I wanted to write a stock screen as homage to one of the founding fathers of value investing, Benjamin Graham. Most know him for his books, "Security Analysis," "The Intelligent Investor," or his depiction of Mr. Market that offers you stock on your doorstep every day.
Value stocks (the Fama French model, 1996) have been tested to outperform the market as a whole. How might the decades-old methods of Benjamin Graham hold up today against these newer value theorems?
Two Types of Graham Investing
Benjamin had at least two types of value investing: aggressive and a defensive.
The defensive would be for the conservative investor buying large industry leaders meeting his criteria. The filter for aggressive or enterprising investors was similar, but with looser standards. Today, we are going to use his stock picking methods as a base concept, and modify them somewhat.
Stock Selection Rules
The first rule to be put on the chopping block is dividends. We will not exclude dividends, per se, but we will not make it a requirement. On this issue I need to side with Benjamin Graham’s greatest pupil, Warren Buffett. A good firm should be allowed to re-invest retained earnings in profitable growth opportunities if it chooses.
We are also going to shy away from selecting only giant companies. Research has shown that while small caps are more susceptible to seasonal variations (Chen and Jindra May 2001), with lowest prices around mid-December and highest by mid-summer, they can also be more profitable than
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