4 Rules for The Defensive & Intelligent Investor

In Benjamin Graham’s Intelligent Investor in the defensive investor chapter there are four key rules he suggests should be followed to construct a portfolio with moderate ease. Although he suggests the rules as guidelines, noting strict “rules” would be arbitrary.

1) There should be adequate diversification but not excessive, therefor a minimum of ten issues must be held and a maximum of about thirty

2) The company’s selected should be large and prominent, paying a continuous dividend. To be ranked as “large” a company should be ranked in the first quartile of the industry it is in. Also Ben Graham notes that an industrial company’s should be ignored, unless finances are conservative with at least half of total capitalization including bank debt in book value and 30% for utility and railroad companies.

3) Each company should have paid 20-25 years of consecutive dividends.

4) Finally the investor should limit himself to what price he is willing to pay in relation to the earnings of the company. Graham likes to use 7-10 year  average earnings and suggests setting the limit of the P/E ratio at 25x and no more than 20x TTM earnings.

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