The Discerning Investor

Which Came First - The Strategy or The Stock

Graham's framework is designed to be sector independent, and comes very highly recommended. But his rules are extremely selective and very few stocks clear them. That's precisely why they give great results.

But Graham's framework is also unpopular for the same reason; because few stocks fare well against it.
(It's not much use for writing articles. In short, good for investors; bad for analysts!)

In the end, it's a personal choice.
Does one pick stocks based on a preferred strategy, or a strategy based on one's preferred stocks?

The answer - for both investors and analysts - is obvious, and they're not the same.

GAAP vs Non-GAAP Earnings

A businessman interviewing job applications for the position of manager asked each applicant only one question, "What is two plus two?"

The first interviewee was a journalist. His answer was, "Twenty-two".

The second was a social worker. She said, "I don't know the answer but I'm very glad that we had the opportunity to discuss it."

The third applicant was an engineer. He pulled out a slide rule and came up with an answer "somewhere between 3.999 and 4.001."

Next came an attorney. He stated that "in the case of Jenkins vs. the Department of the Treasury, two plus two was proven to be four."

Finally, the businessman interviewed an accountant. The accountant went over to the door, closed it and said in a low voice, "How much do you want it to be?"

The point here is that there is a reason GAAP exists.

If one were to do accounting according to one's own rules, almost any number can be shown for any metric. The only constraint would be how much sounds believable.

It is important as a savvy investor to ensure that the information you are using for comparison follows the GAAP rules and is not the (often more publicized) non-GAAP earnings number.

The Discerning Investor

It's important for an investor to be able to differentiate between the stock market, and the financial industry. In very simple terms, one generates profits off stocks, while the other generates profits off investors.

But businesses that generate profits are not necessarily bad just for that reason. GV tries to be profitable by applying Graham's framework as accurately as possible. The internet helps increase freedom of choice by giving everyone a voice, and by encouraging debate.

But this is also where being a discerning investor is essential. Misquotes and misinterpretations are increasingly common in today's ultra competitive market.

Most businesses only exist to make profits and will sell whatever sells best; and the things that usually sell best are sugar water, story stocks and target prices.

Investors today have to be able to look beyond clever marketing, to the actual quality of services marketed to them. Online discussions such as the comments on GV's analyses are a great way to see different points of view and make up one's own mind.

Investing In Gold: Why Not To Have Gold In Your Portfolio 

Anything that doesn't depreciate is a good buy at the right price, including gold. But stocks have given better returns that all other investments historically.

Stocks are also easier to evaluate since every stock has a specific earnings associated with it.

Ben Graham was Warren Buffett's professor and mentor, and the original proponent of Value Investing.
Buffett calls Graham his second greatest influence after his own father, and even named his son after Graham.

The Benjamin Graham stock screener gives a complete Graham analysis, for all 4000 stocks listed on the NYSE and NASDAQ.
Including all the above stocks.

Archived Response

GV's official recommendation is to do whatever Graham says and only invest in whatever clears 100% of Graham's quantitative criteria.

But quite frankly, there simply aren't too many Defensive or Enterprising stocks that clear 100% of Graham's quantitative criteria today.
Graham did not recommend investing more than 3.3% of one's portfolio in an NCAV stock either.
So even with 10 NCAV stocks, that's just 33% of one's stock portfolio.

But then Graham recommended having at least 25% of one's overall portfolio in stocks (and 75% in bonds) even in the most overpriced markets

So it's really up to your own personal judgement.
Do you believe that the market is overpriced and heading for a correction?
Or do feel that Graham's quantitative criteria are simply not feasible with today's interest rates?

If you believe the former, you would perhaps stick to the 100% stocks.
If you believe the latter, you might be willing to pay a little more than what Graham recommended for the given quality of stock. That means buying something with a Quantitative Result of less than 100%.

Either way, sticking as close as possible to the Graham criteria will ensure you're always within the largest possible Margin of Safety.