Graham’s Stock Selection Screen Part 2

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Jae Jun

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Previously I went through 4 combinations from the list of Benjamin Graham’s 10 criteria for stock selection.

Due to the many responses and requests for other combinations, I’ll be going through different conditions. I’ll also try to find the best performing condition to add to the value screens section.

Do take time to read the comments of the first article as it provides excellent additional information about the article as well as the screen itself.

And If you missed the original article, follow the links to get up to date.

Here are a couple of comments that I feel should be read.

Reader “Eldinril“, mentioned

..this is referred to as Graham’s Last Will and Testament. It was written by a man named James Rae, who became friends with Graham in the last few years of his life…

I recall reading once that Rae and/or his son attempted to run money using the ten-point checklist, but achieved lackluster results. I find it particularly intriguing to compare this checklist to the list of criteria included in the later editions of “The Intelligent Investor”. It is important to understand that this particular checklist was the result of conversations between Graham and Rae. Some of the details were the result of compromises between the two of them.

Reader “R” also brought up an interesting point.

..after coming up with these 10 points, Graham said that you could achieve the same result by selecting stocks with only the following 3 out of 10 points: Dividend yield at least 2/3rd AAA bond, Earning yield at least twice the AAA yield, debt to equity less than 1. Which means 1 3 and 6 above. Other points are redundant. See how the performance of a portfolio of those companies look like. I think there was an article on a recent AAII publication.

List of 10 Stock Selection Criteria by Benjamin Graham

1. An earnings-to-price yield at least twice the AAA bond rate

2. P/E ratio less than 40% of the highest P/E ratio the stock had over the past 5 years

3. Dividend yield of at least 2/3 the AAA bond yield

4. Stock price below 2/3 of tangible book value per share

5. Stock price below 2/3 of Net Current Asset Value (NCAV)

6. Total debt less than book value

7. Current ratio great than 2

8. Total debt less than 2 times Net Current Asset Value (NCAV)

9. Earnings growth of prior 10 years at least at a 7% annual compound rate

10. Stability of growth of earnings in that no more than 2 declines of 5% or more in year end earnings in the prior 10 years are permissible.

Test Combination of Criteria

The following combination of screen conditions have been applied

  • (1),(2),(3)
  • (1),(2),(3),(6)
  • (1),(2),(3),(6),(7)
  • (1),(2),(3),(6),(7),(8)
  • (1),(2),(3),(6),(7),(8),(9)

The test conditions remain the same as the original and although I’ve received historical bond yield information, I have no idea how to incorporate it into my screen so I’ll have to stick with a static 4.5%.

I intentionally left out conditions (4) and (5) because these two produce zero results. It is best left as a standalone NCAV screen that I have available already.

As I was performing the screen, I noticed that the results of  (1),(2),(3),(6),(7),(8) was poorer compared to just (1),(2),(3),(6),(7), which means that condition (8) is a hindrance on performance.

I also noticed the same thing with condition (3):Dividend yield of at least 2/3 the AAA bond yield. The screen performed better without the dividend yield requirement.

This is a surprise because everyone has been saying that (3) is a main condition.

Or is it because of the drop after each dividend payment?

Old School Value’s Version of Graham’s Guru Screen


Here is what I have found to be the best stock selection criteria.

1. An earnings-to-price yield at least twice the AAA bond rate

2. P/E ratio less than 40% of the highest P/E ratio the stock had over the past 5 years

6. Total debt less than book value

7. Current ratio great than 2

Surprisingly very simple.

Stocks from the Best Performing Graham Checklist

I’ve added the above stocks to a virtual portfolio for you to track over time. Click to see the Graham Checklist Screen.



No positions.

18 responses to “Graham’s Stock Selection Screen Part 2”

  1. AlwaysInvert says:

    New to Old School, but I think this bit from John Train’s: The Money Masters (2nd Ed, Perennial Library Press) is worth a read.

    According to Mr. Train the following is from a transcript published posthumously from a seminar that Ben Graham conducted in 1976:

    “I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, forty years ago, when our textbook ‘Graham and Dodd’ was first published; but the situation has changed a good deal since then. In the old days any well-trained security analyst could do a good professional job of selecting undervalued issues through detailed studies; but in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost. To that very limited extent I’m on the side of the ‘efficient market’ school of thought now generally accepted by the professors.

    Graham then suggested a highly simplified approach, based on two criteria, to indentify bargain issues:

    “My first, more limited, technique confines itself to the purchase of common stocks at less than their working-capital value, or net current-asset value, giving no weight to the plant and other fixed assets, and deducting all liabilities in full from the current assets. We used this approach extensively in managing investment funds, and over a thiry-odd-year period we must have earned an average of some 20 percent per year from this source. For a while, however, after the mid-1950’s this brand of buying opportunity became very scarce because of the pervasive bull market. But it has returned in quantity since the 1973-1974 decline. In January 1976 we counted over 100 such issues in the Standard & Poor’s Stock Guide – about 10 percent of the total. I consider it a fool-proof method of systematic investment – once again, not on the basis of individual results but in terms of the expectable group outcome.”

    His second approach was, he said, “similar to the first in its underlying philosophy. It consists of buying groups of stocks at less than their current or intrinsic value as indicated by one or more simple criteria. The criterion I prefer is seven times the reported earnings for the past twelve months. You can use others – such as a current dividend return above 7 percent, or book value more than 120 percent of price, etc. We are just finishing a performance study of these approaches over the past half-century 1925-75. They consistently show results of 15 percent or better per annum, or twice the record of the DJIA for this long period. I have confidence in the threefold merit of this general method based on (a) sound logic, (b) simplicity of application, and (c) an excellent supporting record. At bottom it is a technique by which true investors can exploit the recurrent excessive optimism and excessive apprehension of the speculative public.”

    In 1976, Graham and his collaborators finished calculating the application of his simplified criteria of a bargain stock over the fifty years since 1925. They established that besides his traditional criterion:
    1) A stock should be bought for less than two-thirds of its net quick assets* and sold at 100 percent of net current assets*.

    Either of the following gave excellent results:
    2a) The company should owe less than it is worth.
    2b) the earnings yield should be twice the prevailing AAA bond yield.

    3a) The company should owe less than it is worth.
    3b) the dividend yield should be no less than two-thirds of the AAA bond yield.


  2. somrh says:

    I think I may have mentioned this at one point but in the Oppenheimer (1984) study, criteria 1, 3, 6 and 9 were tested and underperformed criteria 1, 3 and 6. Your test period seems to suggest that 9 adds something to the mix whereas Oppenheimer (1984) suggests that 9 doesn’t. This is, at the very least, mixed results.

    And I think I may have already mentioned this before as well but Montier also tested 1, 3 and 6 along with the additional criteria that Graham sometimes mentioned of PE10 less than 16 where PE10 calculates earnings as the average of the last 10 years of earnings. I’m not sure how to screen for that accept by hand.

  3. Eldinril says:

    I would like to say thank you to AlwaysInvert for the nice comments.

    I also find it interesting that Jae’s results correspond to what I was trying to say about using a more lenient number such as the 5-year AAA Corporate Bond when applying this screen. This amounts to a sort of compromise between using a high number and eliminating the criteria entirely.

    One other approach that might be interesting to test would be to eliminate criteria 9 and 10 (which speak to earnings growth and stability) while reinserting criteria either 5 or both 4 and 5 (which gets back to Graham’s Net-Net concept). Criteria 3 (regarding dividends) might also be removed since so few Net-Nets pay them. Perhaps that could be Part 3 of this discussion…

    Best wishes,


  4. fandegraham says:

    I am using the graham method to invest but i use slighty different criteria from you.
    One based on growth : (1) (4) (6) (7)
    (you can try also 1-3-4-6-7 but i am not sure you can obtain some companies for the testing period)
    One based on ncav opportunity : (5) (6) (7) (8)
    It permits me to have a diversified portfolio and some price to buy with (4) and (5)
    For the moment it produces good results. I am curious to know the results of a backtest of my method.

  5. Jae Jun says:

    @ fandegraham,

    Not sure whether my results are correct, but I see a big underperformance with 1,4,6,7. I’m curious, why did you choose these 4?

  6. fandegraham says:

    @Jae Jun : did you try 1,3,4,6,7 ? and 5,6,7,8 ?
    in my opinion: (5,6,7,8) > (1,3,4,6,7) > (1,4,6,7) for a performance comparaison (your backtest should confirm that ?)
    I mainly use (5,6,7,8) and (1,3,4,6,7) .
    (1,4,6,7) just add me more companies to diversify my portfolio

    but recently i slightly modified rule (4) to buy below 44% of tangible book value .. which gave me good results ..

  7. Gil Meriken says:

    Hey, what happened to the Old School Value Stock Screen? 🙁

  8. Jae Jun says:

    That screen wasn’t updated for over 6 months and very hard to keep track of.
    I have plans to replace it with different screens that will actually be updated.

  9. In regards to the two highlighted comments within your article. The first commentator is correct concerning Rae. I’ve read that as well. The second poster seems to be describing greenblatt’s magic formula which I believe graham is where that formula was derived from. I’ve never read greenblatt’s books so I don’t know for sure. I don’t have an interest in formula investing. Although, I believe it to be a better alternative for the average individual that purchasing an index or mutual fund.

  10. Eldinril says:

    I will attest to the second set of comments. You are correct that they are similar to Greenblatt’s Magic Formula premise, but the comments were included in the original article about the Graham-Rea set of criteria from the Journal of Portfolio Management.

    Best wishes,


  11. Chris says:

    This is amazing! Where do you get your data from?
    Do you think it would be worth it to do a similar exercise on the Piotroski score? To see which eliminates of his screen are most predictive of future returns?
    Just curious to hear your thoughts. Keep up the great work!

  12. Jackie says:

    I know this is a value investing website and one should never use technical analysis– but I just wonder whether you could use the same screen (1),(2),(3),(6),(7),(8),(9) AS WELL AS a condition of using Moving Average of say 6 or 10 months. I am a value investor at heart too but found technical anlaysis quite useful as well. If you are have freetime and are openminded, then please visit the website below and have a look at the free app on backtesting on moving averages of your choice using ETF — I think if i am correct the stocks selected using the Graham screen will outperform tremendously as it would have sidestepped the big decline.

  13. Daniel Cluley says:

    I commented late on the previous thread this:

    Nice evaluation of a classic set of rules. I enjoy your analyses of value and dividend strategies.

    For Bond Rates you can find historical rates from the St. Louis Fed here: for AAA: and Treasury I have not updated in a couple months, but AAA historical Mean=5.91 Median=5.25 and 10 yr Treasury Mean=4.7 Median=3.95. Typically I take a midpoint average of the Median and Mean for both in calculating some of my formulae. According to the FRED Data over approximately 100 years the historical AAA Rates are slightly higher than your 4.5% estimate at ~5.58% and 10 Yr Treasuries are slightly lower at ~4.32% using the midpoint average of Mean and Median. Giving an expected alternate _safe_ fixed income return of ~4.95%.

    I think there are other factors you should take into account in your screen as well. The Main one is dividend payout ratio. This must be looked at both quantitatively and qualitatively to ensure that the expected dividend return will continue in the long run. Typically I look for <50% payout ratio with rising dividends and NI that coincide with a typical long term inflation rate.

    Additionally, I look for High FCF and ROE companies and always at the end take a look at Dilution in the stock that may happen through adding Shares outstanding, stock options, and pensions to ensure that future dividend revenue streams won't get spread out to others at my detriment.

    These times have other factors to take into account than just the numbers however. So relying upon qualitative decisions about a company's future prospects such as management and buffet's "wide moat" and constant demand are key as well.

  14. Nemo says:

    John Train revisited Graham’s list in “The Midas Touch” (1987). To quote Train (at page 12): “Graham never stopped studying, and in a work published posthumously in 1977 he came up with still another approach that seemed to work equally well and offered more opportunities. It involves five different tests for value and five for safety. A stock can be bought if it satisfies any one of the value criteria plus any one of the safety criteria.” Train then goes on to list the 5 “value criteria” as 1-5 of your list; the “safety criteria” are 6-10 of your list. On pages 13 – 14, Train refers to some academic work done (by Oppenheimer) to test this approach.

    That’s the way I tend to apply Graham 10 criteria in my own work. I do a preliminary list of stocks which satisfy any one of 1-5 and any one of 6-10. Once I have a list of say 10 such candidates, I try to choose the single stock from that list which has the greatest margin of safety. YMMV

    BTW, I personally think 5 is far too strict, since it’s hard enough to find any profitable company trading at less than NCAV, let alone 2/3rds of NCAV. In some of his later works, Graham seemed to accept that a price less than NCAV is good enough, so I tend to read 5 in this way. Also, in some countries, tax laws encourage relatively high dividend payouts, so it’s common for companies to satisfy 3 – in that case, my preference is to adjust 3 so that it applies only if the dividend yield is greater than the AAA bond yield (ie, not 2/3rds of the AAA bond yield).

  15. josh says:

    I have a question regarding the finding the highest PE over the past 5 years? How do you find that? manually? It seems to be a tedious exercise especially if the screener returns over 100 stocks. DO you have any suggestions?

  16. Jane says:

    Hi guys,

    What is the exit criteria for this strategy?


  17. Jae Jun says:

    The exit condition is very simple. After 1 year, I update the portfolio. The top 15 stocks that meet the criteria then selected.

  18. its_rhs says:

    Aren’t we supposed to look at overall market valuations and then allocate our portfolio between cash and bonds….I think this is what Graham preached at the fag end of his career….having equities as no more than 75% of portfolio at any given time and cash also no more than 75% depending on the overall index PE……I think this should result in few percentage points worth of extra returns….

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