A Stock-Picker’s Guide to Benjamin Graham’s Screening Rules

Benjamin Graham, who has often been called the father of value investing, published The Intelligent Investor in 1949 and revised it several times, most recently in 1972. In that last and fourth edition, published in 1973, he included three different sets of guidelines, which could be called “checklists” or “screens.” The first was for the “defensive investor,” and it’s the most famous. The second was a rule for investing in “Net-Current-Asset (or ‘Bargain’) Issues.” And the third was for the “enterprising investor.”

The Value Inversion

For the past few years, investors have noticed what we call a “value inversion,” which appears to be getting progressively worse. Theoretically—and normally—stocks with low price-to-sales ratios (cheap stocks) outperform those with high price-to-sales ratios (expensive stocks). Such was the case over the majority of the current century, and indeed, as James O’Shaughnessy has shown in What Works on Wall Street, for most of the twentieth century too.

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