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Warren Buffett says the first rule of investing is not losing money, 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. US stock prices experienced enormous gains over the past century because the United States was the winner of two World Wars and became the leader of the world economy. The spectacular performance of US 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 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

Ticker

PE Ratio

Dividend Growth Rate

Debt/Capital Ratio

LUKOIL

OTCPK:LUKOY

7

8.34%

15.25%

CHINA PETRO & CHEMICAL

SNP

8.1

36.74%

0.00%

TOTAL S A

TOT

9.7

12.45%

30.20%

CONOCOPHILLIPS

COP

10.5

12.89%

24.98%

E N I SPA

E

10.7

4.99%

32.83%

CHEVRON CORP NEW

CVX

11.4

9.86%

8.88%

PETROCHINA CO LTD

PTR

12.9

3.97%

19.57%

STATOIL A S A

STO

13.4

17.47%

27.26%

EXXON MOBIL CORP

XOM

13.5

6.58%

7.62%

C N O O C LTD

CEO

13.6

33.24%

12.72%

CHESAPEAKE ENERGY CORP

CHK

13.6

8.45%

41.73%

MARATHON OIL CORP

MRO

14.5

8.67%

22.41%

NOBLE CORP BAAR

NE

15.1

48.91%

27.16%

APACHE CORP

APA

15.2

8.45%

22.14%

E N S C O PLC

ESV

15.3

69.52%

3.91%

CIMAREX ENERGY CO

XEC

17.1

20.11%

9.78%

ENCANA CORP

ECA

17.1

21.67%

26.14%

DEVON ENERGY CORP

DVN

17.3

8.61%

20.37%

MURPHY OIL CORP

MUR

17.6

19.57%

9.08%

WORLD FUEL SERVICES

INT

17.7

14.87%

3.54%

OCCIDENTAL PETROLEUM

OXY

18.4

20.64%

12.45%

The above list is composed of stocks with at least $2.6 Billion in market value, a maximum PE ratio of 20 and a minimum dividend growth rate of 4%. These companies also have a maximum total debt/equity ratio of 50%. The data is sourced from Fidelity. Benjamin Graham’s student Warren Buffett has COP and XOM in his portfolio. Steve Cohen and Bill Miller also own COP in their portfolios. T. Boone Pickens had CHK, NE, DVN, MUR, and OXY at the end of December. Carl Icahn is also invested heavily in CHK. Jim Simons had small amounts of TOT and PTR at the end of 2010.

Julian Robertson and Jim Rogers are among the prominent hedge fund managers who are worried about US dollar inflation. By investing in these relatively conservative stocks investors will protect themselves against possible inflation. They can also benefit from demand driven increases in energy prices.

Source: 21 Benjamin Graham Stocks for Defensive Energy Investors