In Brief

A demanding intrinsic value-based screen designed for less experienced investors which focuses on “important” companies with long histories of profitable operations and strong financial condition. 


Benjamin Graham was the mentor of Warren Buffet and is considered the first proponent of value investing, along with David Dodd through various editions of their famous book Security Analysis. In 1947, Benjamin Graham published “The Intelligent Investor,” a book that outlined in detail his investment philosophy, and which is now considered an investment classic. In the book, Graham describes how his approach would be applied by two different types of investors—those that are “defensive” (i.e. those investors unable to devote much time to the process or inexperienced with investing) and those that are “enterprising” (with greater market experience and more time for portfolio management). Graham felt defensive investors should confine their holdings to the shares of large, prominent, and conservatively financed companies with long histories of profitable operations. By this, he meant a firm of substantial size and with a leading position in its respective industry.

Additionally, Graham sought companies with:

  • Strong ?nancial position (based on the current ratio & debt to working capital).
  • 20 years of uninterrupted dividends
  • No negative earnings in the last 10 years & a 10-year annual earnings growth rate of at least 3%
  • A reasonable price-earnings ratio &  a moderately low ratio of price to assets

Graham summarized his own philosophy by stating that intelligent investing consists of analyzing potential purchases according to sound business principles. This includes making your own decisions, ensuring that you are not risking a substantial portion of your original investment, and sticking to your own judgments without regard to market opinion.

"You are neither right nor wrong because the crowd disagrees with you... You are right because your data and reasoning are right".

Calculation / Definition

Here are seven criteria that he suggests for defensive investors looking for a quality stocks. Some of his rules are extremely strict, meaning that very few stocks pass his criteria. This had lead some to relax the criteria, although that does perhaps defeat the point of the exercise. At the time of writing, Graham viewed utilities as particularly attractive for defensive investors, hence some criteria include adjustments specifically for utilities.

  1. Size: Sales > $400 million ($100m originally, but adjusted for inflation since the time of Graham’s writing). Smaller companies…

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