Graham's Last Will & Testament
While researching Ben Graham’s net current asset value approach to investing for Computerized Investing’s February 2010 Online Exclusive (available online to Computerized Investing subscribers at www.computerizedinvesting.com), I ran across an article written by James Rea shortly after Graham’s death in The Journal of Portfolio Management.
Prior to meeting Graham a few years earlier, Rea had been working on a stock selection methodology that looked for companies with high reward-to-risk ratios. Upon reading an article that Graham had written in Barron’s—“Renaissance of Value”—Rea discovered that his approach seemed similar to Graham’s. On a lark, Rea forwarded his research to Graham. A couple of months later, Graham called Rea and asked how it was that he was finding his kinds of stocks and suggested that they meet. That first meeting led to a three-year working relationship, which culminated in Graham and Rea starting an investment fund that used the “best” stock selection criteria based on their research.
In this article
- Picking Stocks Like Picking a Milk Cow
- Ten Criteria
- The First Five
- The Second Five
- Scoring Stocks
- Testing the Factors
- A Simplified Approach
- Diversity Over In-Depth Analysis
- Building a Screen
- Profile of Passing Companies
- Stocks on the List
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This article outlines the 10 criteria Graham and Rea first developed (and which they tested using a 50-year period), and builds a screen with the three criteria that they used for their Rea-Graham Fund.
Picking Stocks Like Picking a Milk Cow
In Rea’s article, he recounts the first time he met Ben Graham. Graham asked him to describe his stock selection theory, but without using mathematics. Rea did so using his “milk cow” analogy.
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