“All intelligent investing is value investing—acquiring more than you are paying for.”
— Charlie Munger

Benjamin Graham, often regarded as the father of value investing, left behind more than a philosophy—he outlined a system. His investment filters, later referenced by Warren Buffett and Charlie Munger, offer structured, mechanical approaches for different investor profiles: Defensive, Enterprising, and the niche but historically grounded Net-Net.

This article summarizes key principles, screening formulas, and quantitative filters derived from Graham’s work, particularly The Intelligent Investor (Chapters 14 and 15). It does not provide investment advice or make any stock recommendations—it simply highlights how companies may qualify under these classic frameworks.

🛡 The Defensive Investor

Graham's concept of the Defensive Investor emphasizes resilience through size, consistency, and conservative valuation. This approach seeks to limit risk by focusing on companies with long records of financial and operational stability.

🧮 Graham Number (Defensive):

Graham Number=22.5×EPS (3-yr avg)×Book Value per ShareGraham Number=22.5×EPS (3-yr avg)×Book Value per Share

This value serves as a rule-of-thumb ceiling. Stocks trading below this figure may meet one of Graham’s valuation filters, though it does not imply merit or attractiveness on its own.

✅ 10-Point Defensive Checklist (Based on Chapter 14):

Annual Sales ≥ $300M

Current Assets ≥ 2× Current Liabilities

Net Current Assets ≥ Long-term Debt

Positive Earnings for 10 Consecutive Years

Earnings Growth ≥ 33% over 10 Years

Uninterrupted Dividends for 20 Years

Price ≤ 15× Average EPS (3 Years)

Price ≤ 1.5× Book Value

(P/E) × (P/B) ≤ 22.5

Price ≤ Graham Number

Companies that meet all ten criteria may be considered fully aligned with the defensive screen as originally described by Graham.

🧭 The Enterprising Investor

Graham’s Enterprising Investor is willing to conduct deeper research and consider smaller or less widely followed companies, while still applying strict financial discipline.

🧮 Graham Number (Enterprising):

Graham Number=12×Net Tangible Asset Value per Share×EPSGraham Number=12×Net Tangible Asset Value per Share×EPS

This lower multiplier reflects the broader, sometimes higher-risk scope of the enterprising profile.

✅ 8-Point Enterprising Checklist (Based on Chapter 15):

Current Assets ≥ 1.5× Current Liabilities

Net Current Assets ≥ 1.1× Long-Term Debt

Positive Earnings in the Last 5 Years

Dividend Paid in Last 12 Months

EPS Growth over Last 4 Years ≥ 0

Price ≤ 10× EPS (Trailing 12 Months)

Price ≤ 1.2× Net Tangible Asset Value

(P/E) × (P/NTAV) ≤ 12

This checklist provides a mechanical filtering method for identifying companies that historically matched Graham’s enterprising profile.

🧨 The Net-Net Investor

Explained in Chapter 15 about the Enterprising Investor archetype, the Net-Net filter is the most conservative and contrarian of Graham’s approaches.

It focuses on companies trading for less than the value of their net current assets. This is a liquidation-based valuation lens, not commonly used today, but rooted in deep value logic.

🧮 Net-Net Formula:

NCAV per Share=Total Current Assets−Total LiabilitiesShares OutstandingNCAV per Share=Shares OutstandingTotal Current Assets−Total Liabilities

A stock qualifies mechanically as a Net-Net when:

Market Price < NCAV per Share

EPS (TTM) > 0

These filters capture what Graham called “cigar butt” stocks—companies so cheap that even one last “puff” might be profitable under certain conditions.

🔍 Margin of Safety (Net-Net):

Margin=(NCAVPrice−1)×100%Margin=(PriceNCAV−1)×100%

The greater the margin, the wider the mechanical cushion between price and assets—assuming the underlying business is not deteriorating.

Graham even recommended looking for companies trading below 2/3 of the NCAV.

💬 Final Thoughts

Benjamin Graham’s methodology was more than a set of formulas—it was a structured approach to thinking about risk, valuation, and discipline. Whether one studies defensive resilience, enterprising flexibility, or asset-based liquidation filters, the goal is not to predict—but to measure.

He also insisted on diversification, as his approach was a statistical approach to investing.

This article presents a historical overview of Graham’s quantitative frameworks. It does not assign any company to a category of merit or suggest any action based on their inclusion. However, as future tools may allow easier exploration of these filters, the core logic remains the same: clear criteria, applied mechanically, open to thoughtful interpretation.

⚖️ Disclaimer

This article is for informational and educational purposes only. It is not financial advice, and it does not constitute a recommendation to buy, sell, or hold any security.
All screening methods, formulas, and company classifications are based on publicly available financial data and mechanical filters derived from Benjamin Graham’s The Intelligent Investor.
The author may hold personal positions in one or more securities that fit these filters. No compensation is received from any issuer.
Readers are solely responsible for how they interpret and use this information. Always conduct independent research or consult a licensed financial adviser before making investment decisions.

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