Benjamin Graham’s 10 Rules – Still Valid Today?

by The Graham Investor on May 7, 2011

Much has been made of Benjamin Graham’s so-called “10 Rules” for selecting stocks. In his later years, having started to focus more on earnings and dividends than assets, Ben condensed his six decades of investing experience into ten apparently straightforward rules in order to help the intelligent investor select value stocks. The ten rules produced market-beating returns for five of the six decades that Ben tested it on. Later, limited, testing by Henry R. Oppenheimer from 1974 to 1981 showed that selecting stocks based on two or three of the 10 rules would have brought average annual returns of at least 26 percent. It is interesting to note that Oppenheimer used only 2 or 3 criteria, but not surprising as the rules are extremely onerous and cannot result in a significant number of picks. Let’s review the ten rules here:

  1. An earnings-to-price yield of twice the triple-A bond yield. The earnings yield is the reciprocal of the price earnings ratio.
  2. A price/earnings ratio down to four-tenths of the highest average P/E ratio the stock reached in the most recent five years. (Average P/E ratio is the average stock price for a year divided by the earnings for that year.)
  3. A dividend yield of two-thirds of the triple-A bond yield.
  4. A stock price down to two-thirds of tangible book value per share.
  5. A stock price down to two-thirds of net current asset value — current assets less total debt.
  6. Total debt less than tangible book value.
  7. Current ratio (current assets divided by current liabilities) of two or more.
  8. Total debt equal or less than twice the net quick liquidation value as defined in No. 5.
  9. Earnings growth over the most recent ten years of seven percent compounded—a doubling of earnings in a ten-year period.
  10. Stability of growth in earnings—defined as no more than two declines of five percent or more in year-end earnings over the most recent ten years.

At least one of these rules is probably not significant today. For example: the requirement of “A dividend yield of two-thirds of the triple-A bond yield”; this may have been relevant in Graham’s day but nowadays it is not as common for stocks to pay dividends and bond yields are frequently out of tune with stock market returns, that is to say the relationship between bond yields and dividend yields has likely been inexorably altered over the years.

Earnings growth, and Stability of Earnings are certainly to be considered, as is the Current Ratio. These are easy enough to determine. (Although not currently on our screens, these are items we are planning to add in the future.) Price below two-thirds of NCAV is found on our screens. Price down to two-thirds of tangible book is probably overkill but can be determined, as can Total debt vs tangible book and NCAV, although I prefer to just use the Debt to Equity Ratio.

It’s interesting to note that Graham worked with an Aeronautical Engineer named James Rea on screening these types of stocks. They turned up very few, even back then. Soon after Graham died in 1976, Rea and his son (James Jr.) started a mutual fund – American Diversified Global Value – alas, it didn’t do well at all. Who knows if it was the rules, or the management that was to blame?

{ 20 comments… read them below or add one }

1 Chris HedgeurStoxx July 28, 2011 at 2:05 pm

I am not saying this very often, but I adore your site. It is exactly what I was looking for all the time!

Thank you and keep on doing this great work!

Cheers

2 Chris Gieristgut August 9, 2011 at 7:46 am

I had to read your article again and I think that the basic rules of graham are still valid but since there is so much uncertainty out there other factors are relevant as well.
On every stock I analyze Piotroski and his 9 points are important for me.
Also the competition and a huge moat are very big factors since too much competition can ruin every solid corporation!
:)
Have a nice day!

3 Jim Allen August 15, 2011 at 10:00 pm

Actually, there was just as much uncertainty when Graham was alive and still running his investment pool. In some years there was more so. What must it have been like to endure the 6 years from September 1, 1939 (Germany invades Poland) to August, 1945, six long years when the world did not know how things would work out.

Nobody predicts the future, despite the untold man hours devoted to trying. My guess is that the future will be a lot like the past, only longer. But I can’t be certain!

4 TomekValue77 February 5, 2012 at 2:36 am

Hi investors,

I´ve made an experiment with 10 net net´s purchased from your screener on the 3rd february 2011 and I´m still holding the companys. Did I made money? Yes I made.
I´ve put nearly 1000€ in each company in the Credit Acceptance Corp. 2k €.
Invested cash: 10.497,68€

The results in this real experiment are:

1. Amicus Therapeutics + 16,92%
2. Ashford Hospitality + 2,52%
3. CIFC Corp. + 4,11%
4. Credit Acceptance Corp. + 40,58%
5. Duoyuan Printing – 90,22% (maybe using stop loss, would be better ?)
6. Fuqi Int. – 73,51%
7. MicroFinancial Inc. +76,17%
8. Peerless Systems + 24,88%
9. Tessco Techn. + 59,16%
10. Willis Lease Fin. + 3,57%

Value = 11.420,04€ + 86,30€ dividends = 11.506,34€
ROI 12 months = 8,766% or + 1.008,66€

the next time, if I decide to do this experiment again, I pick 30 net net´s from the screener, because Graham tolds us to do the net net game with min. 30 companys.

This is one of the best value investing site in the world and thx for the guy that is running the site
may your business grow and grow and grow…

best regards from germany & poland

Tomek Tenentka
Tenentka Investments

5 The Graham Investor February 6, 2012 at 8:10 pm

Hi Tomek. Glad you are doing so well off the screen. I would avoid any Chinese stocks on the new screen as many of them are reverse-mergers and have poor corporate governance records. At the moment I don’t have an effective way to adequately weed them out by location but am working on it. Thank you for posting your results and for your kind words. Anyone who bought K-Swiss (KSWS) off the screen a few months ago when it was below $2.70 will have done well also. I believe it has further to run.

6 Evan May 18, 2012 at 3:56 am

This is a fantastic site.

Have you considered including Canadian, British, or European stocks? Having screens for other western countries would probably drive more traffic to your site.

Cheers,
Evan

7 The Graham Investor May 19, 2012 at 9:38 am

I have stock data from Toronto, LSE, Paris, Xetra, Australia. None in the screens, though but I did check if any would pass the screens. The problem I have at the moment is handling the different reporting currencies, but I am working on it.

8 Kiet June 19, 2012 at 3:38 pm

quote: I would avoid any Chinese stocks on the new screen as many of them are reverse-mergers and have poor corporate governance records. how about …..

YGE [NYSE]
Yingli Green Energy Holding Co. Ltd.
Technology | Semiconductor – Integrated Circuits | China

9 Yuan Raphael July 1, 2012 at 2:40 am

I agree that all the rules dont hold good today. Stability of earnings and earnings growth however may not always give an indication of companies which have entered new markets and the future is much brighter than its past. Thus in such exceptional cases we could use a more liberal interpretation and look at past 2 or 3 years instead of a longer period – in my opinion.

10 James Burns August 24, 2012 at 7:46 am

I just found this site. I agree that it is a super highway to making money. Howeve, I disagree that dividends are not very meaningful. I don’t buy stocks unless they pay a minimum of 4% dividend.
It does not eliminate potential great buys. Look at WAG, STM, and CLF as current examples. Each of them would fit in the criteria you employ and all of them pay more than 4% dividend.

11 Tim Shanks September 12, 2012 at 12:30 pm

So i read the 10 rules and I am sad to say that I didn’t understand them, though I expected as much since I do not have much experience with business as I am still in high school. I was also hoping you could help me out with that problem by showing me something for beginners so I can properly learn more of the ” investing terms” I would appreciate that very much and I also love this site this is the first time I been here and it is very informative and I plan on visiting this site more often thanks!

12 Jim Roberts November 4, 2012 at 6:03 pm

You mention that you prefer to just use Debt to Equity Ratio, but you don’t say what the test result should be. Less than 1? Less than 0.5?
Thanks!

13 The Graham Investor November 27, 2012 at 6:48 am

Less than 1

14 Anonymous December 25, 2012 at 4:46 pm

Interesting set of metrics for value investing.

15 swamy February 24, 2013 at 10:36 am

Owner of this site – Thanks for running this site. it is very much valuable.
Tomek – Can you please post your 30 net net list, you are coming based on Graham rule.

16 kashif April 5, 2013 at 1:23 pm

there is no doubt that graham value are the most important tool in investment and their 1o rules but the other 1 which are now very sensitive and that is management loyalty so any invester which are going 2 invest pls check their management loyalty…….becouse of the current fraudulent behavier of major corporate scandal

17 Jony August 18, 2013 at 5:49 am

Hi, I was trying to find this rules in one of Graham’s books (Intelligent Investor, Security Analysis) but I couldn’t find them. Can you help me please? Do you know in which book these rules are noted?

18 Balaji February 17, 2014 at 9:59 am

Hi, Do you have a screener for india stocks.

19 Neha Sharma February 18, 2014 at 10:56 pm

Must read for everybody those who manage their own money or manage somebody else money, I bet you it will provide you much more knowledge and really useful practical insight then so called MBA book or MBA classes. I can say this cuz i have been into managing peoples monies and now m full time portfolio manager of my own money. I got more from this book on re-reading then going to MBA for two year and then working for Investment Bank for 5 yrs. I would say its more worth it. Its timeless Classic on Investment and its perspective.

20 The Graham Investor February 19, 2014 at 7:50 pm

Not specifically at the moment. Sorry.

Leave a Comment

{ 3 trackbacks }

Previous post:

Next post: