Benjamin Graham's Intelligent Investor

There isn't any particular formula. The general idea is to buy low and sell high. Specifically, buy lower than 80% of intrinsic value and sell at 120% of intrinsic value.

In today's inflated market, you're not likely to find any stocks selling low enough to buy, so you will have to modify your buying criteria and sell when the stock is 50% above that criteria.

-- Ron

He has formulas for figuring out whether a stock is low

- i.e. P/E, EPS, Book value etc. However, I couldn't find anything to calculate whether it's X% of intrinsic value. How would I calculate if it's X% of intrinsic value?

When I was reading Graham, and others, fairly extensively, I found a paucity of information concerning when to sell.

And over the years I've heard all kinds of recommendations, all of which make sense in their context.

I think you have to decide on "sell rules" in the context of your overall investment strategy.

For example, you might do set up a strategy such as:

1. I will hold a total of ten stocks
2. I will select them using "Graham analysis".

The time to sell a stock would be when you have a candidate that your analysis predicts will do better than any of your holdings.

Or, you might decide on a strategy that invests in several index funds, and/or bonds or bond funds, with some coherent asset allocation.

The time to sell will be when your actual allocation gets significantly different from your target, and you are rebalancing.

If you are a "momentum player" (definitely NOT BG's technique!), you might adopt rules that include, selling when you have sustained a certain loss below your buy point (e.g. 8%) and maybe selling 1/2 when your stock goes up a certain amount.

etc.

--ron

One of the advantages of stock or mutual fund newsletters is that tell you what to buy and when to sell. And their performance is measured based on those recommendations. Also Hurlbert publishes a newsletter that ranks newsletters.

Frank

" ... in [Graham's 1976 article] "The Simplest Way to Select Bargain Stocks," which was republished in the book _The Rediscovered Benjamin Graham_ (ISBN 0471244724) ...[Graham] suggested selling after a price increase of 50% or after two calendar years, whichever came first."

See

for this and more commentary on the subject. Also, google for {"The Simplest Way to Select Bargain Stocks"}, and some good studies of the approach come up. If nothing else, this rough criteria forced me to consider when a stock I own is wildly overpriced. Tending towards buy and hold, I do not usually sell. But if I have been holding (and so watching) a stock for a couple of years, and it shoots up beyond valuation reason and without any obvious reason, and stays up a while still with no good reason, I am inclined to follow Graham above.

(Ron, sorry to piggyback on your post. The original post did not come up on my newsreader.)

Benjamin Graham's says you should buy stock to hold it *forever*. Buying 20% lower and selling 20% higher than you think it's worth is not even considered investing. You valuate stocks and buy those that are grossly undervalued, such as buying a dollar bill for forty cents. There are times when markets offer no such stocks, and it may last for decades, but you should wait. When they are available (and you should choose only companies that meet Graham's criteria), you buy and buy big. And then you hold. Don't look at the market and don't sell unless you have a reason to, and reason is not the market price of your stock that's gone even much lower (in fact if that's the case you should buy even more) but it is the trouble in a company itself, making it a company that fails to meet Graham's conditions and is likely to go down. You don't even look at the market, except from time to time to get an overall picture. There is a time to sell sometimes, and that is if your own stock got ridiculously high, and you might want to buy something else. In all other cases, you hold. Anyway, not everybody is able to listen to Graham's advice, and you should look at your personality for patience, strength and determination. If you lack any of those, you may find some other investing strategy suits you better.

"Nino Samac" wrote

snip for brevity

If indeed there are no stocks that meet Graham criteria, it seems to me that the investor should strongly consider buying significantly into index funds with adequate diversity. Historically speaking, leaving one's money out of stocks and instead in, say, a bank account has not paid well when we're talking about "decades."

For all 20-year periods from 1929-2005, the annualized return averages 11.4% with a standard deviation of 3.3%. See my favorite tool for persuading folks that investing in stocks is strictly for those with a long time horizon,

. Perhaps the matter is moot, though, since I think that even a strict reading and application of Graham criteria to the past will still yield many opportunities within all 20 year periods. (I think from general reading this has been duly studied, and from these studies one could argue there is much to recommend in Graham's approach.) Maybe the bigger question is, when one sees what appears to be a Graham-ian opportunity in Stock X, what fraction of one's portfolio should the investor, especially the new investor, let Stock X be? Graham certainly insisted on diversification.

I suppose that, again, studies have indicated that the Graham-ian opportunities over 20 year periods have always been sufficiently diverse.

Maybe the most important lesson to take is that one need not strictly apply Graham-ian criteria to be an effective investor. His are guidelines. Insight into just how mutable his guidelines are over time is provided in modern editions of Graham with well-chosen recent examples by Jason Zweig accompanying the original Graham text.

The intrinsic value of a stock should be its tangible book value as long as the company is a going concern and hasn't manipulated its accounting.

A company is a going concern if its return on investment matches or beats the average of other companies.

In my portfolio, I can't find any company that I shouldn't sell according to the BG recommendations. TNP would be my best stock according to BG standards selling at a P/B of 1.29 and P/E of 6.75 (per Yahoo).

To get a balanced portfolio the BG standards need to be relaxed, so I will buy at P/B ratios less than 2 and hold up to a P/B of 3.00 (I have a couple of exceptions).

I can't follow a pure BG strategy because I like tech stocks too much.

-- Ron

Ron Peterson wrote: On Dec 26, 5:50 am, "BGFan" wrote: How would I calculate if it's X% of intrinsic value?

The intrinsic value of a stock should be its tangible book value as long as the company is a going concern and hasn't manipulated its accounting.

Tangible book value, with the conditions given, may be a perfectly valid measure of intrinsic value. But Graham's definition is much more loose, and he doesn't give a specific calculation for it. Judgement is required to find intrinsic value according to Graham. The definition of intrinsic value given in the Fifth Edition of _Security Analysis_ is:

"_the value which is justified by assets, earnings, dividends, definite prospects, and the factor of management._"

I'm not sure how helpful that will be to the OP...

-Will

william dot trice at ngc dot com

Sorry, my newsreader is acting wierd and messed up the quoting on my last post, here it is with proper quoting (I hope...):

Ron Peterson wrote: > On Dec 26, 5:50 am, "BGFan" wrote: >>How would I calculate if it's X% of intrinsic value? >

Tangible book value, with the conditions given, may be a perfectly valid measure of intrinsic value. But Graham's definition is much more loose, and he doesn't give a specific calculation for it. Judgement is required to find intrinsic value according to Graham. The definition of intrinsic value given in the Fifth Edition of _Security Analysis_ is:

"_the value which is justified by assets, earnings, dividends, definite prospects, and the factor of management._"

I'm not sure how helpful that will be to the OP...

I don't remember reading this in his books "Intellgent Investor" and "Security Analysis".

Since the stock market as a whole outperforms cash over most long time periods, I don't agree. Owning a basket of "average" stocks has been good enough.

If the stock you bought at 40% of "intrinsic value" (quotes added because intrinsic value is subjective) now trades at at intrinsic value, but there are different stocks now trading far below intrinsic value, why not sell the original stock to buy an undervalued stock, if the costs of taxes, brokerage commissions, and taxes are not too high?

You write as if the main problem with being a value investor is having enough discipline, but the intellectual difficulty of finding undervalued stocks should not be underestimated. In 2007, small cap value drastically underperformed large cap growth, as shown by the relative performance of the Russell 2000 value and Russell 1000 growth indices.

That is the major problem with the BG "method". (i.e. It's very difficult to estimate the intrinsic value of a stock.)

In addition to looking at the financial aspects of a company, investors need to look at the product line and production methods to get an idea of future manufacturing costs and market growth.

-- Ron

wrote

Why the focus on small cap?