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Sunday, November 18, 2007

7 steps at how Benjamin Graham chooses his stocks

You may want to look at an Introduction to Benjamin Graham first.

Adequate Size of the enterprise

All our minimum figures must be arbitrary and especially in the matter of size required. Our idea is to exclude small companies which may be subject to more than average vicissitudes especially in the industrial field. (There are often good possibilities in such enterprises but we do not consider them suited to the needs of the defensive investor.) Let us use round amounts: not less than $100 million of annual sales for an industrial company and, not less than $50 million of total assets for a public utility.

A sufficiently string financial condition

For industrial companies current assets should be at least twice current liabilities- a so called two-to-one current ration. Also, long-term debt should not exceed the net current assets (or “working capital”). For public utilities the debt should not exceed twice the stock equity (at book value).

Earning stability

Dividend recordUninterrupted payments for at least the past 20 years

Dividend record

Uninterrupted payments for at least the past 20 years

Earnings growth

A minimum increase of at least one-third in per-share earnings in the past ten years using three-year averages at the beginning and end.

Moderate price/earning ratio

Current price should not be more than 15 times average earnings of the past three years

Moderate ratio of price to assets.

Current price should not be more than 1½ times the book value last reports. However, a multiplier of earning below 15 could justify a correspondingly higher multiplier of assets. As a rule of thumb we suggest that the product of the multiplier times the ratio of price to book value should not exceed 22.5. (This figure corresponds to 15 times earnings and 1½ ties books value. It would admit an issue selling at only 9 times earning and 2,5 times asset value, etc.)

Source: Benjamin Graham - The intelligent Investor

Introduction to Benjamin Graham

Graham came by his insights the hard way: by feeling firsthand the anguish of financial loss and by studying for decades the history and psychology of the markets. He was born Benjamin Grossbaum on May 9. 1894, in London; his father was a dealer in china dishes and figurines. The family moved to New York when Ben was a year old. At first they lived the good life-with a maid, a cook, and a French governess-on upper fifth avenue. But Ben’s father died in 1903, the porcelain business faltered, and the family slid haltingly into poverty. Ben’s mother turned their home into a boardinghouse; then, borrowing money to trade stocks “on margin,” he was wiped out in the crash of 1907. For the rest of his life, Ben would recall the humiliation of crashing a check for his mother and hearing the bank teller asks, Is Dorothy Grossbaum good for five dollar?”

Fortunately, Graham won a scholarship at Columbia, where his brilliance burst into full flower. He graduated in 1914, second in his class. Before the of graham’s final semester, three departments- English, philosophy, and mathematics-asked him to join the faculty. He was all of 20 years old.

Instead of academia, graham decided to give Wall Street a shot. He started as a clerk at the bond-trading firm, soon became an analyst, then a partner, and before long was running his own investment partnership.

The internet boom and bust would not have surprised Graham. In April 1919, he earned a 250% return on the first day of trading for Savold Tire, a new offering in the booming automotive business; by October, the company had been exposed as a fraud and the stock was worthless.

Graham became a master at researching stocks in microscopic, almost molecular, detail. In 1925, plowing through the obscure reports filed by oil pipelines with the U.S. Interstate Commerce Commission, he learned that Northern Pipe Line Co.-then trading at $65 per share-held at least $80 per share in high-quality bonds. (He bought the stock, pestered its managers into raising the dividend, and came away with $110 per share three years later.)

Despite a harrowing loss of nearly 70% during the Great Crash of 1929-1932, Graham survived and thrived in its aftermath, harvesting bargains from the wreckage of the bull market. There is no exact record of Graham’s earliest returns, but from 1936 until he retired in 1956, his Graham-Newman Corp. gained at least 14.7% annually, versus 12.2% for the stock market as a whole-one of the best long term track records on Wall Street history.

How did Graham do it? Combining his extraordinary intellectual powers with profound common sense and vast experience, Graham developed his core principles, which are at least as valid today as they were during his lifetime:
  • A stock is not just a ticker symbol or an electronic blip; it is an ownership interest in an actual business, with an underlying value that does not depend on its share price.

  • The market is a pendulum that forever swings between unsustainable optimism (which makes stocks too expensive) and unjustified pessimism (which makes them too cheap). The intelligent investor is a realist who sells to optimists and buys from pessimists.

  • The future value of every investment is a function of its present price. The higher the price you pay, the lower your return will be.

  • No matter how careful you are, the one risk no investor can ever eliminate is the risk of being wrong. Only by insisting on what Graham called the margin of safety”-never overpaying, no matter how exciting an investment seems to be-can you minimize your odds of error

  • The secret to your financial success is inside yourself. If you become a critical thinker who takes no Wall Street “fact” on faith, and you invest with patient confidence, you can take steady advantage of even the worst bear markets. By developing your discipline and courage, you can refuse to let other people’s mood swings govern your financial destiny. In the end, how your investments behave is much less important that how you behave.

Source: Benjamin Graham - The intelligent Investor

Tuesday, November 06, 2007

Japanese Magician - Burger Trick