FAQ [Archvie]

 

[From the archives]

How do I use GV? What are Graham's calculations for stocks?

Please see Graham's calculations and GV.

Who is Benjamin Graham?

Benjamin Graham was the teacher and mentor of the World's most successful investors, including Warren Buffett.

Buffett even named his son after Graham, and has said he considers Graham his second greatest influence, after his own father.
Buffett attributes his success almost completely to Graham's teachings, the central principle of which Graham called The Margin of Safety.
(Read more about Graham's timeless principles).

What does GV do?

GV is the first financial portal in the World that applies Graham's calculations for stocks to the entire stock market (for American stocks, all 4000 NYSE stocks in the S&P Total Market Index).
So instead of a few specific stock recommendations, GV gives you a verifiable list of ALL stocks meeting the Graham standards, calculated at their latest price.

For more information, see Graham's calculations and GV.

Don't you have to make riskier investments to make more money?

High-risk-high-reward may work occasionally, but it is never a continuously viable strategy. It is simply a matter of probability and math. Over time, continuous high risk will, by definition, lead to disaster.
So to be a consistently profitable, investments first have to be business-like and sensible.

The most successful investors are not the ones who make the most money.
Stocks are very profitable by nature.
The most successful investors are just the ones who lose the least.

There is another common misconception about risk - that diversification reduces it.
Note the quote below:
"Risk can be greatly reduced by concentrating on only a few holdings."
-Warren Buffett

Graham's most important principle is actually about safety - Safety of Principal, or Margin of safety.
Not risk!

High effort = high reward actually is a lot closer to the truth.
Strategies and rates of returns can vary depending on the amount of effort an investor is willing to put in.
Not the amount of risk they are willing to take.

The concept of risk in investing is actually highly misunderstood.
This is why people end up losing so much money in stocks.

Graham and Buffett have been saying these things for decades, safety first etc.
But their theories have been as unpopular as they have been successful.
Because everything related to investing is so counter intuitive.

Why don't stocks come with standard ratings?

Every product you buy has to pass quality tests except financial products (Accounting standards only ensure that the numbers reported are correct, not that they are invest-worthy).
This lack of standard tests is because, unlike other products, the quality of a stock depends almost completely on its price (Any stock is a bargain if given free, and any stock is risky if bought beyond a certain price).

Also, because of the common misconception that successful investors buy riskier stocks, no one is really able to agree on what price is correct or safe for a stock.

Don't Graham's principles only work for blue chips? Can I use them to invest in smaller companies?

As you can see from the calculations for stocks given by Graham, it is OK to compromise on the size of the company, or the history, as long as the other factors make up sufficiently for it.

Can't I simply invest based on 'tips' instead?

There are rare cases of real tips getting leaked by people who are trying to buy or sell based on them. But the number of false tips that cause hyped-up shares to crash instead are so much more common that they easily wipe out any gains made by the occasional real tip.

Aren't quality and value of a stock subjective?

The calculations for stocks given by Graham are intended to avoid exactly such subjectivity by focusing on documented and objective past numbers, instead of subjective and predicted future ones. The ambiguity arises only when investors use formulas not given by Graham or use subjective predicted numbers against Graham's recommendations.
There is no ambiguity in the calculated value as taught by Graham.

Do Graham's principles account for other important factors like operating margin?

Apart from Graham's theories coming with the highest recommendations, a little personal experience with them will show that in spite of looking simple on the surface, they cover all the basic numbers required to check every aspect of a stock.
Graham's calculations for stocks are a product of nearly 40 years of refinement and research (and pure genius).

By focusing on only the minimum required variables, one is able to do a much more accurate analysis using Graham's theories.
Investing is not about effort after all, but about precision.

Isn't dabbling in stocks, with any principle, gambling?

A stock market is actually the exact opposite of a casino.
A casino makes its profits from the gamblers. A stock market consists of companies that pass on their profits to investors.
Only a small percentage of these profits are retained by the market itself as commissions.

Some ignorant speculators do treat the market as a casino and gamble on prices of unknown or risky companies.
But they do so at their own peril and that is exactly what Graham's teachings seek to prevent.

Aren't Graham's principles outdated? Do they apply in the connected world of Global Finance today?

People have been saying this for decades.
Warren Buffett already answered this question very effectively in 1984.

The American stock market has been active for nearly 150 years. European ones have been around for even longer (The Amsterdam Stock Exchange was established in 1602).
The first age of Global finance actually began in the first part of the 19th century, and some speculate even lead to WWI. IMF and the World Bank were thereafter established in 1944 to regulate global finance.

All Graham asks is for investors to know the worth of what they are buying and selling.
Something as basic as that should not change, no matter what the period one does business in.

Didn't Graham simply say Value = Current (Normal) Earnings x (8.5 plus twice the expected annual growth rate)?

Please see Graham's misquoted formula.

Doesn't Graham only recommends cheap stocks? What if I want to buy growth stocks?

A true student of Graham's principles will also always buy the best stocks at the right price, not the cheapest stocks.
Even on GV, you will see the ones of the highest quality first; not the cheapest.

Also, one of Graham's calculations for stocks is to check the average EPS growth rate of the stock over the last 10 years.
So while Graham does insist on a company having a healthy growth rate, he never recommended overpaying for a stock with a higher than average growth rate.
The reasoning is that higher than average growth rates are not sustainable for long. One could simply buy more stable stocks instead with that money, and that is much more likely to give the expected returns.

How do I create a portfolio of my favourite stocks?

Once you have registered and/or logged on to GV, a stock can be added to your account by cloning the stock.
There is a clone button at the top of every stock page.
You can even modify any of the original data from the stock before adding it to your account. The analysis of the stock in your account will be altered correspondingly.

You can also modify/delete your favourite stocks in bulk.

How do I analyze a stock myself?

You should always analyze a stock with your own data to verify it personally before making an investment decision.
Please see Graham's calculations for stocks and GV for a complete description of all terms.

What is "Stock rating"? Why are the various constituent ratings not linearly calculated?

On Graham's calculations for stocks and GV, you can see the following description for "Stock rating":
"An average percentage of the criteria for defensive investment [1]-[5] above.
The 6 calculations ([2] has two criteria) are also provided as individual percentages for each stock.

Note that this rating is only provided as a convenient way to sort through stocks of the same Risk level.
Risk level and Optimum price are much more precise indicators of the true worth of a stock."

One of those 6 calculations that are used to calculate the final "stock rating" is the "sales rating".
While the "Sales rating" is allowed to grow linearly for sales values from 0 to the currently CPI adjusted value ($500-600 million), beyond that, it is only allowed to grow logarithmically.

The reason this is done is because a higher sales rating should not be able to make up for lower values in other ratings too easily.
You will see lots of companies with sales values in multiples of Graham's specifications and if the Sales rating were allowed to proceed linearly, it would simply overshadow all other ratings.

A similar cap is also present for the Earnings growth but on a different log scale.
Sales and Earnings growth are also the only ratings that are allowed to go beyond 100%.

In any case, these calculations for "Stock rating" are very specific to GV and only used for sorting of stocks which have already been Approved/Rejected as per Ben Graham's specifications, which are much more exact.
These calculations will not in any way interfere with the actual Graham analysis of stocks.

Why are Sales and Earnings growth the only ratings that are allowed to go beyond 100%?

These two are the only ratings which can go beyond 100% and cannot be significantly manipulated.
THey are thus allowed to go a little beyond 100% to allow compensation for any minor lapses in the other ratings.

In any case, these calculations for "Stock rating" are very specific to GV and only used for sorting of stocks which have already been Approved/Rejected as per Ben Graham's specifications, which are much more exact.
These calculations will not in any way interfere with the actual Graham analysis of stocks.

Don't most companies doctor their books? Is it possible to do a thorough analysis?

Fraudulent companies have been doing this since stocks originated. Regulatory bodies like SEC and legal accounting requirements like GAAP were formed for this reason.

The reason for security analysis has always been to see through marketing and accounting gimmicks.
This is also why Graham recommends checking a company's performance for at least a decade or two. It's very tough to fake dividends and reported earnings for such long periods.

As Warren Buffett said, time is the enemy of the mediocre company.

Even Graham's calculations cannot protect against outright fraud though, but those are rare and carry strict penalties.
However, even fraud can be sufficiently hedged against by Graham's recommended limits of diversification - a minimum of ten stocks and a maximum of thirty.

Aren't most investment profits these days are generated by inside information?

Inside information is usually WRT to short-term earnings, quarterly and annual results, M&As etc.
When investing based on a company's performance for the last 10-20 years, what happens next month or next year is of very little significance.

Weren't even the ratings agencies unable to predict the downfall of the large investment houses in 2009-2010?

While Graham did have a good opinion of S&P ratings in general (he did a historical analysis on them too!), this is why it is important to do a full analysis using Graham's principles.

Note that neither Buffett nor any of other Graham's other pupils had a significant investment in any of these companies that failed. Graham's principles of long-term historical analysis are designed exactly to protect against catastrophes like this. A lot of theories work when things are going well, but few hold up when things go bad.

How often is the data on GV updated?

Unlike technical analysis websites, the EPS, Financial and Dividend data on GV is updated only once a year - just enough to account for the different times of filing of various companies across the year, and to give a uniform and up to date analysis for all companies each year.
You will be seeing an update before the end of March each year.

However, the pricing data should be updated everyday and will be as soon as a reliable and open pricing feed becomes available.
This should be done by the end of March 2012.

What is the best browser and resolution for using GV? Why do the stock screeners get clipped in certain browsers and lower resolutions?

For best results, please use the Firefox or Safari browsers on a 1280x800 resolution setting or as close to it as possible.

Most stocks on GV have Optimum prices less than the "Graham Number". Why?

The Graham number applies only to Defensive stocks in combination with a number of other criteria.
The complete Ben Graham stock check procedure is much more elaborate.

GV gives a "complete" Graham analysis for every stock.
Most stocks do not meet any of the other criteria for being Defensive stocks.
They all come under Enterprising or NCAV stock types as specified by Ben Graham.

Hence their actual recommended price as suggested by GV, and Graham, is far lesser than the Graham number.

Aren't stocks risky? Aren't other investments like gold and land safer?

This is a common misconception largely due to the higher liquidity of stocks. . But as the recent housing mortgage crisis should show, anything that can go up can also come down. The fact is, everything fluctuates. But as long as you have bought something of tangible value at a reasonable price, you can ignore the fluctuations of the market and rest assured that the market will eventually correct itself and grow.