The central theme about the value investing strategy, so well documented in the Benjamin Graham classic bestseller, “The Intelligent Investor” is about searching and identifying undervalued stocks to buy from the stock market. Although this book was written well over half a century ago, it still remains one of the most important investment books ever written for investors who believed in the fundamental analysis technique for stock selection, in particular, for undervalued stocks.
In his book, the great guru, Benjamin Graham argued that the value investing strategy to identify the undervalued stocks to buy can be carried out based on a just a few simple principles and criteria. Some of his criteria for stock picks for undervalued stocks are interpreted and simplified below:-
1. Firstly, the investor should ensure that the stock price is below two third of the tangible book value of the stock. The tangible book value is the value of the total assets of the company less the total liabilities of the company.
2. The investor should also ensure that the stock price is below two third of the net current assets of the company. The net current assets are the assets of the company that can be immediately converted into cash less the total debt of the company.
3. Thirdly, ensure that the total debt is less than the tangible book value. The rule is that the current ratio, i.e. the current assets divided by the current liabilities must be more than two.
4. The investor should check and ensure that the historical earnings to price yield is higher than the bond yield. The company must also have a history of stable earnings.
5. The company’s earnings must show a rising trend and the earnings must have doubled over the last ten years.
6. One other criteria is to ensure that the company’s dividend yield is at least two third of the bond yield.
Historical records have shown that many fund managers have benefited from the value investing strategy outlined by Benjamin Graham, and so many glowing tributes from successful well known investors, including the greatest investor of all times, Mr. Warren Buffet have been given to this investing strategy.
Therefore, it is without doubt we should be educating ourselves on the above mentioned principles to acquire that important ability to search and identify the undervalued stocks to buy. Needless to say, by applying this proven investment strategy, the probability of success in profiting from the stock market is certainly enhanced.