Below are my reflections and answers to the discussion questions posted at Modern Graham for chapter 14 – Stock Selection for the Defensive Investor – of the Intelligent Investor written by Benjamin Graham.
1. What quote from this chapter do you think best summarizes the point Graham is making?
“His second choice would be to apply a set of standards to each purchase, to make sure that he obtains (1) a minimum of quality in the past performance and current financial position of the company, and also (2) a minimum of quantity in terms of earnings and assets per dollar of price.”
2. What do you think of Graham’s original requirements for Defensive Investors? Do you agree with the changes I’ve made for the ModernGraham approach?
I think Graham’s original requirements for the defensive investor look reasonable.
- Adequate Size of the Enterprise: I would stick to annual sales as a measure of a company’s size. Graham used $100 million back in the beginning of the 1970’s, which equals about approximately $600 million today (calculated at http://www.usinflationcalculator.com/). So, I think that it seems appropriate to use a sales range of $600 million to $2 billion. Maybe for the defensive investor a sales range of $1-1,5 billion is suitable.
- A Sufficiently Strong Financial Condition: Agree.
- Earnings Stability: Agree.
- Dividend Record: Agree.
- Earnings Growth: 1/3 growth during the last ten years is a bit low I think. Maybe increase growth in earnings to 1/2 or 2/3.
- Moderate Price/Earnings Ratio: I think an earnings multiplier of 15 is desirable, at least not above 20. An earnings multiplier between 15 to 20 times seems reasonable.
- Moderate Ratio of Price to Assets: Agree.
3. Are there any other “modernizations” you would make to Graham’s requirements?
No, not at the moment. Maybe consider raising the growth in earnings to 1/2 or 2/3.
4. What did you think of the chapter overall?
One of the best so far.