For completion, I’m including the critieria that Benjamin Graham listed for finding value investments for the “enterprising investor”.
Graham divided investing into what he categorized as “defensive” or “enterprising (or aggressive)”. In essence, a defensive investor is one who’s interested mainly in passive investment, such as someone who regularly dollar-cost averages into index funds. Graham devotes several chapters and paragraphs to what an enterprising investor is not, but essentially, we can sum up this sort as someone who seeks a greater return than a defensive investor, and is willing to put in the time and effort to find appropriate opportunities for both nearer and longer term. I put an emphasis on appropriate because there are many people out there who would consider themselves “aggressive” investors but would still not fit the definition here.
For enterprising investors, Graham loosened some of his criteria. I’ve listed them below. However, I have no doubt that they are probably out of date given the changes to business and industry since the last revision of his book was written in 1972. Worth reading are the comments made by Market Participant on the post I wrote on criteria for defensive value investments. He shares some insightful advice and rightly points out that calculating numbers in a 10-K is not the same thing as gaining real insight and knowledge into a stock and illustrates why some of these ratios may be out of date.
Ratios for Enterprising investors:
Current Ratio > 1.5
Price <= 1.2 x working capital / number of shares Working Capital/Debt >= 0.91
Earnings Stability: The company should have had some positive earnings for the last 5 years
Dividend Record: Some current dividend
Most of my investments are ETFs and I am, by nature, a defensive investor. Being new to value investing, I have put in much less money investing in specific stocks, and I’ve also had trouble finding companies that meet these criteria, specifically the ones related to working capital. (I suspect that this is due to the movement toward minimizing working capital that Market Participant wrote about.) Dividend payouts have also dropped dramatically since Graham’s day. As mentioned before, I’m including these numbers for completion’s sake (since many websites list defensive, but not enterprising, criteria) and again with a recommendation to read The Intelligent Investor for a full understanding on what value investing is all about.
Meanwhile, I continue to use both defensive and enterprising ratios as a loose guidelines while hunting for opportunities. I will write more on any specifics as I find them.