham, always recommended investing with a large margin of safety. Defensive investing may not yield the best returns in bull markets but there are no guarantees in the stock market. U.S. stock prices experienced enormous gains over the past century because United States was the winner of two World Wars and became the leader of the world economy. The spectacular performance of U.S. stocks is a result of these developments.

It is not certain that the U.S. will be the major beneficiary of social, political and economic developments in this century. That’s why investing with a margin of safety is more important now more than ever. Benjamin Graham describes the margin of safety concept in Intelligent Investor in detail. Here is what he prescribes for defensive investors:

The selection of common stocks for the portfolio of the defensive investor should be a relatively simple matter. Here we would suggest four rules to be followed:

1. There should be adequate though not excessive diversification. This might mean a minimum of ten different issues and a maximum of about thirty.

2. Each company selected should be large, prominent, and conservatively financed. Indefinite as these adjectives must be, their general sense is clear. Observations on this point are added at the end of the chapter.

3. Each company should have a long record of continuous dividend payments.

4. The investor should impose some limit on the price he will pay for an issue in relation to its average earnings over, say, the past seven years. We suggest that this limit be set at 25 times such average earnings, and not more than 20 times those of the last twelve-month period.

Company name

Symbol

Market cap

P/E ratio

Total debt/equity (%)

Div yield (%)

ACE Limited

ACE

20.80B

6.8

20

2.2

The Chubb Corporation

CB

17.42B

8.7

26

2.7

The Travelers Companies, Inc.

TRV

25.15B

8.8

26

2.5

Intel Corporation

INTC

110.09B

10.0

4

3.7

Northrop Grumman Corporation

NOC

19.80B

10.1

36

2.9

ConocoPhillips

COP

110.48B

10.2

34

3.6

Raytheon Company

RTN

18.11B

10.5

37

3.0

Microsoft Corporation

MSFT

212.26B

10.7

13

2.6

AFLAC Incorporated

AFL

25.20B

10.8

27

2.4

General Dynamics Corporation

GD

28.36B

11.2

24

2.6

Magna International Inc. (NYSE:USA)

MGA

12.05B

11.8

1

2.0

Johnson & Johnson

JNJ

161.32B

12.3

30

3.8

Exxon Mobil Corporation

XOM

409.38B

13.3

10

2.2

Marathon Oil Corporation

MRO

36.21B

14.1

33

2.1

Analog Devices, Inc.

ADI

11.40B

14.5

13

2.4

Bristol Myers Squibb Co.

BMY

44.84B

14.7

35

5.3

Applied Materials, Inc.

AMAT

19.90B

14.9

3

2.2

Becton, Dickinson and Co.

BDX

17.29B

15.6

31

2.1

Carnival Corporation

CCL

31.04B

15.9

41

2.6

3M Company

MMM

64.67B

16.1

35

2.5

Staples, Inc.

SPLS

14.22B

16.2

37

2.1

Tyco International Ltd.

TYC

21.01B

16.5

30

2.3

The Procter & Gamble Company

PG

171.02B

16.6

49

3.2

United Technologies Corporation

UTX

74.48B

17.1

48

2.2

EnCana Corporation (USA)

ECA

25.24B

17.1

44

2.5

BlackRock, Inc.

BLK

35.56B

17.6

18

3.1

Illinois Tool Works Inc.

ITW

27.13B

18.0

30

2.6

VF Corporation

VFC

10.18B

18.1

25

2.7

The Allstate Corporation

ALL

16.70B

18.4

31

2.7

Eaton Corporation

ETN

17.90B

19.3

47

2.7

The above list is composed of stocks with at least $10 Billion in market value, a maximum PE ratio of 20 and a minimum dividend yield of 2%. These companies also have a maximum total debt/equity ratio of 50%. The data is sourced from Google Finance. Benjamin Graham’s student Warren Buffett has COP, XOM, JNJ, and PG in his portfolio. George Soros has TRV, NOC, and MSFT in his portfolio. In fact, Microsoft was owned by 161 hedge funds at the end of last year. Barry Rosenstein’s Jana Partners, David Einhorn’s Greenlight Capital, Craig Effron’s Scoggin Capital, and Brevan Howard are some other hedge funds bullish about Microsoft.

Leon Cooperman had MMM in his portfolio at the end of December. John Griffin’s Blue Ridge, John Burbank’s Passport Capital, Lee Ainslie’s Maverick, and Andreas Halvorsen’s Viking Global are extremely bullish about Blackrock.



Disclosure: I am long MSFT.

Source: 30 Benjamin Graham Stocks for Defensive Investors