Benjamin Graham was a British-born American economist and professional investor, who taught Warren Buffett and other world famous investors at Columbia Business School.
Buffett credits Graham with grounding him with a sound intellectual investment framework, and describes him as the second most influential person in his life, after his own father.
In fact, Graham had such an overwhelming influence on his students that two of them, Warren Buffett and Irving Kahn, named their sons, Howard Graham Buffett and Thomas Graham Kahn, after him.
In his preface to Graham's book The Intelligent Investor, Buffett calls it "by far the best book about investing ever written."
Graham's Defensive Grade Criteria:
Graham recommended three different grades of stocks, and the now-popular Graham Number actually covers only two of the seven criteria required by the first grade.
This highest grade of stocks is what Graham called the Defensive grade. There are seven unique financial criteria that a stock has to meet before it can be used for Defensive investment (the Graham Number covers only the last two).
Summarized from CHAPTER 14 of The Intelligent Investor - Stock Selection for the Defensive Investor:
1. Not less than $100 million of annual sales.
[GrahamValue note: This comes to $500 million today based on the difference in CPI/Inflation from 1973]
2. (A) Current assets should be at least twice current liabilities.
2. (B) Long-term debt should not exceed the net current assets.
3. Some earnings for the common stock in each of the past ten years.
4. Uninterrupted payments for at least the past 20 years.
5. A minimum increase of at least one-third in per-share earnings in the past ten years.
6. Current price should not be more than 15 times average earnings.
7. Current price should not be more than 1-1⁄2 times the book value.
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.
A Few Defensive Grade Stocks:
Given below is a unique list of stocks meeting all of Graham's seven defensive criteria today, along with their values for each of the criteria.
*All figures except prices and percentages are in $Millions
|Company||Symbol||Annual sales||Current assets||Current liabilities||Long term debt||Earnings growth||Dividend record||Graham Number||Current price|
|Murphy Oil Corp||MUR||27,750.00||14,140.00||5,360.00||249.55||101.94%||100.00%||$63.45||$58.39|
|Baker Hughes Inc||BHI||19,830.00||24,850.00||9,100.00||3,850.00||101.76%||100.00%||$57.46||$44.65|
|Marathon Oil Corp||MRO||15,280.00||31,370.00||14,220.00||4,670.00||101.63%||100.00%||$36.53||$29.30|
|Molson Coors Brewing Co B||TAP||3,520.00||12,420.00||4,780.00||1,910.00||100.89%||100.00%||$59.32||$44.31|
|Helmerich & Payne Inc||HP||2,540.00||5,000.00||1,730.00||235.00||100.72%||100.00%||$54.87||$48.26|
The criteria are being checked against values adjusted for increases due to inflation for more accurate results.
For example, $500 million has been used as the minimum required sales figure instead of the $100 million recommended by Graham. This corresponds to a CPI growth of 5x since 1973.
Defensive stocks are also the only grade of Graham stocks in which the Graham Price is equal to the Graham Number.
The Graham Number is essentially the highest price recommended by Graham for Defensive stocks. The recommended price for Enterprising grade and NCAV grade stocks use different calculations and are much lower than the Graham Number.
The S&P Total Market Index includes all common equities listed on the NYSE (including NYSE Arca), the NYSE Amex, the NASDAQ Global Select Market, the NASDAQ Global Market and the NASDAQ Capital Market.
The free comprehensive Benjamin Graham screener screens all 4000 stocks in the S&P Total Market Index - using 40 data points each - to show the complete list of stocks that meet all of Graham's three grades of selection criteria.
The screening system includes complete checks for Defensive and Enterprising stocks with inflation adjustments, as well as the usually omitted checks for recent net losses for NCAV or Net-Net stocks.
Additional disclosure: The lists of stocks were arrived at by automated quantitative analysis and were not verified individually. Check for any recent changes in the data used before making an investment decision, especially for any recent stock splits.
Submitted by GrahamValue. Created on Wednesday 24th October 2012. Updated on Wednesday 19th January 2022.
A Unique List Of Fully Defensive Graham Stocks
Thanks Serenity for this list of fully defensive Graham stocks. Seeing the criteria for this class of stocks spelled out is an important reminder of how defensive Graham was. It is also significant that you mention the lower levels of Graham stocks and provide a screener. I have CVX on my watch list at the 4% yield point $90. I believe $90 will provide a significant safety margin. It is good to know that CVX is already below it's Graham Number. I have recently purchased INTC at 4% yield ($22.50) and note that it went lower.
Thank you for your comment, Norman Tweed!
Such praise from a seasoned investor is highly appreciated.
Beta vs Risk
I am not sure why volatility (Beta) has become the standard for judging risk. I understand volatility as the measure of risk if you are highly leveraged, but for a long only investor I think risk is the possibility of pemanent loss of capital. If you are not levered and not subject to margin calls, then defensive is a stock that won't go away and will recover from any market irrationaity. I often feel that our view of risk has been warped by the hedge funds and investment banks that must consider volatility a risk because of leverage, something I do not use in my retirement portfolio.
Thank you for your comment, Amerlafrance!
Risk is truly highly misunderstood.
Warren Buffett and Seth Klarman too seem to echo your thoughts.
Thanks for this post! Is excellent for measuring actions by time!
Chevron Corp (CVX) | Granham Number 60.26 (-56.55%) | Current Price 142.77 (26.28%) | Ratting Score = 4.5
Intel Corp (INTC) | Granham Number 50.51 (69.52%) | Current Price 37.99 (75.23%) | Ratting Score = 8.5
Murphy Oil Corp | Granham Number 0.00 (-63.45) | Current Price 28.95 (-50.42%) | Ratting Score = 4.5
Occidental Petroleum | Granham Number 0.00 (-93.59) | Current Price 60.67 (--26.57%) | Ratting Score = 3.5
Baker Hughes (BKR) | Granham Number 0.00 (-57.56) | Current Price 28.47 (-56.83%) | Ratting Score = 5
Marathon Oil Corp (MRO) | Granham Number 0.00 (-36.53) | Current Price 21.72 (-34.90%) | Ratting Score = 4.5
Molson Coors Beverage Co (TAP) | Granham Number 25.02 (-57.82%) | Current Price 55.50 (25.25%) | Ratting Score = 4.5
Helmerich & Payne (HP) | Granham Number 25.02 (-54.87%) | Current Price 42.98 (12.28%) | Ratting Score = 5.5
Knowing that long term investment is 5 to 10 years and the teachings of graham This portfolio should be intact?
what would you change in this portfolio?
How would a defensive investor behave from 2012 to now?
Selling and Watchlist
Thank you for your comment!
Graham also gave instructions on when stocks were to be sold.
Given below are the current analyses for all the above stocks. They can also be tracked using the free Stock Watchlist. They may need to adjusted for splits and bonuses. As you have noted, BHI is now BKR.
1. Intel Corp (INTC)
2. Helmerich and Payne Inc (HP)
3. Molson Coors Beverage Co (TAP)
4. Chevron Corp (CVX)
5. Occidental Petroleum Corp (OXY)
6. Baker Hughes Co (BKR)
7. Murphy Oil Corp (MUR)
8. Marathon Oil Corp (MRO)
Thank you again for your comment!