Graham suggests that when comparing companies in the same field, the best approach is to line up the basic financial numbers side by side over a long period. He wants the analyst to look at earnings records, balance sheet strength, capital structure, and consistency. The point is not to forecast the future but to understand which companies are truly stronger and more stable based on actual history. Graham prefers long-term averages rather than one-year snapshots because short-term results can be misleading.
Question 2:
There are several limitations to these comparisons. Companies might use different accounting methods, which can distort the numbers. One company might look more profitable simply because it uses more leverage. Cyclical industries can make weak companies look good at the top of the cycle and strong companies look weak at the bottom. Some businesses also have unique risks or strengths that do not show up in high-level comparisons. For these reasons, Graham warns that comparisons are helpful but must be used carefully.
Question 3:
Graham recommends uncovering opportunities by doing broad and steady reading. This includes going through company lists, financial statements, and industry summaries, and watching for unusual price behavior or neglected companies. He believes bargains rarely appear in popular companies. In today’s environment, I would still follow this approach but combine it with modern tools like stock screeners, databases, and AI systems to help surface unusual patterns or overlooked names more efficiently. The core idea remains the same: keep looking widely, then narrow in.
Question 4:
Here are some investing dimensions and where I think Graham sits on each, along with where I would place myself.
Time horizon
1 means short term and 10 means very long term
Graham is around 9
I would also be around 9 because I do not want to trade often.
Valuation strictness
1 is loose and 10 is extremely strict
Graham is a 10
I would be an 8 to allow more flexibility for businesses with intangible strengths.
Use of forecasting
1 is heavy forecasting and 10 is almost none
Graham is about a 9
I would be around 7 because today’s world sometimes requires some forecasting.
Risk tolerance
1 is high risk and 10 is very low risk
Graham is a 9
I am probably a 7 because some modern opportunities require selective risk taking.
Balance sheet focus
1 is minimal and 10 is heavy focus
Graham is a 10
I am roughly an 8 since I still value balance sheets but also consider competitive advantages.
Quantitative emphasis
1 is mostly qualitative and 10 is mostly quantitative
Graham is about an 8
I am closer to a 6 because I think qualitative analysis has grown in importance.
Diversification
1 is very concentrated and 10 is highly diversified
Graham is around 8
I would be an 8 or 9 since diversification fits my investing style.
These dimensions help show that Graham sits far toward discipline and conservatism. I sit somewhat close to him but with more flexibility for modern businesses.
Question 5:
My overall assessment is that Graham’s approach is still extremely useful. His focus on downside protection, long-term thinking, and conservative financial analysis stands up well even today. The parts I want to incorporate include using long-term earnings records instead of short-term numbers, checking balance sheet strength, and always thinking about the margin of safety. The part I would modify is being more open to high-quality, asset-light companies whose value comes from things like brand, network effects, or intellectual property. Those types of companies did not exist in his era in the same way, so I want to combine his discipline with a more modern understanding of competitive advantages.
Question 6: SEB – Qualitative and Quantitative Analysis
One security that I believe Graham would view as having a solid margin of safety today is Seaboard Corp. (SEB). SEB is an underfollowed conglomerate operating in several basic industries, including pork production, shipping, commodity trading, milling, and power. None of these are high-visibility sectors, and the company does very little investor promotion. This fits Graham’s belief that many real bargains come from quiet, steady companies that the market simply ignores. SEB also has a long record of conservative management and maintains a diversified group of essential businesses with tangible assets.
On the quantitative side, SEB trades at a P/E of about 9.7, which is low for a company with consistent profitability. The stock also trades at about 0.8 times book value, even though its Book Value Per Share is around 5184, which is higher than the current share price near 4184. The balance sheet is conservative, with a debt-to-equity ratio of only 0.36, which is in line with Graham’s preference for low leverage. The company generates positive earnings every year, and over time it has also produced meaningful free cash flow even though the most recent FCF yield is about 4 percent. The mix of steady earnings, tangible assets, and a valuation below book value suggests that the stock is priced with conservative assumptions already reflected in it.
Putting everything together, SEB appears to trade below what a cautious investor might consider its intrinsic value, while also offering stability and conservative financial management. This combination matches Graham’s idea of a margin of safety, and I believe he would consider this type of opportunity attractive.
Benjamin Graham advises that when comparing companies in the same industry, investors should focus on fundamental measures of earning power, financial strength, and intrinsic value. Graham recommends atleast five year averages alongside the most recent 12 month results. This smooths out cyclical or abnormal conditions (like the depressed business climate of 1938) and avoids over emphasis on one year’s data. Ideally use Use standardized forms, multi year averages, and a broad set of financial indicators like the below
• Earnings relative to market price of common stock
Even if one company (Continental) shows better figures across earnings, margins, assets, and dividends, Graham warns that comparisons are only statistical exhibits.They don’t guarantee future performance or eliminate business risk.
Variations in Homogeneity :
The reliability of comparisons depends on how homogeneous the companies are. Even within the same industry (e.g., steel), differences in capitalization structure, product mix, or reporting methods can weaken the validity of side by side tabulations.
Heterogeneous Groups:
Industries where companies respond differently to new conditions, often prospering at each other’s expense. In these groups, comparisons are much less reliable because relative standings shift frequently. In heterogeneous industries, past numbers are less predictive, since competitive shifts and branding can radically alter relative performance.
Question 3:
Graham’s playbook is about systematically hunting mispricing with conservative assumptions and repeatable filters. He focuses on Net-nets and asset bargains i.e Stocks trading below net current asset value (NCAV) or below conservative liquidation value. He looks for Stability i.e 10-year earnings history with no large losses, and stable dividend history. Finally, Margin of safety i.e big discount to conservative intrinsic value
Markets today are shaped less by hard assets on balance sheets and more by intangible drivers—software, data, brands, networks, and customer relationships—that don’t neatly appear as book value. Faster capital cycles mean advantages can emerge and erode quickly. Idea is on preserving his core—margin of safety, disciplined underwriting, absolute-return focus—while upgrading the toolkit to measure intangibles, cash flows, and competitive durability, and to react thoughtfully to quicker industry shifts.
Question 4:
Graham was
• conservative,
• quantitative with Deep intensive analysis of many aspects,
• diversified, and
• focused on margin of safety & liquidation values
My preferred style would be more growth-aware, while still keeping Graham’s discipline on fundamentals and risk control.
The key difference (at the risk of oversimplification would be) : Graham sought cheapness and safety, whereas I’d tilt toward quality and compounding.
Question 5:
Graham’s approach is a masterclass in risk-aware, fundamentals-driven investing. I’d keep his margin of safety, discipline (rigour?), and absolute-return mindset, but layer in quality, selective concentration, scenario-based valuation to capture more durable compounding without sacrificing downside protection. Easier said than done.
His approach excels at protecting capital, exploiting mispricings, and delivering steady returns. The trade-off could be that it can miss exceptional compounding from high-quality growth businesses and often underweights qualitative drivers—management quality, moats, industry dynamics—when they aren’t immediately visible on the balance sheet.
Question 6:
COAL INDIA appears as a Graham style opportunity. Good margin of safety in Net curret asset value, Minimal debt and strong dividend payouts, Tangible asset backing from coal reserves and infrastructure with a power hungry economy. Will have to do a detailed qualitative and quantitative analysis
Graham suggests using a standard set of metrics to compare companies within the same field. The standard metrics have 3 different forms depending on the type of company, Rail roads, Utilities and Industrials. The metrics fit into the 8 different groups, which have mostly been covered in depth in preceding chapters:
- Capitalisation
- Income Account
- Calculations
- Seven Year Average Figures
- Trend
- Dividends
- Balance Sheet
- Supplementary Data
Question 2:
Graham lists several limitations:
- Comparing speculatively to conservatively capitalised stocks does not take account of how changes in environment will impact each differently.
- Comparing depreciation amounts is not useful other than to indicate differences in policy
- Qualitative differences still need to be taken into account
- The homogeneity of a field affects how useful comparisons are
Question 3:
1. investmnet for Income - US government savings bond
2. Investment for Profit
1. Purchase of stocks when the market level is clearly below long term levels
2. Purchase of stocks with special growth possibilities
3. Purchase of well secured senior bonds with privileges
4. Securities selling well below intrinsic value
For investors with significant amounts to invest he highlights the issue of not being able to invest large sums in US government savings bonds. Another issue for this type of investor is being able to purchase smaller issues.
Question 4:
Graham:
1. Depth of Research (shallow 1 to deep 10) - 10
2. Portfolio Concentration (concentrated 1 to diversified 10) - 7
3. Quantitative (1) vs. Qualitative (10) - 5
4. Business Analyst (1) vs. Security Analyst (10) - 7
5. Time Horizon (short 0 to long 10) - 3
6. Investing Universe: Asset Class - Any asset class he can draw a reasonable conclusion on it’s value
7. Investing Universe: Market Cap - Any value he see’s fit
8. Investing Universe: Geography - US only
9. Investing Universe: Sector Focus - Any sector he sees value in
12. Bottom-Up (micro 1) vs. Top-Down (macro 10) - 2 (I assume graham would make some allowance for this in his qualitative analysis)
13. Financial Leverage (no debt 1 to any 10) - 5 (he is willing to use leverage for arbitrage positions)
14. Growth Rate (any 1 to high 10) - 3 (It’s mentioned a couple of times that high growth firms are better investments, but only at the right prices)
15. Activism (passive 1 vs. active 10) - 1 (Assumed as it’s not mentioned either way)
16. Focus on Earnings (1) vs. Assets (10) - 5 (it depends on the investment)
17. Technical Analysis (1) vs. Fundamental Analysis (10) - 10
18. Reversion to the Mean (1) vs. Escape from the Mean (10) - 1
19. Management Interaction (none 1 to detailed 10) - 1 (Assumed as it’s not mentioned either way)
20. Primary Research (none 1 to in-depth 10) - 5 (Graham appears to have primarily worked from published documents although in 1940 this would have required significant effort)
21. Long Only (1) vs. Long/Short (10) - 5 (he’ll go short on arbitrage opportunities)
Me:
1. Depth of Research (shallow 1 to deep 10) - 10 (I intend to hold concentrated positions in companies so need to understand them well)
2. Portfolio Concentration (concentrated 1 to diversified 10) - 5 (I take the approach of investing in very diversified passive investments, with very concentrated positions in stocks I believe are undervalued)
3. Quantitative (1) vs. Qualitative (10) - 5
4. Business Analyst (1) vs. Security Analyst (10) - 7
5. Time Horizon (short 0 to long 10) - 10
6. Investing Universe: Asset Class - Equities (I don’t have the resources to be able to effectively invest in other asset classes)
7. Investing Universe: Market Cap - Any but focus I’m more likely to be able to find opportunities in Small Caps because they often aren’t included in indexes and are too small for active funds to invest in
8. Investing Universe: Geography - Any country where laws are strong and enforced, governance is strong and corruption is low.
9. Investing Universe: Sector Focus - Any sector where I can assess the value of a company
12. Bottom-Up (micro 1) vs. Top-Down (macro 10) - 1 (I don’t feel I would have enough confidence around my prediction of macro events to be profitable)
13. Financial Leverage (no debt 1 to any 10) - 1 (It is less stressful to own equities out right)
14. Growth Rate (any 1 to high 10) - 1 ((I’m agnostic on this, it’s what is priced is in vs a conservative assessment of the businesses prospects)
15. Activism (passive 1 vs. active 10) - 1 This requires significantly more time than I have available
16. Focus on Earnings (1) vs. Assets (10) - 5 (it depends on the investment)
17. Technical Analysis (1) vs. Fundamental Analysis (10) - 10
18. Reversion to the Mean (1) vs. Escape from the Mean (10) - 5 (I’m agnostic on this, it’s what is priced is in vs a conservative assessment of the businesses prospects)
19. Management Interaction (none 1 to detailed 10) - 1 (This requires significantly more time than I have available
20. Primary Research (none 1 to in-depth 10) - 6 (I’m better resourced to use publicly available data and focus on analysing it well)
21. Long Only (1) vs. Long/Short (10) - 1 (Shorting isn’t something available to me at a reasonable price)
Question 5:
What I’ve learned fits into two categories
- Underlying Principle
- Investment Tactics
A lot of the investment tactics Graham outlined are now very well known and because they have a low risk of loss with a potential big return have been arbitraged away - in the modern world they are easier to filter for. The main value of this is in understanding the investment principles, but may be of use in small markets/companies and at times of distress.
Grahams underlying investment principle are more timeless and can be summarised as minimising the probability of money being lost and secondly exceeding the returns of government bonds. This is highlighted by 2 themes, the Margin Of Safety and differentiation between and investment and a speculation. A second principle is making a separation between the value of the company and the price. He also emphasised that Qualitative factors are very important.
I think Graham is a lot more flexible than he is often given credit for… He spent a lot of time on net-net’s but they were very prevalent and profitable at the time, he also covers when he would switch to using a different tactic eg buying cheap growth stocks. Also highlighted is the importance of intangible assets and his belief the most shares are efficiently priced.
In summary I would be aware of Graham’s tactics and adopt his investment principles. Modern tools can be used to enhance his approach such as better modern data (Cash Flow Statements) and modeling approaches (DCF) - future scenarios can be modeled quickly and cheaply so you can work out what you’re paying for. A very specific change I would like to make is to consider the how securities are priced in relation to government bonds.
Question 6:
Churchill China listed on AIM:
Market Capitalisation - £38.7M
Balance sheet:
Book Value - £60.6M
Estimated Liquidation Value - £27M to £34M
Its only non-current liabilities are leases. On the asset side it has a strong cash position, a large surplus on its pension scheme (this could be sold to an insurer) and a decent portion of its PPE is land.
Nearly a net-net!
Capitalisation:
Straight forward, consists of only one class of shares with no bond or debt.
Income:
7 year average comprehensive income* - £5.2M
7 year margin - 9.1%
7 year ROE - 12.6%
7 year dividend coverage ratio - 2.5x
7 year P/E - 7.4x
Current Earnings (FY25 interims) - £4.2M
Current Margin - 5.5%
Current ROE - 7%
Current dividend coverage ratio - 1.05x
Current P/E - 9.2x
*there is a regular pension loss out of the consolidated earning
Qualitative:
The business is selling crockery to the hospitality industry. There is likely to always be a need for its products. It’s not a very exciting business and so is unlikely to attract competition. Manufacturing crockery also requires significant capital outlay for factory, kilns etc and technical expertise to operate them. It’s not a business one person can start in a garage! They have a significant distribution network that ensures they can supply customers with what then need when they need it.
Given it’s customers are in a cyclical business it’s revenue is also cyclical, revenue has dropped 5% in a year and employee costs have risen by £1.5m due to an increase in employer payroll taxes. Customers need to continually by replacement crockery and so may reduce spend, but not completely stop it.
A significant portion of the shares are owned by the family that has been involved in the business for many generations
Management is taking swift action:
- Pricing has been increased where appropriate
- Production has been reduced more than the reduction in sales to reduce inventory
- The dividend has been reduced
-
The company has financial options:
- Sell the pension assets to a pension company, it is earning 4% on these assets and the assets cannot be used for any other purpose
- Borrow up to the point where it would remain investment grade
1. in essence it seems that we must take a close look at how the company is capitalized is first port of call, followed by a thorough investigation of the balance sheet and the ratios contained therein. From there, a survey of the income statement (emphasizing the most recent years). This is specific to industrials. With the railroads he didn’t even touch the balance sheet, which I think warrants me zooming out and seeing if I can get a better handle on why. — As an aside, I wonder if trucking and railroads, might be considered to be in the same bucket from a Graham perspective.
2. Essentially comparing speculatively capitalized to conservatively capitalized companies is like comparing apples to oranges.
3. In a word, sleuthing. My sense of his tone was that we should be receptive to anything that perks up our attention for inquiry into a security, but we should be ruthless in our determination of letting it become an investment. I find this profoundly optimistic, we must always be receptive to new ideas & new possibilities. This is a very open-minded stance, rather than “I only look at companies that fulfill such-and-such criteria.” Now while we may be receptive to many possibilities, we only act on a few. — I used this analogy with my wife as I tried to explain my understanding. The resting state of an investor is like a single person on the dating scene, always open to potential and possibility, but, very few become short terms= relationships, even fewer long term, & only one wife. She seemed to appreciate the sentiment. — In the current environment I think we need to recognize that value takes many different forms, it may be a substantially compressed P/S, it may be a pronounced accumulation of unrecognized earnings power, or something else entirely. That may be somewhat different than some of the purely statistical significance that Graham is better known for, but perhaps that’s because that is a very clear methodology to teach. One thing that hasn’t changed since Graham though, he very rarely seems to suggest that what provides value will simultaneously be popular.
4. I’d call Graham’s dimensions moderately researched and highly diversified.
5. I like his approach in ways. What I find most important is that there can be statistically cheap stocks trading at any given time. People tend to reference Buffett when he essentially said that that category of investment opportunities dried up, however I think that is due to his amount of capital and the fact that there are fewer than there used to be. The main change that I would like to make is to be more intentional with my monitoring of the interest coverage ratio of the company, by calculating it manually.
When comparing companies in the same industry, our goal is to find possible clues that direct us to investigate further. We are looking for those who stand out from industry norms and their peers. He suggests looking over a complete business cycle. We should not compare on super detailed level initially, but a cursory, using normalized earnings for our comparisons. If something stands out in the crowd, we should conduct a more in-depth analysis. His main waring is echoed again: even if statistical comparisons show clear dominance by one company, qualitative factors must also be considered. Good numbers are not enough to build on. Also, we should not jump from one security to the next unless there is significant gain (>50% is his suggestion).
Question 2:
Comparing companies is not a guaranteed scientific process. One of the challenges is finding companies that are legitimately comparable, an apple to apple. Capital structures should match; heterogeneous comparisons are intrinsically more difficult. Also, nothing is exempt from future change: Company A may have historically outperformed Company B, but that is no guarantee for the future.
Question 3:
The goal is to find the extraordinary, the diamond in the rough. This requires hard work and time. Look for stocks cast off by the market because of exaggeration, oversimplification or neglect. How can we exploit the voting machine over market cycles? He employed two methods, but cautions again that there is no scientific formula for consistent success. We are to find out why there is disparity between value and price.
1) Find outliers in industries as discussed before. I don't have any changes. I like this method because it allows me to focus on industries I follow, which might help me understand the individual business better.
2) Go through individual financial reports in a systematic manner; in essence, use a screener. In his day, this was done manually. Today, we have the advantage of computers. This is true for everyone though, so the odds of finding the extraordinary might actually be harder now with so many systems processing the information. When he was screening, he looked for statistical net-nets or those with high average and current earnings compared to price. He underscored again to look into qualitative and not just go by the numbers: the market usually has a good reason for the low price. He also suggests studying smaller cap or newer companies, that although a bit risky, could have price dips massively below value. Since net-nets are very rare, I wouldn't spend time searching for those. Looking for lower PE and then digging into the individual financials still makes sense.
Question 4:
------Graham-----
1. Depth of Research (shallow to deep): 10
2. Portfolio Concentration (concentrated to diversified): 10
3. Quantitative vs. Qualitative: 3 -- put significant weight on facts to back the story, but also valued the qualitative (management especially)
4. Business Analyst vs. Security Analyst: 5
5. Time Horizon (short to long): 8
6. Sector Focus: I don’t think he was picky about sector.
7. Absolute Return Focus vs. Relative Return Focus: 1 -- Seeks 'reasonable return' (which I think was relative to 10 year US Treasury Notes)
8. Risk Tolerance (low to high): 2 -- he would take some reasonable speculations
9. Bottom-Up (micro) vs. Top-Down (macro): 1
10. Financial Leverage (no debt to any): 2 -- based on capital structure chapter, he wasn’t afraid of investment quality debt
11. Value vs. Growth: 2 -- minimal weight on future growth
12. Focus on Earnings vs. Assets: 8
13. Technical Analysis vs. Fundamental Analysis: 10
14. Reversion to the Mean vs. Escape from the Mean: 1
15. Long Only vs. Long/Short: 1
------Me------
16. Depth of Research (shallow to deep): 5 -- time/patience
17. Portfolio Concentration (concentrated to diversified): 10
18. Quantitative vs. Qualitative: 7
19. Business Analyst vs. Security Analyst: 5
20. Time Horizon (short to long): 8
21. Sector Focus: I have preferred sectors.
22. Absolute Return Focus vs. Relative Return Focus: 1 -- Return relative to safest risk-free options
23. Risk Tolerance (low to high): 5
24. Bottom-Up (micro) vs. Top-Down (macro): 5
25. Financial Leverage (no debt to any): 8
26. Value vs Growth: 5 -- I accept future speculation of growth, in a small portion of my portfolio
27. Focus on Earnings vs. Assets: 3 -- hard assets are less used today
28. Technical Analysis vs. Fundamental Analysis: 10
29. Reversion to the Mean vs. Escape from the Mean: 6
30. Long Only vs. Long/Short: 1
Question 5:
Strict. Builds conservative into everything. Very good at preserving capital. Clarity about what actions ins relations to facts mean. Honest about the reasonableness of his thesis. Attempts to build on scientific conclusions where possible but knows that complete surety is impossible. Works hard and is patient.
I appreciate his emphasis on understating the 'why' and 'what matters' in financials and metrics. Margin of safety is not numerical only but qualitative as well. Don't focus on the numbers, but what makes up the numbers. Like how he looks at the business as a business, not a ticker: clarity about true earnings, realistic depreciate, coverage of debt, etc.
He sets a high bar for 'investment' that today could be difficult for me to **strictly** meet. In my journey, I will be more open to what he might call intelligent speculation. I lean towards accepting more risk over pure protection of principal. Balance sheet backing can't be a limit today. I can work as much reality that can be determined into my thesis but will have to be honest about when it goes beyond what can be conservatively justified in. Then I will need to decide if I can afford that much risk. I do foresee a future challenge for me in patience and FOMO.
Question 6:
Unfortunately, I'm not able to give this the due diligence as I was hoping to (sick/traveling). I was looking into ADOBE. For Adobe, I think that the market is overreacting about AI's impact on their future; PE 20 is the lowest it's been in a long time. Coverage ratios are very strong (>20x), earnings are trending up. Their moat is huge, and as a user of their tools and in contact with others in the industry, we can't see ourselves switching anytime soon.
1) Graham believed comparisons were useful only when they revealed relative value, not relative popularity. The analyst should focus on structure, earnings power, and balance sheet strength – and try to ignore market sentiment. Comparisons need to normalize for differences in accounting, leverage, and cyclical position so that the contrast highlights price vs. estimated intrinsic value.
2) Peer comps can disguise risks rather than expose them. Entire industries/geographies become overvalued (AI today?) or depressed together (China?) giving a false sense of “cheap” or “expensive.” Accounting differences blur real contrasts, and investors often anchor on the best-known company ($NVDA, $BABA) instead of the best-valued one. When looking at a stock, you need to use comps as a tool for discovery, not justification.
3) Graham’s detective work begins with facts that don’t fit the market’s story. Analysts should dig where something seems ‘off’ relative to what the market is ‘thinking’ or pricing in. On page 683, he seems to mention small-caps, special situations, and bankruptcies as ripe areas.
In today’s market, much of your analysis has moved from hard industry/factories to software/intangibles. Things like brand equity, network effects, and recurring cash flow are still paramount – it’s just the types of companies that demand our attention are now in completely different GICS sectors. The modern Graham would be a disgruntled, deep-value, small-cap manager with $100M in AUM, but his process would never change…
4) I like your 21 dimensions – it helped me think more deeply about my own style and some of my favorite investors. As for Graham, I would label him a Deep Research-focused and primarily Quant, meaning he had to crunch the numbers himself and through that hard work and serendipity, he would uncover (qualitative) nuances about a company. Solely fundamental analysis with a strong belief in reversion to the mean.
5) I love Graham’s math-based approach. He makes it seem quite simple – uncover seemingly cheap ideas, put your head down, do the math, and you may be rewarded. When looking for shorter-term, deep-value investments, I try to pretend he is my portfolio manager. But there is only so much time in the day… So, I also try to keep in mind his caution about ‘confirmation bias’ – From Lecture 5 “A thing I would like to warn you against is spending a lot of time on over-detailed analyses of the company’s and the industry’s position, including counting the last bathtub that has been or will be produced; because you get yourself into the feeling that, since you have studied this thing so long and gathered together so may figures, your estimates are bound to be highly accurate. But they won’t be. They are only very rough estimates, and I think I could have given, and probably you could have given me, these estimates in American Radiator in half an hour, without spending perhaps the days, or even weeks, of studying the industry.” Source: https://business.columbia.edu/sites/default/files-efs/imce-uploads/Graham_Sept1946Feb1947_CurrentProblemsinSecurityAnalysis_Lecture5.pdf
6) Kohl’s ($KSS) might fit the bill. The price is well below tangible book ($15 vs ~$35) with some FCF, and hence a probable margin for error. But the business model is under severe pressure (and short interest is very high). Huge question about leases, which I know are handled differently vs. 90 years ago…
He says: "the first five groups measure the performance and financial strength of the enterprise considered apart from the market. The sixth group will indicate what the investor is getting for his money." He emphasises the last part with italics.
Having derived these key statistics for a comparison set of companies, he talks about the "dissective" stage of security analysis, where the relative merits are weighed up.
Question 2:
He says "The determination of the respective merits or attractiveness of common stocks at their prevailing market prices is the final an most difficult stage of the full-scale comparative security analysis. He says that the usual observation is that the qualitative factors favor the higher priced company, but the price favours the lower quality company, and "The analyst must accustom himself to this contrast or contradiction, because it is typical of stock-market behaviour." He says in making this judgement "We believe that on the whole the market tends to exaggerate the significance of qualitative differences and thus to set too high a price" on higher quality companies.
Question 3:
He talks about two kinds of investor, Defensive and Enterprising.
The defensive investor focuses on safety of principle and avoidance of losses. To do this they should focus on financial strength, long record of trading, good dividend payout ratios, and reasonable valuation having appraised the position qualitatively for market strength and trends as well as specific company judgements on the future. Safety and avoiding speculation are the watchwords. Also a second emphasis on freedom from effort. He recommends a classic stock/bond ratio with the proportions adjusted depending on the assessment of market conditions of somewhere between 25% and 75%.
A sensible large tracker fund 60/40 portfolio is the obvious modern equivalent. Returns have been satisfactory over the years since 1932, and it employs all the modern advantages of doing it in an efficient, low cost, low risk style. The tracking element helps to capture the very high growth outliers that Graham's approach is not suited to, and it can be easily tweaked to suit investors at different ages and stages and with different levels of wealth by adjusting the percentage of lower risk assets where the individual near retirement, and with modest savings cannot afford significant losses.
The enterprising investor, who digs deeper and looks where others have neglected or ignored. the distinguishing feature is "willingness and ability to devote time and care to the selection of sound and attractive investments... use their training and intelligence to take advantage of the numerous opportunities to buy securities for considerably less than they are worth." He specifically says that as long as it is treated seriously and as a business, there is "no single pattern" he may buy low, sell high, he may look for unusual growth companies making sure he does not pay too much, or he may look "to purchase "bargain issues" of many conceivable varieties- which are selling considerably below their true value, as measured by reasonably dependable techniques." Of course over the whole book he favours his own style of value investing, and does not think that the others are as safe or dependable, but as we have discussed he was a man of his time, and at his time he was completely right in this.
In our time things have changed. In a click of a button you can search a whole index for NCAV opportunities, with no work whatsoever. Is it surprising that this is no longer a very good way of looking for hidden value? The enterprising investor needs to work harder than that, and look for things that are not so easy or obvious.
There are parts, particularly the more value driven formulaic areas that mostly no longer work well. In this respect he was a man of his time. However there are several principles that are hugely valuable in designing a good framework for investment. For me these are:
1. Quantify where possible, measure, evaluate and record, invest on evidence not on opinion, and even if a measure is qualitative by nature, try and quantify it if possible. For example, measure how many times management have not guided correctly, been economical with the truth, feathered their own nest, or made unforced errors. Once might be an accident, a pattern over years is usually not. Corporate cultures are very enduring and vital for long term company success.
2. Do the work. Build the model of value using all the information at your disposal to try and build an edge. Don't cut corners or rely on an LLM, that information is available to anyone with a click of a mouse. Assume that some investment house has already run every conceivable prompt on every conceivable investment opportunity, and tested the model to destruction over every conceivable time frame.
3. Be clear about what you do know, and what you don't, and if the potential value lies with the latter, don't invest. Graham constantly emphasised this in many different areas, lumping it into the bracket of speculation. For example, if you are not a researcher with cutting edge knowledge of biotech research and techniques, you have no business investing in biotechs. The finances will tell you literally nothing useful, except the negatives like when they will run out of money. Focus on where you do know something! If you want to invest in an area like this, pick the best specialist investment house with a really sharp team and invest in them instead. Look at the CV of someone like Kate Bingham and ask yourself whether you really could even have any realistic chance of doing better than her.
4. Build in a margin of safety. Make sure that your estimates can stand being out within a reasonable margin of error without totally destroying the investment case. If it's marginal, leave it and find a better opportunity. I'm forever finding a convincing reason that a stock is 20% undervalued, and I try never to buy them. It's not enough!
Question 6:
I have spent more time on this than any other section of the course so far. It has been a fascinating journey and I have learned a lot. Partly driven by frustration at trying to find a candidate. In the current climate that is extremely hard. However it is also reassuring: if I could find many of them I would be very suspicious of the process.
This is the first time I have used ChatGPT extensively for the research. It speeds things up, though the new version 5.1 is much slower than the previous, and seems to get stuck much more often. On the other hand it is much better at not making things up, checking its working and giving good caveats, even when not asked to. Overall an upgrade. I also believe that the long and rather prescriptive AI prompts are becoming less necessary or effective as a result of this. I have broadly used the workflow suggested by Gary - Thank you! It has helped cover a lot more ground, but I have found that it in no way replaces human judgement, in fact it makes it even more important.
I looked for classic value candidates. I looked all over the world as far as my software allows, and found one reasonably clean pass. The STEM recruiter SThree. It passed almost all:
Summary scorecard vs Graham’s classic “defensive” criteria
Criterion Graham Rule SThree Now Pass?
Simple, non-speculative business STEM recruitment Yes
Adequate size Mid/large company ~£1.5bn revenue Yes
Financial strength Current ratio ≥2; LT debt ≤ net current assets~2x CR, minimal debt Yes
Earnings stability No losses in last 10 years Profitable for a decade Yes with volatility
Dividend record 20+ years uninterrupted dividends Long record Yes except covid
Earnings growth ≥33% over 10 years EPS several-fold higher Yes
Moderate P/E ≤15 4.3 fc 12 Yes
Moderate P/B ≤1.5 0.9x Yes
P/E × P/B rule ≤22.5 11 Yes
Industry cyclicality (defensive criterion) Prefer non-cyclical Very cyclical recruiter No
I think it unreasonable to strike it for COVID. Cutting a dividend at such a moment is sensible in my opinion as the visibility was literally zero at the time, so as far as I'm concerned it's a pass on all financials according to Graham. BUT. I would not buy it. Recruiters are highly cyclical, and this one is right in the firing line. It's announcements are awful, and it is expecting no improvement until the end of 2026. It is not explicit enough about how it is so sure of this, and I would prefer it if it was. This level of problem deserves a bit more disclosure in my opinion. Running a bear case AI search gives a lot of bad news, including management continuing with buybacks and dividends, audit committee resignations, short interests, and a marked slowdown in customer payments - days to pay 46 to 55. Would Graham buy it as an enterprising investment? Honestly I don't know. The bad stuff is very much the sort of thing that Graham might ignore as Mr Market being over pessimistic. He might regard the strong financials and track record, along with acknowledgement of future difficulties by management with honesty as to how long it would take to turn round as enough. Or he might reject it on the basis of its overly cyclical nature.
Thanks Gary. I like this whole concept, and I've not come across it before. If you have time I have a few questions to ask on it: Do you have one for yourself? Has yours changed with time? Do you record the changes? Do you use it to assess other investors apart from the course ones? How else do you use it?
This will be short and incomplete as I will be traveling - but at least I tried.
1. Graham mentions differences in both qualitative and quantitative factors used to compare two companies in the same industry. He uses capitalization, the income account, different calculations, a 7-year average, looking at trends, the balance sheet, and additional information. Will future developments likely to affect all companies in the same group similarly.
2. Shareholders may be of 2 types: One the investor who usually holds through downturns, and speculators who trade markets and focus on stock prices. Popularity and market activity are two elements not connected with intrinsic value that exert a continual and powerful effect on the market quotation of stocks.
3. The first is a comparison of industry groups, the second corporate reports and relating them to their market price. Checking for market cycles. Evaluating secondary markets for mispriced securities. Is there a difference between how the viewpoint of a speculator and an investment analyst would evaluate a security. In normal markets, do the securities show high current and average earnings in relation to market price and do they make a reasonably satisfactory exhibit of earnings and selling at a low price in relation to net-current-asset value. Evaluating both qualitative and quantitative factors.
4. Cheap v expensive - always on the cheap side, always including a margin of safety. Would you buy this if it went down by 50%. HI vs. low quality - in the middle. Would invest in a lower quality stock if at a better value. Looks at company v market price - he was always focused on the value of the company and very little on the market price. Research - deep v shallow. Graham was always into deep research and understanding the strengths and weaknesses of the firm. Financial strength of firm - weak or strong. He was looking for firms that could financially weather challenges.
5. I have incorporated it into my approach for years, but have not done as much in-depth research as he did. I focused on firms that cold withstand and grow under challenging times. I once worked at a firm that focused on using charts and would overlay value fundamentals. This manages risk and as a result, I usually had better returns over time.
Graham shares three frameworks based on industry (Railroads, Utilities, and Industrial companies) that include a variety of metrics regarding Capitalization, from the Income Account, Financial Ratio calculations, 7 year average figures, Trend, and Dividends (for Industrials he adds Balance Sheet and Supplementary data, e.g. business specific business driving metrics). He also suggests qualitative analysis (industry outlook, management assessment, and popularity)
Question 2:
Graham has mentioned this earlier in the book but he cautions being “deluded by the mathematical exactitude” of compiling various statistics. It also needs to be used with qualitative analysis of those figures. However, even if the numbers and analysis say something, the market may play out in a totally different way, or you may missed an important factor in your analysis.
Question 3:
“Mainly by hard and systemic work” 1) series of comparative analysis of industry groups which will allow you to understand benchmarks and see which companies are leading and lagging 2) reviewing corporate/summary reports and seeing how they relate to security prices, to distill a shortlist of names after reviewing hundreds that warrant further research.
I think a similar approach should be followed even in this environment, however I think it’d also be important to look at prices relative to historical perspective. Also, it might be implied but there's been a blurring of industry lines (e.g. some see a subscription retail gym business as having similar characteristics as a “sticky’ SaaS business) so looking at industry benchmarks may allow you to draw on valuations of a similar industries.
Question 4:
1. Quantitative => Fundamental… score: 8 though looking at quant factors as a screen in his approaches at first, they are mainly to help point where to conduct more thorough Fundamental and qualitative analysis/research. I'd like to be more fundamental oriented as well, because it’s where I'm most interested at this point in my career. However, I‘ve heard it could be helpful to integrate quant factors/style to better understand certain market forces/risks.
2. Bottom Up => Top Down… score: 5 seems like the 2 approaches he outlines are opposites in this regard (industry groups more top down, and corporate reports is more bottom up) - I think I’d like to take a more Top Down approach. Recently I’ve been doing more bottoms up analysis, and I think especially if I’d like to focus on a specific industry coverage for a career, it’d be helpful to have a better pulse on the metric benchmarks, and how certain segments of the industry are performing relative to others to understand broader narratives, vs it might be riskier/biased to start a deep dive on one company without having a broader industry perspective.
Question 5:
Graham’s approach is a comprehensive, common-sense framework that serves as an essential primer. It forces an analyst to evaluate their own capabilities by defining the limits of what is "knowable."
I plan to incorporate Forecasting Perspective: I am incorporating his skepticism toward "conjecture." I now view forecasts—both my own and those of others—with more scrutiny. Margin of Safety as Position Sizing: I will continue to use his "downside-first" mentality to size positions more thoughtfully, ensuring that the "bird in the hand" is protected before chasing the "two in the bush." Scale of Effort: I will adopt his pragmatic view that the depth of analysis should match the scale and purpose of the investment to avoid diminishing returns on research.
Changes and Adaptations: While Graham focused on deep value, I will apply his "Safety of Principal" filters to growth-oriented companies. My goal is to find "intelligent speculation" where the qualitative upside is supported by statistics, rather than buying on narrative alone. Valuation as Judgment, Not Science: I am moving away from trying to "perfect" models like DCFs. I will use them to understand market pricing but rely on Graham’s realization that valuation is an imperfect art where precision does not equal edge.
Question 6:
I think Rocky Mountain Chocolate Factory (RMCF) is a Graham-style "Special Situation." While its 3x book value exceeds the net-net approach, Graham would value its asset-light franchising model and the early signs of operational turnaround that prioritize profitability towards steady state operating benchmarks and debt reduction
The margin of safety is found in earning power stabilization, evidenced by the recent swing to a positive $0.4M EBITDA and a jump in gross margins from 16% to 26%. They also completed a $2.7M equity raise to pay down $1.2M of its $7.2M in debt with the remaining going to working capital to de-risk its balance sheet. The announcement of 34 new franchise locations with sophisticated multi-unit operators serves as a signal of the brand’s under-tapped potential. Ultimately, the margin of safety lies in the gap between the current "distress price" and the company's value as a stabilized, debt-light franchisor moving toward profitability, converting existing franchisors to higher product mix, and launching new franchises (but not just for growth’s sake).
1) Graham says companies in the same industry should be compared only after adjusting their financials so that accounting differences don’t distort the analysis. The focus should be on long-term earning power, cost structure, and balance-sheet strength—not on short-term performance. Any valuation premium must be justified by a demonstrated and durable competitive advantage, not temporary conditions or market enthusiasm.
2) Industry comparisons can mislead when accounting policies, capital structures, or business models differ in ways that make “peer” metrics look comparable when they aren’t. They also invite false precision by assuming that average industry performance represents a fair benchmark, even when the entire sector may be cyclically distorted or structurally unattractive.
3) Graham advises searching systematically for unpopular, neglected, or mispriced securities—especially those selling below demonstrable value—while insisting on wide margins of safety. Today, the same logic applies by focusing on data-driven screens for balance-sheet strength and cash-flow durability, but adding modern filters for accounting quality, capital allocation discipline, and industries where passive flows or temporary fear have created indiscriminate mispricing.
4) Graham sits far toward the conservative ends of most investment-style dimensions—Value (10/10 value vs. growth), Balance-Sheet Focus (10/10 tangible vs. narrative), Quantitative Discipline (9/10 quantitative vs. qualitative), Margin-of-Safety Requirement (10/10 high vs. low), Time Horizon (7/10 long vs. short), and Trading Activity (2/10 low vs. high turnover)—reflecting a method built on statistical cheapness, downside protection, and repeatable criteria. You might prefer a slightly more flexible position—e.g., Value 7/10, Balance-Sheet 7/10, Quantitative 7/10, Margin of Safety 8/10, Time Horizon 8/10, Turnover 4/10—to incorporate modern qualitative factors (management quality, industry structure, capital allocation) while keeping Graham’s core principles of discipline and downside protection.
5) Graham’s approach is exceptionally disciplined and protective—its emphasis on intrinsic value, margins of safety, and statistical cheapness remains one of the most reliable ways to avoid permanent loss. I’d keep his focus on balance-sheet strength and downside protection but adapt it by adding more forward-looking qualitative judgment—industry structure, management quality, capital allocation, and competitive dynamics—to capture opportunities that pure deep-value screens might miss.
6) Exxon Mobil (XOM) combines exceptionally strong free-cash-flow generation and a fortress balance sheet, giving it durable earning power even across commodity cycles. At current valuations it trades at a meaningful discount to conservative DCF and asset-based estimates, offering a classic Graham-style margin of safety despite long-term energy-transition risks.
Question 1:
Graham suggests that when comparing companies in the same field, the best approach is to line up the basic financial numbers side by side over a long period. He wants the analyst to look at earnings records, balance sheet strength, capital structure, and consistency. The point is not to forecast the future but to understand which companies are truly stronger and more stable based on actual history. Graham prefers long-term averages rather than one-year snapshots because short-term results can be misleading.
Question 2:
There are several limitations to these comparisons. Companies might use different accounting methods, which can distort the numbers. One company might look more profitable simply because it uses more leverage. Cyclical industries can make weak companies look good at the top of the cycle and strong companies look weak at the bottom. Some businesses also have unique risks or strengths that do not show up in high-level comparisons. For these reasons, Graham warns that comparisons are helpful but must be used carefully.
Question 3:
Graham recommends uncovering opportunities by doing broad and steady reading. This includes going through company lists, financial statements, and industry summaries, and watching for unusual price behavior or neglected companies. He believes bargains rarely appear in popular companies. In today’s environment, I would still follow this approach but combine it with modern tools like stock screeners, databases, and AI systems to help surface unusual patterns or overlooked names more efficiently. The core idea remains the same: keep looking widely, then narrow in.
Question 4:
Here are some investing dimensions and where I think Graham sits on each, along with where I would place myself.
Time horizon
1 means short term and 10 means very long term
Graham is around 9
I would also be around 9 because I do not want to trade often.
Valuation strictness
1 is loose and 10 is extremely strict
Graham is a 10
I would be an 8 to allow more flexibility for businesses with intangible strengths.
Use of forecasting
1 is heavy forecasting and 10 is almost none
Graham is about a 9
I would be around 7 because today’s world sometimes requires some forecasting.
Risk tolerance
1 is high risk and 10 is very low risk
Graham is a 9
I am probably a 7 because some modern opportunities require selective risk taking.
Balance sheet focus
1 is minimal and 10 is heavy focus
Graham is a 10
I am roughly an 8 since I still value balance sheets but also consider competitive advantages.
Quantitative emphasis
1 is mostly qualitative and 10 is mostly quantitative
Graham is about an 8
I am closer to a 6 because I think qualitative analysis has grown in importance.
Diversification
1 is very concentrated and 10 is highly diversified
Graham is around 8
I would be an 8 or 9 since diversification fits my investing style.
These dimensions help show that Graham sits far toward discipline and conservatism. I sit somewhat close to him but with more flexibility for modern businesses.
Question 5:
My overall assessment is that Graham’s approach is still extremely useful. His focus on downside protection, long-term thinking, and conservative financial analysis stands up well even today. The parts I want to incorporate include using long-term earnings records instead of short-term numbers, checking balance sheet strength, and always thinking about the margin of safety. The part I would modify is being more open to high-quality, asset-light companies whose value comes from things like brand, network effects, or intellectual property. Those types of companies did not exist in his era in the same way, so I want to combine his discipline with a more modern understanding of competitive advantages.
Question 6: SEB – Qualitative and Quantitative Analysis
One security that I believe Graham would view as having a solid margin of safety today is Seaboard Corp. (SEB). SEB is an underfollowed conglomerate operating in several basic industries, including pork production, shipping, commodity trading, milling, and power. None of these are high-visibility sectors, and the company does very little investor promotion. This fits Graham’s belief that many real bargains come from quiet, steady companies that the market simply ignores. SEB also has a long record of conservative management and maintains a diversified group of essential businesses with tangible assets.
On the quantitative side, SEB trades at a P/E of about 9.7, which is low for a company with consistent profitability. The stock also trades at about 0.8 times book value, even though its Book Value Per Share is around 5184, which is higher than the current share price near 4184. The balance sheet is conservative, with a debt-to-equity ratio of only 0.36, which is in line with Graham’s preference for low leverage. The company generates positive earnings every year, and over time it has also produced meaningful free cash flow even though the most recent FCF yield is about 4 percent. The mix of steady earnings, tangible assets, and a valuation below book value suggests that the stock is priced with conservative assumptions already reflected in it.
Putting everything together, SEB appears to trade below what a cautious investor might consider its intrinsic value, while also offering stability and conservative financial management. This combination matches Graham’s idea of a margin of safety, and I believe he would consider this type of opportunity attractive.
Thank you for taking the time to write up SEB
Question 1:
Benjamin Graham advises that when comparing companies in the same industry, investors should focus on fundamental measures of earning power, financial strength, and intrinsic value. Graham recommends atleast five year averages alongside the most recent 12 month results. This smooths out cyclical or abnormal conditions (like the depressed business climate of 1938) and avoids over emphasis on one year’s data. Ideally use Use standardized forms, multi year averages, and a broad set of financial indicators like the below
• Earnings relative to market price of common stock
• Earnings on total capitalization
• Ratio of gross to market value of common
• Profit margins
• Depreciation relative to plant account
• Working capital position
• Tangible asset values
• Dividend return
• Trend of earnings
Question 2:
Statistical Superiority ≠ Investment Superiority :
Even if one company (Continental) shows better figures across earnings, margins, assets, and dividends, Graham warns that comparisons are only statistical exhibits.They don’t guarantee future performance or eliminate business risk.
Variations in Homogeneity :
The reliability of comparisons depends on how homogeneous the companies are. Even within the same industry (e.g., steel), differences in capitalization structure, product mix, or reporting methods can weaken the validity of side by side tabulations.
Heterogeneous Groups:
Industries where companies respond differently to new conditions, often prospering at each other’s expense. In these groups, comparisons are much less reliable because relative standings shift frequently. In heterogeneous industries, past numbers are less predictive, since competitive shifts and branding can radically alter relative performance.
Question 3:
Graham’s playbook is about systematically hunting mispricing with conservative assumptions and repeatable filters. He focuses on Net-nets and asset bargains i.e Stocks trading below net current asset value (NCAV) or below conservative liquidation value. He looks for Stability i.e 10-year earnings history with no large losses, and stable dividend history. Finally, Margin of safety i.e big discount to conservative intrinsic value
Markets today are shaped less by hard assets on balance sheets and more by intangible drivers—software, data, brands, networks, and customer relationships—that don’t neatly appear as book value. Faster capital cycles mean advantages can emerge and erode quickly. Idea is on preserving his core—margin of safety, disciplined underwriting, absolute-return focus—while upgrading the toolkit to measure intangibles, cash flows, and competitive durability, and to react thoughtfully to quicker industry shifts.
Question 4:
Graham was
• conservative,
• quantitative with Deep intensive analysis of many aspects,
• diversified, and
• focused on margin of safety & liquidation values
My preferred style would be more growth-aware, while still keeping Graham’s discipline on fundamentals and risk control.
The key difference (at the risk of oversimplification would be) : Graham sought cheapness and safety, whereas I’d tilt toward quality and compounding.
Question 5:
Graham’s approach is a masterclass in risk-aware, fundamentals-driven investing. I’d keep his margin of safety, discipline (rigour?), and absolute-return mindset, but layer in quality, selective concentration, scenario-based valuation to capture more durable compounding without sacrificing downside protection. Easier said than done.
His approach excels at protecting capital, exploiting mispricings, and delivering steady returns. The trade-off could be that it can miss exceptional compounding from high-quality growth businesses and often underweights qualitative drivers—management quality, moats, industry dynamics—when they aren’t immediately visible on the balance sheet.
Question 6:
COAL INDIA appears as a Graham style opportunity. Good margin of safety in Net curret asset value, Minimal debt and strong dividend payouts, Tangible asset backing from coal reserves and infrastructure with a power hungry economy. Will have to do a detailed qualitative and quantitative analysis
Question 1:
Graham suggests using a standard set of metrics to compare companies within the same field. The standard metrics have 3 different forms depending on the type of company, Rail roads, Utilities and Industrials. The metrics fit into the 8 different groups, which have mostly been covered in depth in preceding chapters:
- Capitalisation
- Income Account
- Calculations
- Seven Year Average Figures
- Trend
- Dividends
- Balance Sheet
- Supplementary Data
Question 2:
Graham lists several limitations:
- Comparing speculatively to conservatively capitalised stocks does not take account of how changes in environment will impact each differently.
- Comparing depreciation amounts is not useful other than to indicate differences in policy
- Qualitative differences still need to be taken into account
- The homogeneity of a field affects how useful comparisons are
Question 3:
1. investmnet for Income - US government savings bond
2. Investment for Profit
1. Purchase of stocks when the market level is clearly below long term levels
2. Purchase of stocks with special growth possibilities
3. Purchase of well secured senior bonds with privileges
4. Securities selling well below intrinsic value
For investors with significant amounts to invest he highlights the issue of not being able to invest large sums in US government savings bonds. Another issue for this type of investor is being able to purchase smaller issues.
Question 4:
Graham:
1. Depth of Research (shallow 1 to deep 10) - 10
2. Portfolio Concentration (concentrated 1 to diversified 10) - 7
3. Quantitative (1) vs. Qualitative (10) - 5
4. Business Analyst (1) vs. Security Analyst (10) - 7
5. Time Horizon (short 0 to long 10) - 3
6. Investing Universe: Asset Class - Any asset class he can draw a reasonable conclusion on it’s value
7. Investing Universe: Market Cap - Any value he see’s fit
8. Investing Universe: Geography - US only
9. Investing Universe: Sector Focus - Any sector he sees value in
10. Absolute Return Focus (1) vs. Relative Return Focus (10) - 1
11. Risk Tolerance (low 1 to high 10) - 3
12. Bottom-Up (micro 1) vs. Top-Down (macro 10) - 2 (I assume graham would make some allowance for this in his qualitative analysis)
13. Financial Leverage (no debt 1 to any 10) - 5 (he is willing to use leverage for arbitrage positions)
14. Growth Rate (any 1 to high 10) - 3 (It’s mentioned a couple of times that high growth firms are better investments, but only at the right prices)
15. Activism (passive 1 vs. active 10) - 1 (Assumed as it’s not mentioned either way)
16. Focus on Earnings (1) vs. Assets (10) - 5 (it depends on the investment)
17. Technical Analysis (1) vs. Fundamental Analysis (10) - 10
18. Reversion to the Mean (1) vs. Escape from the Mean (10) - 1
19. Management Interaction (none 1 to detailed 10) - 1 (Assumed as it’s not mentioned either way)
20. Primary Research (none 1 to in-depth 10) - 5 (Graham appears to have primarily worked from published documents although in 1940 this would have required significant effort)
21. Long Only (1) vs. Long/Short (10) - 5 (he’ll go short on arbitrage opportunities)
Me:
1. Depth of Research (shallow 1 to deep 10) - 10 (I intend to hold concentrated positions in companies so need to understand them well)
2. Portfolio Concentration (concentrated 1 to diversified 10) - 5 (I take the approach of investing in very diversified passive investments, with very concentrated positions in stocks I believe are undervalued)
3. Quantitative (1) vs. Qualitative (10) - 5
4. Business Analyst (1) vs. Security Analyst (10) - 7
5. Time Horizon (short 0 to long 10) - 10
6. Investing Universe: Asset Class - Equities (I don’t have the resources to be able to effectively invest in other asset classes)
7. Investing Universe: Market Cap - Any but focus I’m more likely to be able to find opportunities in Small Caps because they often aren’t included in indexes and are too small for active funds to invest in
8. Investing Universe: Geography - Any country where laws are strong and enforced, governance is strong and corruption is low.
9. Investing Universe: Sector Focus - Any sector where I can assess the value of a company
10. Absolute Return Focus (1) vs. Relative Return Focus (10) - 1 (I)
11. Risk Tolerance (low 1 to high 10) - 4
12. Bottom-Up (micro 1) vs. Top-Down (macro 10) - 1 (I don’t feel I would have enough confidence around my prediction of macro events to be profitable)
13. Financial Leverage (no debt 1 to any 10) - 1 (It is less stressful to own equities out right)
14. Growth Rate (any 1 to high 10) - 1 ((I’m agnostic on this, it’s what is priced is in vs a conservative assessment of the businesses prospects)
15. Activism (passive 1 vs. active 10) - 1 This requires significantly more time than I have available
16. Focus on Earnings (1) vs. Assets (10) - 5 (it depends on the investment)
17. Technical Analysis (1) vs. Fundamental Analysis (10) - 10
18. Reversion to the Mean (1) vs. Escape from the Mean (10) - 5 (I’m agnostic on this, it’s what is priced is in vs a conservative assessment of the businesses prospects)
19. Management Interaction (none 1 to detailed 10) - 1 (This requires significantly more time than I have available
20. Primary Research (none 1 to in-depth 10) - 6 (I’m better resourced to use publicly available data and focus on analysing it well)
21. Long Only (1) vs. Long/Short (10) - 1 (Shorting isn’t something available to me at a reasonable price)
Question 5:
What I’ve learned fits into two categories
- Underlying Principle
- Investment Tactics
A lot of the investment tactics Graham outlined are now very well known and because they have a low risk of loss with a potential big return have been arbitraged away - in the modern world they are easier to filter for. The main value of this is in understanding the investment principles, but may be of use in small markets/companies and at times of distress.
Grahams underlying investment principle are more timeless and can be summarised as minimising the probability of money being lost and secondly exceeding the returns of government bonds. This is highlighted by 2 themes, the Margin Of Safety and differentiation between and investment and a speculation. A second principle is making a separation between the value of the company and the price. He also emphasised that Qualitative factors are very important.
I think Graham is a lot more flexible than he is often given credit for… He spent a lot of time on net-net’s but they were very prevalent and profitable at the time, he also covers when he would switch to using a different tactic eg buying cheap growth stocks. Also highlighted is the importance of intangible assets and his belief the most shares are efficiently priced.
In summary I would be aware of Graham’s tactics and adopt his investment principles. Modern tools can be used to enhance his approach such as better modern data (Cash Flow Statements) and modeling approaches (DCF) - future scenarios can be modeled quickly and cheaply so you can work out what you’re paying for. A very specific change I would like to make is to consider the how securities are priced in relation to government bonds.
Question 6:
Churchill China listed on AIM:
Market Capitalisation - £38.7M
Balance sheet:
Book Value - £60.6M
Estimated Liquidation Value - £27M to £34M
Its only non-current liabilities are leases. On the asset side it has a strong cash position, a large surplus on its pension scheme (this could be sold to an insurer) and a decent portion of its PPE is land.
Nearly a net-net!
Capitalisation:
Straight forward, consists of only one class of shares with no bond or debt.
Income:
7 year average comprehensive income* - £5.2M
7 year margin - 9.1%
7 year ROE - 12.6%
7 year dividend coverage ratio - 2.5x
7 year P/E - 7.4x
Current Earnings (FY25 interims) - £4.2M
Current Margin - 5.5%
Current ROE - 7%
Current dividend coverage ratio - 1.05x
Current P/E - 9.2x
*there is a regular pension loss out of the consolidated earning
Qualitative:
The business is selling crockery to the hospitality industry. There is likely to always be a need for its products. It’s not a very exciting business and so is unlikely to attract competition. Manufacturing crockery also requires significant capital outlay for factory, kilns etc and technical expertise to operate them. It’s not a business one person can start in a garage! They have a significant distribution network that ensures they can supply customers with what then need when they need it.
Given it’s customers are in a cyclical business it’s revenue is also cyclical, revenue has dropped 5% in a year and employee costs have risen by £1.5m due to an increase in employer payroll taxes. Customers need to continually by replacement crockery and so may reduce spend, but not completely stop it.
A significant portion of the shares are owned by the family that has been involved in the business for many generations
Management is taking swift action:
- Pricing has been increased where appropriate
- Production has been reduced more than the reduction in sales to reduce inventory
- The dividend has been reduced
-
The company has financial options:
- Sell the pension assets to a pension company, it is earning 4% on these assets and the assets cannot be used for any other purpose
- Borrow up to the point where it would remain investment grade
- Sell the business to a private buyer
Appreciate how thorough you were on the dimensions and taking the time to write up Churchill China
1. in essence it seems that we must take a close look at how the company is capitalized is first port of call, followed by a thorough investigation of the balance sheet and the ratios contained therein. From there, a survey of the income statement (emphasizing the most recent years). This is specific to industrials. With the railroads he didn’t even touch the balance sheet, which I think warrants me zooming out and seeing if I can get a better handle on why. — As an aside, I wonder if trucking and railroads, might be considered to be in the same bucket from a Graham perspective.
2. Essentially comparing speculatively capitalized to conservatively capitalized companies is like comparing apples to oranges.
3. In a word, sleuthing. My sense of his tone was that we should be receptive to anything that perks up our attention for inquiry into a security, but we should be ruthless in our determination of letting it become an investment. I find this profoundly optimistic, we must always be receptive to new ideas & new possibilities. This is a very open-minded stance, rather than “I only look at companies that fulfill such-and-such criteria.” Now while we may be receptive to many possibilities, we only act on a few. — I used this analogy with my wife as I tried to explain my understanding. The resting state of an investor is like a single person on the dating scene, always open to potential and possibility, but, very few become short terms= relationships, even fewer long term, & only one wife. She seemed to appreciate the sentiment. — In the current environment I think we need to recognize that value takes many different forms, it may be a substantially compressed P/S, it may be a pronounced accumulation of unrecognized earnings power, or something else entirely. That may be somewhat different than some of the purely statistical significance that Graham is better known for, but perhaps that’s because that is a very clear methodology to teach. One thing that hasn’t changed since Graham though, he very rarely seems to suggest that what provides value will simultaneously be popular.
4. I’d call Graham’s dimensions moderately researched and highly diversified.
5. I like his approach in ways. What I find most important is that there can be statistically cheap stocks trading at any given time. People tend to reference Buffett when he essentially said that that category of investment opportunities dried up, however I think that is due to his amount of capital and the fact that there are fewer than there used to be. The main change that I would like to make is to be more intentional with my monitoring of the interest coverage ratio of the company, by calculating it manually.
Question 1:
When comparing companies in the same industry, our goal is to find possible clues that direct us to investigate further. We are looking for those who stand out from industry norms and their peers. He suggests looking over a complete business cycle. We should not compare on super detailed level initially, but a cursory, using normalized earnings for our comparisons. If something stands out in the crowd, we should conduct a more in-depth analysis. His main waring is echoed again: even if statistical comparisons show clear dominance by one company, qualitative factors must also be considered. Good numbers are not enough to build on. Also, we should not jump from one security to the next unless there is significant gain (>50% is his suggestion).
Question 2:
Comparing companies is not a guaranteed scientific process. One of the challenges is finding companies that are legitimately comparable, an apple to apple. Capital structures should match; heterogeneous comparisons are intrinsically more difficult. Also, nothing is exempt from future change: Company A may have historically outperformed Company B, but that is no guarantee for the future.
Question 3:
The goal is to find the extraordinary, the diamond in the rough. This requires hard work and time. Look for stocks cast off by the market because of exaggeration, oversimplification or neglect. How can we exploit the voting machine over market cycles? He employed two methods, but cautions again that there is no scientific formula for consistent success. We are to find out why there is disparity between value and price.
1) Find outliers in industries as discussed before. I don't have any changes. I like this method because it allows me to focus on industries I follow, which might help me understand the individual business better.
2) Go through individual financial reports in a systematic manner; in essence, use a screener. In his day, this was done manually. Today, we have the advantage of computers. This is true for everyone though, so the odds of finding the extraordinary might actually be harder now with so many systems processing the information. When he was screening, he looked for statistical net-nets or those with high average and current earnings compared to price. He underscored again to look into qualitative and not just go by the numbers: the market usually has a good reason for the low price. He also suggests studying smaller cap or newer companies, that although a bit risky, could have price dips massively below value. Since net-nets are very rare, I wouldn't spend time searching for those. Looking for lower PE and then digging into the individual financials still makes sense.
Question 4:
------Graham-----
1. Depth of Research (shallow to deep): 10
2. Portfolio Concentration (concentrated to diversified): 10
3. Quantitative vs. Qualitative: 3 -- put significant weight on facts to back the story, but also valued the qualitative (management especially)
4. Business Analyst vs. Security Analyst: 5
5. Time Horizon (short to long): 8
6. Sector Focus: I don’t think he was picky about sector.
7. Absolute Return Focus vs. Relative Return Focus: 1 -- Seeks 'reasonable return' (which I think was relative to 10 year US Treasury Notes)
8. Risk Tolerance (low to high): 2 -- he would take some reasonable speculations
9. Bottom-Up (micro) vs. Top-Down (macro): 1
10. Financial Leverage (no debt to any): 2 -- based on capital structure chapter, he wasn’t afraid of investment quality debt
11. Value vs. Growth: 2 -- minimal weight on future growth
12. Focus on Earnings vs. Assets: 8
13. Technical Analysis vs. Fundamental Analysis: 10
14. Reversion to the Mean vs. Escape from the Mean: 1
15. Long Only vs. Long/Short: 1
------Me------
16. Depth of Research (shallow to deep): 5 -- time/patience
17. Portfolio Concentration (concentrated to diversified): 10
18. Quantitative vs. Qualitative: 7
19. Business Analyst vs. Security Analyst: 5
20. Time Horizon (short to long): 8
21. Sector Focus: I have preferred sectors.
22. Absolute Return Focus vs. Relative Return Focus: 1 -- Return relative to safest risk-free options
23. Risk Tolerance (low to high): 5
24. Bottom-Up (micro) vs. Top-Down (macro): 5
25. Financial Leverage (no debt to any): 8
26. Value vs Growth: 5 -- I accept future speculation of growth, in a small portion of my portfolio
27. Focus on Earnings vs. Assets: 3 -- hard assets are less used today
28. Technical Analysis vs. Fundamental Analysis: 10
29. Reversion to the Mean vs. Escape from the Mean: 6
30. Long Only vs. Long/Short: 1
Question 5:
Strict. Builds conservative into everything. Very good at preserving capital. Clarity about what actions ins relations to facts mean. Honest about the reasonableness of his thesis. Attempts to build on scientific conclusions where possible but knows that complete surety is impossible. Works hard and is patient.
I appreciate his emphasis on understating the 'why' and 'what matters' in financials and metrics. Margin of safety is not numerical only but qualitative as well. Don't focus on the numbers, but what makes up the numbers. Like how he looks at the business as a business, not a ticker: clarity about true earnings, realistic depreciate, coverage of debt, etc.
He sets a high bar for 'investment' that today could be difficult for me to **strictly** meet. In my journey, I will be more open to what he might call intelligent speculation. I lean towards accepting more risk over pure protection of principal. Balance sheet backing can't be a limit today. I can work as much reality that can be determined into my thesis but will have to be honest about when it goes beyond what can be conservatively justified in. Then I will need to decide if I can afford that much risk. I do foresee a future challenge for me in patience and FOMO.
Question 6:
Unfortunately, I'm not able to give this the due diligence as I was hoping to (sick/traveling). I was looking into ADOBE. For Adobe, I think that the market is overreacting about AI's impact on their future; PE 20 is the lowest it's been in a long time. Coverage ratios are very strong (>20x), earnings are trending up. Their moat is huge, and as a user of their tools and in contact with others in the industry, we can't see ourselves switching anytime soon.
Nice job going in-depth on the dimensions
1) Graham believed comparisons were useful only when they revealed relative value, not relative popularity. The analyst should focus on structure, earnings power, and balance sheet strength – and try to ignore market sentiment. Comparisons need to normalize for differences in accounting, leverage, and cyclical position so that the contrast highlights price vs. estimated intrinsic value.
2) Peer comps can disguise risks rather than expose them. Entire industries/geographies become overvalued (AI today?) or depressed together (China?) giving a false sense of “cheap” or “expensive.” Accounting differences blur real contrasts, and investors often anchor on the best-known company ($NVDA, $BABA) instead of the best-valued one. When looking at a stock, you need to use comps as a tool for discovery, not justification.
3) Graham’s detective work begins with facts that don’t fit the market’s story. Analysts should dig where something seems ‘off’ relative to what the market is ‘thinking’ or pricing in. On page 683, he seems to mention small-caps, special situations, and bankruptcies as ripe areas.
In today’s market, much of your analysis has moved from hard industry/factories to software/intangibles. Things like brand equity, network effects, and recurring cash flow are still paramount – it’s just the types of companies that demand our attention are now in completely different GICS sectors. The modern Graham would be a disgruntled, deep-value, small-cap manager with $100M in AUM, but his process would never change…
4) I like your 21 dimensions – it helped me think more deeply about my own style and some of my favorite investors. As for Graham, I would label him a Deep Research-focused and primarily Quant, meaning he had to crunch the numbers himself and through that hard work and serendipity, he would uncover (qualitative) nuances about a company. Solely fundamental analysis with a strong belief in reversion to the mean.
5) I love Graham’s math-based approach. He makes it seem quite simple – uncover seemingly cheap ideas, put your head down, do the math, and you may be rewarded. When looking for shorter-term, deep-value investments, I try to pretend he is my portfolio manager. But there is only so much time in the day… So, I also try to keep in mind his caution about ‘confirmation bias’ – From Lecture 5 “A thing I would like to warn you against is spending a lot of time on over-detailed analyses of the company’s and the industry’s position, including counting the last bathtub that has been or will be produced; because you get yourself into the feeling that, since you have studied this thing so long and gathered together so may figures, your estimates are bound to be highly accurate. But they won’t be. They are only very rough estimates, and I think I could have given, and probably you could have given me, these estimates in American Radiator in half an hour, without spending perhaps the days, or even weeks, of studying the industry.” Source: https://business.columbia.edu/sites/default/files-efs/imce-uploads/Graham_Sept1946Feb1947_CurrentProblemsinSecurityAnalysis_Lecture5.pdf
6) Kohl’s ($KSS) might fit the bill. The price is well below tangible book ($15 vs ~$35) with some FCF, and hence a probable margin for error. But the business model is under severe pressure (and short interest is very high). Huge question about leases, which I know are handled differently vs. 90 years ago…
Question 1:
He suggests looking at 6 Key ratios:
Profitability ratios
Credit ratios
Growth ratios
Stability ratios
Pay out ratio - Dividend policy
Price Ratios.
He says: "the first five groups measure the performance and financial strength of the enterprise considered apart from the market. The sixth group will indicate what the investor is getting for his money." He emphasises the last part with italics.
Having derived these key statistics for a comparison set of companies, he talks about the "dissective" stage of security analysis, where the relative merits are weighed up.
Question 2:
He says "The determination of the respective merits or attractiveness of common stocks at their prevailing market prices is the final an most difficult stage of the full-scale comparative security analysis. He says that the usual observation is that the qualitative factors favor the higher priced company, but the price favours the lower quality company, and "The analyst must accustom himself to this contrast or contradiction, because it is typical of stock-market behaviour." He says in making this judgement "We believe that on the whole the market tends to exaggerate the significance of qualitative differences and thus to set too high a price" on higher quality companies.
Question 3:
He talks about two kinds of investor, Defensive and Enterprising.
The defensive investor focuses on safety of principle and avoidance of losses. To do this they should focus on financial strength, long record of trading, good dividend payout ratios, and reasonable valuation having appraised the position qualitatively for market strength and trends as well as specific company judgements on the future. Safety and avoiding speculation are the watchwords. Also a second emphasis on freedom from effort. He recommends a classic stock/bond ratio with the proportions adjusted depending on the assessment of market conditions of somewhere between 25% and 75%.
A sensible large tracker fund 60/40 portfolio is the obvious modern equivalent. Returns have been satisfactory over the years since 1932, and it employs all the modern advantages of doing it in an efficient, low cost, low risk style. The tracking element helps to capture the very high growth outliers that Graham's approach is not suited to, and it can be easily tweaked to suit investors at different ages and stages and with different levels of wealth by adjusting the percentage of lower risk assets where the individual near retirement, and with modest savings cannot afford significant losses.
The enterprising investor, who digs deeper and looks where others have neglected or ignored. the distinguishing feature is "willingness and ability to devote time and care to the selection of sound and attractive investments... use their training and intelligence to take advantage of the numerous opportunities to buy securities for considerably less than they are worth." He specifically says that as long as it is treated seriously and as a business, there is "no single pattern" he may buy low, sell high, he may look for unusual growth companies making sure he does not pay too much, or he may look "to purchase "bargain issues" of many conceivable varieties- which are selling considerably below their true value, as measured by reasonably dependable techniques." Of course over the whole book he favours his own style of value investing, and does not think that the others are as safe or dependable, but as we have discussed he was a man of his time, and at his time he was completely right in this.
In our time things have changed. In a click of a button you can search a whole index for NCAV opportunities, with no work whatsoever. Is it surprising that this is no longer a very good way of looking for hidden value? The enterprising investor needs to work harder than that, and look for things that are not so easy or obvious.
Question 4:
https://datawrapper.dwcdn.net/P2LDa/1/
Question 5:
There are parts, particularly the more value driven formulaic areas that mostly no longer work well. In this respect he was a man of his time. However there are several principles that are hugely valuable in designing a good framework for investment. For me these are:
1. Quantify where possible, measure, evaluate and record, invest on evidence not on opinion, and even if a measure is qualitative by nature, try and quantify it if possible. For example, measure how many times management have not guided correctly, been economical with the truth, feathered their own nest, or made unforced errors. Once might be an accident, a pattern over years is usually not. Corporate cultures are very enduring and vital for long term company success.
2. Do the work. Build the model of value using all the information at your disposal to try and build an edge. Don't cut corners or rely on an LLM, that information is available to anyone with a click of a mouse. Assume that some investment house has already run every conceivable prompt on every conceivable investment opportunity, and tested the model to destruction over every conceivable time frame.
3. Be clear about what you do know, and what you don't, and if the potential value lies with the latter, don't invest. Graham constantly emphasised this in many different areas, lumping it into the bracket of speculation. For example, if you are not a researcher with cutting edge knowledge of biotech research and techniques, you have no business investing in biotechs. The finances will tell you literally nothing useful, except the negatives like when they will run out of money. Focus on where you do know something! If you want to invest in an area like this, pick the best specialist investment house with a really sharp team and invest in them instead. Look at the CV of someone like Kate Bingham and ask yourself whether you really could even have any realistic chance of doing better than her.
4. Build in a margin of safety. Make sure that your estimates can stand being out within a reasonable margin of error without totally destroying the investment case. If it's marginal, leave it and find a better opportunity. I'm forever finding a convincing reason that a stock is 20% undervalued, and I try never to buy them. It's not enough!
Question 6:
I have spent more time on this than any other section of the course so far. It has been a fascinating journey and I have learned a lot. Partly driven by frustration at trying to find a candidate. In the current climate that is extremely hard. However it is also reassuring: if I could find many of them I would be very suspicious of the process.
This is the first time I have used ChatGPT extensively for the research. It speeds things up, though the new version 5.1 is much slower than the previous, and seems to get stuck much more often. On the other hand it is much better at not making things up, checking its working and giving good caveats, even when not asked to. Overall an upgrade. I also believe that the long and rather prescriptive AI prompts are becoming less necessary or effective as a result of this. I have broadly used the workflow suggested by Gary - Thank you! It has helped cover a lot more ground, but I have found that it in no way replaces human judgement, in fact it makes it even more important.
I looked for classic value candidates. I looked all over the world as far as my software allows, and found one reasonably clean pass. The STEM recruiter SThree. It passed almost all:
Summary scorecard vs Graham’s classic “defensive” criteria
Criterion Graham Rule SThree Now Pass?
Simple, non-speculative business STEM recruitment Yes
Adequate size Mid/large company ~£1.5bn revenue Yes
Financial strength Current ratio ≥2; LT debt ≤ net current assets~2x CR, minimal debt Yes
Earnings stability No losses in last 10 years Profitable for a decade Yes with volatility
Dividend record 20+ years uninterrupted dividends Long record Yes except covid
Earnings growth ≥33% over 10 years EPS several-fold higher Yes
Moderate P/E ≤15 4.3 fc 12 Yes
Moderate P/B ≤1.5 0.9x Yes
P/E × P/B rule ≤22.5 11 Yes
Industry cyclicality (defensive criterion) Prefer non-cyclical Very cyclical recruiter No
I think it unreasonable to strike it for COVID. Cutting a dividend at such a moment is sensible in my opinion as the visibility was literally zero at the time, so as far as I'm concerned it's a pass on all financials according to Graham. BUT. I would not buy it. Recruiters are highly cyclical, and this one is right in the firing line. It's announcements are awful, and it is expecting no improvement until the end of 2026. It is not explicit enough about how it is so sure of this, and I would prefer it if it was. This level of problem deserves a bit more disclosure in my opinion. Running a bear case AI search gives a lot of bad news, including management continuing with buybacks and dividends, audit committee resignations, short interests, and a marked slowdown in customer payments - days to pay 46 to 55. Would Graham buy it as an enterprising investment? Honestly I don't know. The bad stuff is very much the sort of thing that Graham might ignore as Mr Market being over pessimistic. He might regard the strong financials and track record, along with acknowledgement of future difficulties by management with honesty as to how long it would take to turn round as enough. Or he might reject it on the basis of its overly cyclical nature.
Really appreciate the depth to which you went in answering the dimensions question
Thanks Gary. I like this whole concept, and I've not come across it before. If you have time I have a few questions to ask on it: Do you have one for yourself? Has yours changed with time? Do you record the changes? Do you use it to assess other investors apart from the course ones? How else do you use it?
This will be short and incomplete as I will be traveling - but at least I tried.
1. Graham mentions differences in both qualitative and quantitative factors used to compare two companies in the same industry. He uses capitalization, the income account, different calculations, a 7-year average, looking at trends, the balance sheet, and additional information. Will future developments likely to affect all companies in the same group similarly.
2. Shareholders may be of 2 types: One the investor who usually holds through downturns, and speculators who trade markets and focus on stock prices. Popularity and market activity are two elements not connected with intrinsic value that exert a continual and powerful effect on the market quotation of stocks.
3. The first is a comparison of industry groups, the second corporate reports and relating them to their market price. Checking for market cycles. Evaluating secondary markets for mispriced securities. Is there a difference between how the viewpoint of a speculator and an investment analyst would evaluate a security. In normal markets, do the securities show high current and average earnings in relation to market price and do they make a reasonably satisfactory exhibit of earnings and selling at a low price in relation to net-current-asset value. Evaluating both qualitative and quantitative factors.
4. Cheap v expensive - always on the cheap side, always including a margin of safety. Would you buy this if it went down by 50%. HI vs. low quality - in the middle. Would invest in a lower quality stock if at a better value. Looks at company v market price - he was always focused on the value of the company and very little on the market price. Research - deep v shallow. Graham was always into deep research and understanding the strengths and weaknesses of the firm. Financial strength of firm - weak or strong. He was looking for firms that could financially weather challenges.
5. I have incorporated it into my approach for years, but have not done as much in-depth research as he did. I focused on firms that cold withstand and grow under challenging times. I once worked at a firm that focused on using charts and would overlay value fundamentals. This manages risk and as a result, I usually had better returns over time.
6. NA
Question 1:
Graham shares three frameworks based on industry (Railroads, Utilities, and Industrial companies) that include a variety of metrics regarding Capitalization, from the Income Account, Financial Ratio calculations, 7 year average figures, Trend, and Dividends (for Industrials he adds Balance Sheet and Supplementary data, e.g. business specific business driving metrics). He also suggests qualitative analysis (industry outlook, management assessment, and popularity)
Question 2:
Graham has mentioned this earlier in the book but he cautions being “deluded by the mathematical exactitude” of compiling various statistics. It also needs to be used with qualitative analysis of those figures. However, even if the numbers and analysis say something, the market may play out in a totally different way, or you may missed an important factor in your analysis.
Question 3:
“Mainly by hard and systemic work” 1) series of comparative analysis of industry groups which will allow you to understand benchmarks and see which companies are leading and lagging 2) reviewing corporate/summary reports and seeing how they relate to security prices, to distill a shortlist of names after reviewing hundreds that warrant further research.
I think a similar approach should be followed even in this environment, however I think it’d also be important to look at prices relative to historical perspective. Also, it might be implied but there's been a blurring of industry lines (e.g. some see a subscription retail gym business as having similar characteristics as a “sticky’ SaaS business) so looking at industry benchmarks may allow you to draw on valuations of a similar industries.
Question 4:
1. Quantitative => Fundamental… score: 8 though looking at quant factors as a screen in his approaches at first, they are mainly to help point where to conduct more thorough Fundamental and qualitative analysis/research. I'd like to be more fundamental oriented as well, because it’s where I'm most interested at this point in my career. However, I‘ve heard it could be helpful to integrate quant factors/style to better understand certain market forces/risks.
2. Bottom Up => Top Down… score: 5 seems like the 2 approaches he outlines are opposites in this regard (industry groups more top down, and corporate reports is more bottom up) - I think I’d like to take a more Top Down approach. Recently I’ve been doing more bottoms up analysis, and I think especially if I’d like to focus on a specific industry coverage for a career, it’d be helpful to have a better pulse on the metric benchmarks, and how certain segments of the industry are performing relative to others to understand broader narratives, vs it might be riskier/biased to start a deep dive on one company without having a broader industry perspective.
Question 5:
Graham’s approach is a comprehensive, common-sense framework that serves as an essential primer. It forces an analyst to evaluate their own capabilities by defining the limits of what is "knowable."
I plan to incorporate Forecasting Perspective: I am incorporating his skepticism toward "conjecture." I now view forecasts—both my own and those of others—with more scrutiny. Margin of Safety as Position Sizing: I will continue to use his "downside-first" mentality to size positions more thoughtfully, ensuring that the "bird in the hand" is protected before chasing the "two in the bush." Scale of Effort: I will adopt his pragmatic view that the depth of analysis should match the scale and purpose of the investment to avoid diminishing returns on research.
Changes and Adaptations: While Graham focused on deep value, I will apply his "Safety of Principal" filters to growth-oriented companies. My goal is to find "intelligent speculation" where the qualitative upside is supported by statistics, rather than buying on narrative alone. Valuation as Judgment, Not Science: I am moving away from trying to "perfect" models like DCFs. I will use them to understand market pricing but rely on Graham’s realization that valuation is an imperfect art where precision does not equal edge.
Question 6:
I think Rocky Mountain Chocolate Factory (RMCF) is a Graham-style "Special Situation." While its 3x book value exceeds the net-net approach, Graham would value its asset-light franchising model and the early signs of operational turnaround that prioritize profitability towards steady state operating benchmarks and debt reduction
The margin of safety is found in earning power stabilization, evidenced by the recent swing to a positive $0.4M EBITDA and a jump in gross margins from 16% to 26%. They also completed a $2.7M equity raise to pay down $1.2M of its $7.2M in debt with the remaining going to working capital to de-risk its balance sheet. The announcement of 34 new franchise locations with sophisticated multi-unit operators serves as a signal of the brand’s under-tapped potential. Ultimately, the margin of safety lies in the gap between the current "distress price" and the company's value as a stabilized, debt-light franchisor moving toward profitability, converting existing franchisors to higher product mix, and launching new franchises (but not just for growth’s sake).
Sorry for late input.
1) Graham says companies in the same industry should be compared only after adjusting their financials so that accounting differences don’t distort the analysis. The focus should be on long-term earning power, cost structure, and balance-sheet strength—not on short-term performance. Any valuation premium must be justified by a demonstrated and durable competitive advantage, not temporary conditions or market enthusiasm.
2) Industry comparisons can mislead when accounting policies, capital structures, or business models differ in ways that make “peer” metrics look comparable when they aren’t. They also invite false precision by assuming that average industry performance represents a fair benchmark, even when the entire sector may be cyclically distorted or structurally unattractive.
3) Graham advises searching systematically for unpopular, neglected, or mispriced securities—especially those selling below demonstrable value—while insisting on wide margins of safety. Today, the same logic applies by focusing on data-driven screens for balance-sheet strength and cash-flow durability, but adding modern filters for accounting quality, capital allocation discipline, and industries where passive flows or temporary fear have created indiscriminate mispricing.
4) Graham sits far toward the conservative ends of most investment-style dimensions—Value (10/10 value vs. growth), Balance-Sheet Focus (10/10 tangible vs. narrative), Quantitative Discipline (9/10 quantitative vs. qualitative), Margin-of-Safety Requirement (10/10 high vs. low), Time Horizon (7/10 long vs. short), and Trading Activity (2/10 low vs. high turnover)—reflecting a method built on statistical cheapness, downside protection, and repeatable criteria. You might prefer a slightly more flexible position—e.g., Value 7/10, Balance-Sheet 7/10, Quantitative 7/10, Margin of Safety 8/10, Time Horizon 8/10, Turnover 4/10—to incorporate modern qualitative factors (management quality, industry structure, capital allocation) while keeping Graham’s core principles of discipline and downside protection.
5) Graham’s approach is exceptionally disciplined and protective—its emphasis on intrinsic value, margins of safety, and statistical cheapness remains one of the most reliable ways to avoid permanent loss. I’d keep his focus on balance-sheet strength and downside protection but adapt it by adding more forward-looking qualitative judgment—industry structure, management quality, capital allocation, and competitive dynamics—to capture opportunities that pure deep-value screens might miss.
6) Exxon Mobil (XOM) combines exceptionally strong free-cash-flow generation and a fortress balance sheet, giving it durable earning power even across commodity cycles. At current valuations it trades at a meaningful discount to conservative DCF and asset-based estimates, offering a classic Graham-style margin of safety despite long-term energy-transition risks.