The model by Benjamin Graham, who is credited with systematising fundamental analysis, recommended for use by conservative investors.
Accordng to Graham's stock-selection criteria, the company must have an adequate size (Rs 100 crore sales may be taken as adequate size for Indian companies) and a strong financial condition.
To satisfy this criterion, the current assets should be at least twice that of current liabilities and the total debt-equity ratio should not be greater than 1:1.
The company should have paid dividends and earned profits for the last 10 years.
There should be a growth in earnings per share of 10 per cent per annum over the last seven years.
The current price should not exceed 20 times the average EPS in the last seven years for companies with past seven-year growth higher than 20 per cent. For companies with past growth rates between 10 and 20 percent per annum, the multiplier has to be the growth rate itself.
The current price should also not be more than 1.5 times the book value last reported.
These prescriptions by Graham require 10-year data to pick stocks. But the method is unambiguous and uses a limited number of ratios.
Investors may complain about the 10-year data requirement; but they have to keep in mind that their hard-earned money has to be protected by committing it to companies with a good past record.
Tuesday, October 16, 2007
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3 comments:
dont you think you should give Mr. Graham some more respect?
You've pretty much plagiarised his entire life's work and added your name next to his.
Don't you think Mr. Graham deserves more respect?
You've pretty much plagiarised his entire life's work, added a few comments here and there, and put your name next to his!
Ideas of any scientist don't reach nooks and corners of the world just by themselves. They require carriers. There are reasons why some ideas get stuck. A small change done could sometimes take the idea forward. I did something that occurred to me after years of thinking about it.
The judgment is in your hands. I listen to critical comments comments as well as to appreciative comments. My behaviour does change even though very minutely as I absorb the reactions of people around me.
Thank you for the comments.
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