Everyone knows that Benjamin Graham is one of the forever best investors. Inside of his book, “Intelligent Investors”, he offers five tests for defensive stock selection. These tests serve as the filter speculative stocks out of a conservative portfolio.
These tests will be the best work for passive investors who want to put together a portfolio of solid companies for the long term.
Adequate Size of the Company
In the investing world, there is a correlation between investment safety and company size. A smaller company usually has a bigger chance to face a wider fluctuation in earning. On the other hand, larger companies usually are more stable.
According to Graham, a company should at least own $100 of annual sales and public utility of no less than $50 million on its total asset.
Adequately Strong Financial
Graham recommends that a stock should at least have two current ratios and its long term debt should not be more than its working capital.
The public utilities, their debt should not go twice beyond the stock equity at their book value. This will be a strong buffer zone for the company against the probability of default and bankruptcy.
Stabil Earning
A company should not report any loss for in these current 10 years, at least. This company has been proven to be more stable than other companies that have reported a loss.
Have the History of Paying Dividend
The company should have a history of paying a dividend to its shareholders over these past 20 years. This serves as the assurance that the company will also pay a dividend in the future.
The Earnings Growth and Profit of the Company
You have to make sure that the company has the ability to make its profit keep up with inflation. Thus, you need to select the company with increasing net income by one third or more on the per-share basis for at least the past 10 years.