Seeking Alpha

New Low Observer's  Instablog

New Low Observer
Send Message
As a contributor to the New Low Observer (http://www.newlowobserver.com/about-this-site), we intend to give new insights on a low risk approach to trading in dividend paying stocks for tax deferred accounts. The New Low Observer (http://www.newlowobserver.com/about-this-site) is not intended for... More
My blog:
New Low Observer
  • Graham Ratio And Application 0 comments
    Aug 29, 2014 3:06 PM | about stocks: SRCE, ABM, ANAT, AMAT, ADM, AROW, BMO, CLX, COP, GS, HRC, LM, JCI, MATW, MCY, TDS, WBA, UNM

    The core of value investing is to obtain an investment for less than its worth. Professional investors will typically focus on the price to earnings (P/E) ratio which compares the current share price with its per share earnings. Although this is a good gauge, more than one ratio should be considered when assessing an investment. Students of value investing should also be familiar with price to book (P/B) ratio. This ratio (P/B) compares the current share price to the current shareholder equity.

    In the book The Intelligent Investor, Benjamin Graham highlights a key concept which combined the two ratios [P/E and P/B] as a gauge on the valuation of a company. These combined ratios are known as the Graham ratio. The computation is elementary, simply multiply the P/E ratio with the P/B ratio. If the product is less than 22.5, the company may be of good value. This thesis is highlighted in Chapter 14 - Stock Selection for the Defensive Investor of The Intelligent Investor. We find this concept to be so compelling that we've decided to back test this ratio against our watch lists from 2012.

    We started with our U.S. Dividend Watch Lists from May 11, 2012 through August 24, 2012 and compared the share price after two years. Because many companies appeared on our list multiple times, we selected only the instances with the least amount of return. We then split the list into two sections, one with companies that meet the Graham ratio and others that fail. We believe the results are distinct and worth reviewing.

    Each list contains 31 companies. The list of companies meeting the Graham ratio criteria of less than 22.5 had an average return of +45%. The list of companies with a Graham ratio higher than 22.5 had an average return of +32%. As a result, by simply applying the Graham ratio criteria to our list, we were able to enhance investment returns by +13%. The results can be seen in the following link.

    Disclosure: The author is long WAG, UNM, AMAT, ABM, MCY.

    Stocks: SRCE, ABM, ANAT, AMAT, ADM, AROW, BMO, CLX, COP, GS, HRC, LM, JCI, MATW, MCY, TDS, WBA, UNM
Back To New Low Observer's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (0)
Track new comments
Be the first to comment
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.