挑选廉价股票的最简方法（《医学经济学》，1976年9月20日）

GRAHAM

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The Simplest Way to Select Bargain Stocks

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'd be hard pressed to find anyone more knowledgeable about the stock market and the secrets oflatching on to real stock values Benjamin Graham, a man generally regarded as the dean of secuanalysts. Not only did Graham co-author a boak, Security Analysis, become the bible of the business, but his record of picking winning stocks is legendary on Wall Street. A millionaire at 35, Graham retired to California some time ago. In recent years he's devoted himself to distilling the methods of stock selec· tion he used successfully for nearly half a century into a few easily followed principles. Now 82, Graham has lately gone into association with investment counselor James B. Rea to establish a fund whose investment policy will be based on those principles. Graham believes that a doctor · handling his own investments should be able to utilize those same prin· ciples to achieve an average return of 15 percent a year or better. Sitting in the study of his La Jolla oceanfront apartment, Graham outlined the fundamentals of his approach for Medical Economics West Coast Editor Bart Sheridan. Here Senior Associate Editor Laton McCartney gives the higlilights of their conversation:

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, been content to live" La Jolla and spendin~ )fFrance. He no longa get any richer?") And, professional activity of ·or. "It expresses whal I I'm glad to hear that it's o the Rancho La Cosla .s something of a rarity. omparative isolation of of modern institutional f younger money mangood memory," he says. )f being 80 next Maylal, you know, and my 'c market operations for ctogenarian says finally.

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: Q. Would you start by telling us how you arrived at the simplified Graham technique? A. Well, for the past few years I've been testing the results of selecting undervalued stocks according to a few simple criteria. My research shows that a portfolio put together using such an approach would From Special Report, Medical Economic~ September 20, 1976. Copyright © 1976 by Medical Economics Publishing. Reprinted by permission from MEDICAL ECONOMICS magazine.

have gained twice as much as the Vow Jones lllUW>llldl metab'" over the long run. The research period goes back 50 years, but the approach has proven successful when carried out over far shorter periods. I was so impressed by it, I felt it should be put into practice. Q. Are you seeking out growth issues with this technique of yours?

A. No. To my mind the so-called growth-stock investor-or the average security analyst for that matter-has no idea of how much to pay for a growth stock, how many stocks to buy to obtain the desired return, or how their prices will behave. Yet these are basic questions. That's why I feel the growth-stock philosophy can't be applied with reasonably dependable results. Q. What about the conventional yardsticks like a company's projected earnings or market share for evaluating stocks? A. Those factors an! significant in theory, but they turn out to be of little practical use in deciding what price to pay for particular stocks or when to sell them. The only thing you can be sure of is that there are times when large numbers of stocks are priced too high and other times when they're priced too low. My investigations have convinced me you can predetermine these logical "buy" and "sell" levels for a widely diversified portfolio without getting involved in weighing the fundamental factors affecting the prospects of specific companies or industries. Q. That kind of thinking-ignoring fundamentals-would be branded as heresy by many analysts today ... A. Maybe so, but my research shows it works. What's needed is, first, a definite rule for purchasing which indicates a priori that you're acquiring stocks for less than they're worth. Second, you have to operate with a large enough number of stocks to make the approach effective. And finally you need a very definite guideline for selling. Q. Can a doctor or any investor, like me, do all that? A. Absolutely. Q. How should I start?

A. By making as large a list as possible of common stocks currently selling at no more than seven times their latest-not projected-

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~~~1t~-;;~ck quota~ion columns ~fThe WalrStreet Journal or other major daily newspapers. Q. Why a P-E ratio of seven instead of, say, nine or five?

A. One of the ways to determine what you should pay for stocks at any given time is to look at what quality bonds are yielding. If bond yields are high, you want to buy stocks cheaply, meaning you will look for relatively low P-Es. And if bond yields drop, then you can pay more for the stock and accept a higher P-E. As a rule of thumb in pricing stocks this way, I select only those issues whose earnings-to-price ratio-simply the P-E in reverse-is at least twice the average current yield on top-quality (triple-A) corporate bonds. Q. Give me an example.

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A. Sure. Just double the bond yield and divide the result into 100. Right now the average current yield of AAA bonds is something over 7 percent. Doubling that you get 14, and 14 goes into 100 roughly seven times. So in building a portfolio using my system, the top price you should be willing to pay for a stock today is seven times earnings. If a stock's P-E is higher than seven, you wouldn't include it. Q. What if AAA bond yields go down to, say, 6 percent?

A. Then the acceptable P-E goes up. Twice six is 12; divide 12 into 100 and you get a maximum P-E of eight. However, in my opinion, you should never buy a stock with a P-E ratio over 10 no matter how low bond yields get. Conversely, in my system, a P-E of seven is always allowable no matter how high bond yields go. Q. Okay. So, as of today, your formula says to consider only stocks with a P-E of seven or less. Is that all there is to it?

A. Well, that group alone should provide the basis for a pretty good portfolio, but by using an additional criterion you could do even better. You should select a portfolio of stocks that not only meet the P-E requirements but also are in companies with a satisfactory financial position.

ll. How llo 1 llC[CrnUUC lUal! A. There are various tests you could apply, but! favor this simple rule: A company should own at least twice what It owes. ,An e~sy way to check on that is to look at the ratio of stockholders, eqUlty:o total assets; if the ratio is at least 50 percent, the company s financIal condition can be considered sound. Q. What's "stockholders' equity"? A. Simply put, it's the company's n.et worth-the amount left over when you subtract its debts from Its assets. Q. Wouldn't I need an accountant to figure that out for me?

A. Not at all. You can easily obtain the figures for total assets and stockholders' equity from the company's annual report, or your broker can get them for you. , k1 Q. Would you give me an example of how the rule wor s. A. Say a company has stockholders' equity of.$30 m i1:ion and50t~~1 assets of $50 million, a ratio of 60 percent. Smce th at s over , e company passes the test. Q. Are there stocks around today that meet this {requirement and have P-Es of seven or lower? A. Oh, yes. Not nearly as many as in the market decline[To~~9~31 ~n: 1974, but there are still plenty; the box on page 49 a e IS s some of them. Q. Once I've gone through the screening process and set:l~? 10n my "buy" candidates, how do I go about structuring a port 0 10. A. To give yourself the best odds statistically, the more stocks you have to play with, the better. A portfolio of 30 would probably ~; an ideal minimum. If your capital is limited, you can deal m odd lots"-Iess than 100 shares of stock. Q. How long should I hold onto these stocks? A. First you set a profit objective for yourself. An objective of 50 percent of cost should give good results. Q. You mean that I should aim for a 50 percent profit on every stock I buy?

n- ~\f 't:\G;~. ff'S. ;:,.~ in ,"\; ;""'1ec~ ~""""-r , \ .Q. What if it doesn't reach that objective?

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A. You have to set a limit on your holding period in advance. My research shows that two to three years works out best. So I recommend this rule: If a stock hasn't met your objective by the end of the second calendar year from the time of purchase, sell it regardless of price. For example, if you bought a stock in September 1976, you'd sell it no later than the end of 1978. Q. What do I do with the money when I sell off a stock? Reinvest it in other issues that meet your requirements?

A. Usually, yes, with some flexibility dictated by market conditions. In times like the 1974 drop, when you find many good companies whose stocks are selling at low P-E levels, you should take advantage of the situations and put up to 75 percent of your investment capital into common stocks. Conversely, in periods when the market as a whole is overpriced you'd have trouble finding stocks to reinvest in that meet my criteria. In such periods you should have no more than 25 percent of your funds in stocks and the rest in, say, U.S. Government bonds. Q. Using your strategy what kind of results can I expect?

A. Obviously you're not going to get a 50 percent gain on every stock you buy. If your holding-period limit on a stock expires, you'll have to sell it at a smaller profit or even take a loss. But in the long run, you should average a re~rn of 15 percent a year or better on your total investment, plus dividends and minus commissions. Over all, dividends should amount to more than commissions. Q. This is the return you'd have gotten over 50 years according to your research?

A. Yes, and the results have been very consistent for successive periods as short as five years. I don't think a shorter period gives the strategy a really fair chance to prove itself. In applying the approach every investor should be prepared financially and psychologically for the possibility of poor short-term results. For example, in the 1973-1974 decline the investor would have lost money on paper,

but if he'd held on and stuck with the approach, he would have recouped in 1975-1976 and gotten his 15 percent average return for the five-year period. If we get a repeat of that situation, the investor should be prepared to ride out the downturn. Q. With the Dow around 1000 and many issues at their five-year highs, is there a danger of the kind of drop that followed the overpriced markets of the late 1960s and early 1970s? A. I have no particular confidence in my powers-or anyone else'sto predict what will happen with the market, but I do know that if the price level is dangerously high, chances are you will get a serious correction. In my own tests there were a number of periods of overvaluation, and the number of stocks available at attractive prices was very small; that proved a warning that the market as a whole was too high. Q. Can you summarize the key to making your approach work? A. The investor needs the patience to apply these simple criteria con-

sistently over a long enough stretch so that the statistical probabilities will operate in his favor.

A SAMPLING OF BARGAIN STOCKS

A Sampling of Bargain Stocks Total Assets (millions)

Gordon Jewelry

$92

Graniteville Co.

$120

Harsco Corp.

54 "l'

Company Amalgamated Sugar

Ampco-Pittsburgh Amstar

Blue Bell Federal Co. Federal Paper Board

Houdaille Industries

Houghton Mifflin Hughes & Hatcher Jantzen

Jorgensen (Earle M.) Lane Bryant Leslie Fay McCord Corp. Michigan Seamless Tube Murray Ohio Norris Industries

The following stocks meet the selection criteria recommended by Benjamin Graham in the accompanying artic\e-a P-E ratio of seven or less and an equity-asset ratio of 50 percent or more. All are listed on the New York Stock Exchange. [See Table 9.J

poE EquityAsset Ratio Ratio (%) (8/16/76)

Stockholders' Equity (millions)

Oroark Industries Reeves Brothers Riegel Textile

Russ Togs Sparton Corp. Uarco Wallace- Murray Western Publishing

Weyenberg Shoe Mfg. Zale Corp.

Recent Price

(8/16/76) 36%

44 1/4 39%

25% 37% 10% 13}/4

22% 16'/, 18'/, 11% 20'12 20 I'. 37%

11% 16%

10% 8 1/4

18% 16%

The[sel . " ,stocks, meet the sele~tion criteria recommended by Benjamin Graham in the accompanytng, artlcle--a P-E ratio of seven or less and an equity-asset ratio of 50 percent or more, All are hsted on the New York Stock Exchange .

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