Benjamin Graham
Defensive Value
Benjamin Graham pioneered the discipline of security analysis and value investing. His approach emphasizes buying stocks at a significant discount to their intrinsic value, providing a "margin of safety" that protects against downside risk. Graham focused on quantitative metrics like earnings stability, conservative balance sheets, and low price multiples to identify undervalued securities.
Valuation Method
Graham Number & NCAV
Uses the Graham Number formula: √(22.5 × EPS × Book Value Per Share). Also calculates Net Current Asset Value (NCAV) as a floor valuation: (Current Assets - Total Liabilities) / Shares Outstanding. The lower of the two provides a conservative intrinsic value estimate.
Checklist (9 Criteria)
| # | Criterion | Metric | Threshold | Data Source |
|---|---|---|---|---|
| 1 | Adequate Size | Annual Revenue | >= $100M (inflation-adjusted) | Income Statement: Total Revenue |
| 2 | Strong Financial Condition | Current Ratio | >= 2.0 | Balance Sheet: Current Assets / Current Liabilities |
| 3 | Conservative Debt | LT Debt vs. Net Current Assets | LT Debt <= Net Current Assets | Balance Sheet: Long-Term Debt, Current Assets, Current Liabilities |
| 4 | Earnings Stability | Positive EPS | Every year for past 10 years | Income Statement: EPS (diluted), 10-year history |
| 5 | Dividend Record | Uninterrupted Dividends | >= 15 consecutive years (relaxed from 20; XBRL data available since ~2009) | Cash Flow Statement: Dividends Paid |
| 6 | Earnings Growth | EPS Growth (3-yr avg) | >= 33% increase over 10 years | Income Statement: EPS, 10-year window |
| 7 | Moderate P/E | Price / 3-yr avg earnings | <= 15x | Market Price / avg(EPS last 3 years) |
| 8 | Moderate P/B | Price-to-Book Ratio | <= 1.5x | Market Price / (Total Equity / Shares Outstanding) |
| 9 | Combined Safety | P/E x P/B | <= 22.5 | Derived from criteria #7 and #8 |
Intrinsic Value Methods
Graham Number
sqrt(22.5 * EPS * Book Value per Share)The theoretical maximum price a defensive investor should pay. Derived from requiring both P/E <= 15 and P/B <= 1.5 simultaneously.
Net-Net (NCAV)
(Current Assets - Total Liabilities) / Shares OutstandingA more aggressive deep-value screen. Buy when stock price is below 67% of NCAV per share, ensuring a margin of safety even in liquidation.
Verdict Logic
BUY if >= 7/9 criteria pass AND current price < Graham Number (margin of safety exists). PASS if >= 7/9 criteria pass but price is at or above Graham Number. FAIL if fewer than 7/9 criteria pass.
What Would Benjamin Graham Buy Today?
Sources
The Intelligent Investor
1949 (rev. 1973)Benjamin Graham
The definitive guide to value investing. Chapter 14 outlines the defensive investor criteria used in this checklist. The revised edition includes commentary by Jason Zweig.
Security Analysis
1934Benjamin Graham & David Dodd
The foundational text on fundamental analysis. Establishes the framework for analyzing financial statements and determining intrinsic value that underpins the entire value investing discipline.