NEW YORK (TheStreet) -- I often wonder what the old master Ben Graham, whom many of us consider to be the father of value investing, would think about today's markets. Things have changed quite a bit since his death in 1976, not the least of which is the never-ending supply of information available to investors.
Things were quite different during Graham's time, but I suspect that his overall investment philosophy might not be all that different if he was still alive and investing in these markets.
He'd probably be shunning the likes of Amazon (AMZN), Twitter (TWTR) and Facebook (FB) simply because none of these stocks provide the margin of safety, nor do they have the consistent and profitable operating histories Graham would require.
Graham also drew a great distinction between investing and speculating, and I suspect he'd put the aforementioned stocks into the speculation category, at least until they demonstrated that they are here to stay, and can generate solid, growing bottom lines.
Some now put Graham's investment techniques in the "dinosaur" bucket; no longer relevant in modern times. If you are in that camp, I strong suggest that you read Graham's classic "The Intelligent Investor." Although written in a different era (the last original edition was in 1973, and a version published in 2006, which includes commentary by Jason Zweig, is a fantastic read), the book stands as a testament to the belief that some investment principles never lose their relevance.
I still utilize some of Graham's techniques, including, a search based on stock selection for the "Defensive Investor":
- Adequate Size: Graham excluded smaller companies; I've set the minimum market cap at $1 billion.
- Strong Financial Condition: Minimum current ratio of 2; long-term debt must be less than working capital.
- Earnings Stability: Graham required positive earnings for at least 10 consecutive years: I am using seven years.
- Dividends: Graham required "uninterrupted" dividends for at least 20 years; I am using seven years here as well.
- Earnings Growth: Graham sought a minimum increase of 33% in earnings per share in the past 10 years; I am using a minimum compounded annual growth rate in earnings of 5% over seven years.
- Moderate Price-to-Earnings Ratio: Average P/E should be less than 15 over the past three years
- Moderate Ratio of Price to Assets: Graham sought companies with price to book ratios below 1.5, but would accept a higher P/E ratio, if price to book was lower. This end result was that P/E times Price to Book ratio should be less than 25.5.
- Other: U.S. companies only; I excluded foreign companies and American Depository Receipts (ADRs) from the results
HFC data by YCharts If you have a few hours this weekend, grab yourself a copy of "The Intelligent Investor," it will be well worth your time. At the time of publication the author held no positions in any of the stocks mentioned. Follow @JonMHellerCFA This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
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