In my years of using Equities Lab as a quantitative investment tool, I have never lost sight of the core values of long term investing. Many of these values are in the teachings of Benjamin Graham and used by an idol of mine, Warren Buffett. Remembering this, no matter how much risk I take on in my portfolio, I always keep a subsection for value investments. Now, his teachings are comprehensive, and there are more value factors than any one person wants to write in each of their strategies; and because of this we have created our own Graham Score which looks for ten different factors based entirely on the teachings of Benjamin Graham.
For those of you who have yet to be exposed to the Equihack language, here is the breakdown of what the above photo states –
- An earnings to price ratio ranking in the top 75% when compared to all companies that have an earnings to price of at least greater than 0.
- P/E that is less than 60% of the highest P/E within the past 5 years.
- A dividend yield that is better than 65% of dividend producing stocks.
- A price that is less than 2/3 of the tangible book value per share.
- A price that is less than 2/3 of the net current asset value.
- A company whose total debt is less than the current book value.
- A one quarter current ratio that is greater than 2.
- Total debt is less than two-times the current asset value.
- The long term earnings have increased by at least 7% annually over the past 7 years.
- Earnings have increased relatively consistently over the past 7 years.
Essentially, this screener isn’t looking for anything too crazy – just companies who have established themselves as a reliable possible investment.
We’ve gone ahead and thrown this formula into a screen within Equities Lab. To access it, simply type “Benjamin Graham Count” into your explorer.
Like the formula itself, this screen is incredibly simple. We are screening companies with a Benjamin Graham Count Score of greater than 6 as long as they are not considered a depositary receipt.
The fact that our strategy makes money over the past twenty years isn’t really surprising since it is following the teachings of one of history’s most revered investors. The question now becomes, is following these teachings to the dot worth it?
Personally, I am a fairly risk adverse investor; and though I can make more money with certain strategies I want to make sure that I can do so at a lower risk profile than just putting my money into an ETF that follows the S&P. Thankfully, there is a variable that I use extremely often – the Sharpe Ratio. Essentially we are looking for a strategy that has a higher Sharpe ratio than the SPY over the same time period. Sadly, in the case of the Graham score screen, the standard deviation is high enough that it pushes the ratio down at right below the SPY.
That said, you shouldn’t fret. Beating the market is still a goal you should aim to achieve, and to do that you need to take your fair share of risks. If you are a value investor who bases their portfolio off of the teachings of Benjamin Graham, this score may very well cut down your analysis time and help increase your returns long term.