[Beginner Recipe] Value Investing like Benjamin Graham

You may be surprised that value investing like Benjamin Graham is classified as a beginner recipe, but it really is not difficult. This recipe provides a basic idea how you could go about value investing.

What is good about it:

  • Investing rules are clearly defined
  • It is value investing, which is proven to work- it can beat the market
  • It is much less time consuming than many other stock picking strategies
  • It is safer than most stock picking (if paired with a good portfolio diversification)

What minimum level of investment we recommend:

  • You want to make your fees within 1%, maximum 2% of your investment, so it means between £300 and £3000 depending if you invest in a regular scheme, where you can get it much cheaper, or just through a normal on-line broker
  • You want to think about your buys as at least 2-3 years commitments, as this strategy can take time to be successful.

How does it work:

First we will use the advice from Benjamin Graham on how to select criteria for the equity screener:

  • We want companies with book value below 0.5. If you feel that you understand this parameter, you can tweak it, as 0.5 could be too harsh for the less ‘physical’ companies.
  • We want current ratio over 2. This provides us with level of safety- the company will not easily bankrupt.
  • Price to earning below 10. We want companies that can make a lot of money quickly, they will also have much bigger potential for a large dividend.
  • Market capacity should be over 25 – 100 millions. This one depends on how much risk you want to take with the smaller companies.

Once you have screened the companies, look at them one by one and chose the ones that seem the most promising. This way you can start slowly building your diversified portfolio. If a company condition deteriorates while you hold it significantly, that it no longer offers a value proposition- get rid of it. If the value of the company returns to similar level of its peers- you can take the profit! This is the first step towards building your value investing portfolio!

What do we think:

This is a great way to start your journey on becoming a value investor. This simple screen should be very helpful in showing you companies that may be worth your investment. As this is the first stock picking recipe that we are showing, it is worth reminding, that you should never invest more than you can afford to lose, thing of it long term and keep your portfolio diversified. Good luck in your investing!

Bookmark the permalink.

Leave a Reply

Your email address will not be published. Required fields are marked *