Graham value investing metrics:

Invest in quality, he recommended using Standard & Poor’s quality rating system and required
companies to have an S&P earnings and dividend rating of B or better.

Low debt to asset ratio, he recommended investing in companies with total debt to asset ratios of
less than 1.10.

Always be aware of the current ratio (current assets divided by current liabilities) to locate stocks
with ratios over 1.50.

An investor wants to see positive earnings per share growth for companies. A minimum increase of
at least one-third in per-share earnings in the past ten years using three-year averages at the
beginning and end.

If an investor can find good companies with P/E (price to earnings per share) ratios of 9.0 or less that
is an outstanding value stock. In modern times this level of value is usually found only near the
bottom of bear markets and market corrections.

Good companies with P/BV ratios (price to book value) less than 1.20 can be value stocks. P/E ratios
can sometimes not tell the whole story of a stocks value. Book value shows the total underlying
value of a company’s assets, brands, and intellectual property.

Dividends are a great source of cash flow for an investor and they can be reinvested to buy more
equity. High dividend stocks pay the value investor for waiting for price to return to the true
company value and can have a compounding growth effect when reinvested.

Benjamin Graham’s margin of safety is the difference between a stock’s price and the underlying
company’s intrinsic value for assets and future cash flows. The lower a stock’s price is below the
company’s intrinsic fundamental value, the more margin of safety against the stock price falling
much lower in the future. In theory, the greater the value of the price of the stock versus the
company’s intrinsic value the higher the probability of the stock not going much lower, even during
market corrections. An investor has less chance of losing money the better the value the stock is at
purchase.

Graham did not believe in the efficient market hypothesis, he believed markets were inefficient due
to human emotions. He believed that risk and reward are not always correlated and that an investor
can create good asymmetric risk/reward ratios in their favor if they buy good companies at great
prices when the odds of them going much lower were very small but their odds of returning to true
value was much greater. As an example Graham was looking to by $1 in company value for .50 cents
invested in its stock. He wanted to create investment situations where the upside reward was
potentially much greater than the downside risk based on fundamental valuation metrics at entry.