It is worth noting that any company, acquired cheaply enough at the right moment over some certain holding period may easily become a good investment. However such operation may not be suitable for the common public investor and might require a higher degree of experience and financial intelligence gained through years of diligent competence in the industry to get such a satisfactory result. We believe our readers are not such type of investors but rather more laid back ones which usually have a daytime job outside the investment field and spend more of their time with their family enjoying life as they should. Therefore, for these common type of investors, the investment choice, specifically in stocks, are much more limited to avoid being exposed with too much risk or uncertainties. Thus, some criteria must be determined and here below are what we're proposing. These criteria are applied to all of the companies' data presented on our website and companies which do not meet these requirements are not being displayed at all since we are sceptical of whether the usefulness of providing such non-investment-worthy companies' data outweigh its potential to mislead our readers. Hence, we choose to simply eliminate these companies from our records until these requirements are someday being met.
Making a price estimation for a stock is inherently difficult. Mainly, due to its underlying business risk, but nowadays it is also due to the market sentiment which distorts its price valuations towards its future value a.k.a. speculate. As far as we're concerned, the second problem is least important if you have enough time to let its price to eventually get even to its intrinsic value. However, the first one is a bit tricky.
Suppose you're buying a private company, how much would you be comfortable to pay? 10-15 times its current earnings (about 7.5-10% expected ROI) and no more than 1.5 times its asset value? As low as possible you can haggle? Good enough, yet what if the company's capital structure is overindebted or its management performance is not that favourable? What if even after having a decent debt ratio and popularity, it doesn't actually grow itself from time to time? Precarious isn't it?
Our selected list of stocks have been through all that consideration. Guided by Mr Graham's idea, we devise some criteria that will hopefully provide a clearer guidance to the stock's pricing for investors. Nonetheless as you have now aware, even in a decent overall company condition, price estimate can be less reliable due to its inherent risk. Surely, in an unfavourable position, it could come close to becoming meaningless. Therefore, to reduce biases, we do not provide any analysis or information for companies that don't meet our criteria. We simply are not confident enough to release any conclusive analysis for such companies, unless they had previously entered our list but got removed. Yes we are conservative and it is reflected in our estimates yet such pricing might provide margins of safety as Graham always recommends.
Finally, despite our best effort to minimise errors, always be sure to double check everything before trusting our analyses. Here's how we qualify the stocks. As a reminder, please be aware of these several things before committing into stock investment:
1) Proper diversification—spreading your portfolio through several industries and issues, ideally more than 10 different ones—are very useful to reduce your investment risk. 2) We suggest that the ideal time frame of investments should be counted by years, preferably decades with all the returns being reinvested, allowing the compounded return works its magic. 3) Although it is much more logical that an undervalued stock price should have favourable advances over the long run, markets are continuously proving themselves to be highly illogical. Certain types of issues are observed to have anomalies, especially big, well-performing, and reputable ones. They can keep their price advances high for an unpredictably long period, even after surpassing the price level of several times their fair value and vice versa. Still, we suggest that profiting from such an event is considered as speculating. 4) One of the safest ways of investing inspired by Graham is by sticking only to large and reputable companies' stocks that pay their dividends continuously and uninterruptedly for more than 20 years with a positive profit figure for the last 10 years and buying them at a price not more than about 15 times of their earnings per share (EPS). His observation shows that such stocks are very likely to provide satisfactory long term investment results with the least requirement of making any portfolio changes.
Our first mandatory criterion is a good company reputation. This is observable by looking at the availability of the financial report for at least ten financial years since their IPO (Initial Public Offering). Those reports must also be easily accessible on their websites and are published regularly without any significant delay from the regulatory deadline (say, not more than a month delay), as 'audit delay' usually means something is not right with the management.
Size and Capital Structure
Large companies have so many advantages than their smaller peers. Although the proper line on how large a company should be to be qualified as investment-worthy is more or less arbitrary, our qualification limits all companies to be at least 10% of the average total assets of the companies within the same stock market—excluding banks, financial companies, and those which have debts more than 2.3 times their equities. This will eliminate relatively weak and 'too-small-sized' companies from our list, thus hopefully will help our readers build a stronger and stabler stock investment portfolio.
Profit and Dividend Records
Regular dividend payout is not mandatory to qualify within our list. However, companies have to make good use of those unpaid dividends by showing a satisfactory growth rate reflected on the stocks' earnings per share (EPS). We set the figure to be at least increasing 30% in 10 years apart, measured by comparing the average of the last 3 years' EPS against their initial EPS average from 10, 11, and 12 years ago. For companies with less than 13 years of age, a single or double year's average will be used instead. During those 10 years, ideally, the companies must not score any losses, but an exception can be made for strong companies which fulfil all the other criteria well enough (especially if the company pays their dividends regularly) and only if it is non-recurring. Once is the maximum limit. Lastly, the figures used as the yearly EPS is likely to be different from what is stated in the financial reports. We use a conservative basis which chooses the lower between the net income and the net comprehensive income, then divide it by the net outstanding shares at the end of the period (rather than using the weighted average approach). We believe that this number can provide a better 'margin of safety' which Graham advises any investor should have.