The stock market that Benjamin Graham saw in the 1940’s was a much different place than the markets we see today. Some of the buildings might be the same, but the companies and the people who invest in them have changed plenty. Securities tend to trade at a much higher premium today than at any other time - possibly caused by the increase interest in investing from the middle class, a product of 401(k) retirement plans and more information about how to invest, often provided by the literature of Benjamin Graham himself.

Applying the tradition Graham rules for investing, finding a stock that fits the mold can be hard, if not impossible, in modern markets. While it’s easy to find a dividend-paying large cap company, it gets much harder when we start applying criteria like a low debt to assets ratio and high growth over the past decade (Graham required 33% over 10 years).

Investing like Graham today requires us to modify the rules to what we suspect Graham would have wanted, given the changes in the stock markets over the past 60 years. Instead of require 1/3rd growth over 10 years, instead look for 1% growth over each of the last 5 years. A P/E ratio of 15 might have once scared away Graham, but in modern times that’s fairly low. The often overlooked price-to-book ratio is rarely going to be under 1, which was the number that made Graham students like Warren Buffett salivate, but you can still find companies with a healthy price-to-book under 2.

Despite some very changed markets, it’s still possible to successfully invest with the same philosophies that made Graham disciples like Buffett very rich men.

I love tracking stocks picked by sites that are actively screening the market for what it believes are Graham stocks. The criteria from this list (see trackback) are: current ratio greater than 1.5, positive net income for 5 years, current dividend payment, and earnings growth over 5 years. Three of these four must be met.

Here are some of the companies they found trading at the greatest discount to intrinsic value:
Tempur Pedic (TPX), Big Rock Brewery (BR), Integral Systems (ISYS), and Beverly Hills Banc (BHBC). Take note of the date of this story and lets see how these do over the next 6 months.

Technorati Tags: benjamin, graham, stocks, investing

Columbia Business School held its 16th Annual Graham and Dodd Breakfast on Friday. The event honors the legacy of the authors of Security Analysis, a book that is still considered the bible of the value investing world. It is hosted by The Heilbrunn Center for Graham & Dodd Investing at Columbia Business School.

It’s great to see that so many years after the passing of the most important investor of the last century he is still remembered by the faculty and students at the school where he once taught.

Coming next… a look at screeners that use the Graham method for picking stocks.

Technorati Tags: benjamin graham, david dodd, columbia, business school

As I read online investing sites like MarketWatch, Bloomberg, and Fool.com, along with the various shows on CNBC, I’m often intrigued at the number of so-called “expert” investors who like to ignore the basic rules of value investing. Sure, they justify their actions by saying their growth investors, not value investors, but does that really allow them to make some downright stupid choices?

My main problem with growth investing is that it is inherently speculative. A large part of being a growth investor is “being able to see the future.” In other words, there’s a lot of guessing. Think of a monkey picking a random company on a long list.

In my opinion, any wise investor will choose to be a value investor. The returns can still be fantastic, but the risk is significantly lower than the risk assumed by the growth investor. Value investing is all about finding companies that are undervalued based on their assets compared to their market price.

If a company has $1 billion in assets and a market value of $500 million, the value investor will recognize that there is very little risk in buying that company. Growth investors, on the other hand, will see a company with $10 million in assets and a market value of $1 billion and try to make up scenarios where that company will be able to grow so fast that it will have significantly more than $1 billion in a few years. Growth investors created the dot-com bubble and its burst by speculating that companies like Pets.com would dominate  a market for pet supplies that they hoped would grow to tens of billions of dollars. Where was all this money going to come from to create a huge market for such things? The growth investor need not think rationally.

This site is a haven for those sensible people we call value investors. I will preach the principles of Benjamin Graham, who shook the investing world with his books, including Security Analysis, The Intelligent Investor, and The Interpretation of Financial Statements. I’ll also bring in some ideas from investors who have used his method, including Warren Buffett. If you want tips on what’s “gonna be hot” next month, go watch Jim Cramer or Fast Money (although those shows can sometimes be useful to all investors, you have to know when to ignore them). If you use sound reasoning to make sound investments, you will have no reason to apologize later for making a stupid pick.