Inspired by Benjamin Graham

November 29, 2019    Portfolio Idea Graham Value

This time, I want to go back to the basics. I’m taking a look at Benjamin Graham, the father of value investing. I will limit my search to the New York Stock Exchange and NASDAQ. Probably some of the best known stock exchanges and the easiest to access for most people in the world.

The Graham Number

Benjamin Graham has written what many people would call the foundational book on value investing: The Intelligent Investor.

As you can see from this very short summary, Benjamin Graham had a lot of theories and ideas to value stock. Throughout his life, these ideas have changed, but this month, I want to highlight the “Graham number”.

The idea of the Graham number is to measure a company’s fundamental value. It’s a deceptively simple calculation, so it has its limitations.

The number takes into account two numbers:

  • Earnings per share: How much profit does the company have per outstanding share. The higher, the better.
  • Book value per share: If the company would have to be sold or liquidated right now, what would it be worth? If it is higher than 1, it means you are getting a discount. You are paying $1 for assets worth more than $1. So again, in general, the higher this number, the better.

The number ignores many qualitative factors that you may also want to look into when value investing:

  • Management
  • Value of patents or the company’s brand
  • Competitive advantage

But sometimes simplicity can be a good thing and overcomplicating things with subjective qualitative analysis can lead to bad decisions.

Since Graham has a lot of interesting thoughts on selecting companies of high value, I may return to his writings in later months.

This Month’s Portfolio

This month’s criteria is looking for companies that provide the most value for the buck:

  • Order by price / Graham number, lowest first.
  • Companies on the NYSE or NASDAQ.
  • Excluding financial companies, just because.
  • Enterprise value over 250 million.
Symbol Name Current price Enterprise value Price / Graham number
TVC Tennessee Valley Authority 26.05 USD 35.47B USD 0.018
KGJI Kingold Jewelry Inc 1.57 USD 995.56M USD 0.019
CXDC China XD Plastics Company Ltd 1.92 USD 1.02B USD 0.094
DLNG Dynagas LNG Partners LP 2.13 USD 680.86M USD 0.16
EDN Empresa Distribuidora y Comercializadora Nort 5.37 USD 450.89M USD 0.17
RYAM Rayonier Advanced Materials Inc. 3.94 USD 1.39B USD 0.17
NMCI Navios Maritime Containers L.P. 1.70 USD 311.71M USD 0.19
BH Biglari Holdings Inc. 112.90 USD 658.57M USD 0.20
SORL SORL Auto Parts, Inc. 4.36 USD 354.23M USD 0.30
TRQ Turquoise Hill Resources Ltd. 0.47 USD 2.37B USD 0.23

There you have it. A varied selection of companies in various industries and of various sizes. I’m looking forward to how they perform over the next 12 months.

Thanks again to Uncle Stock for selecting this interesting portfolio.

My philosophy: If you want to invest and your goal is to try to beat the market, you need a system. You need a system that can decide for you what to buy, when to sell and not to panic when things go down. Everything starts with selecting stock. You should not just select random stock here and there based on whims or things you read. No, create a system that suites your style and follow it. These posts give you example of what such a stock selection could look like.

Unless otherwise noted, I do all my research through the Uncle Stock screener. It's a great tool to have in your belt. (note: this is an affiliate link, if you sign up, I get a commision)

Disclaimer: Don't believe anything I say or write. Always do your own research before making any investment decisions.