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7 Pointers on How a Defensive Investor Should Invest

When we talk about the most important book for value investors, most of us would mention, “The Intelligent Investor” by Benjamin Graham. Many would also highlight the key ideas of the book such as “margin of safety” and “Mr Market”.

However, the book is more than just about margin of safety or the concept of Mr Market. Benjamin Graham laid out the criteria that a defensive investor should follow when investing in the stock market.

Here are the seven pointers he gave us from his well-renowned book.

Size

The company should be of a certain size. It is best to avoid the small-cap stocks.

Strong Financial Position

The company should have a strong balance sheet. He classified it by saying that the company’s current assets should be at least twice its current liabilities. The long-term debt of the company should also be less than its net current assets.

Earnings Stability

The company should be profitable over the past 10 years.

Dividend

The company should be paying a dividend for the past 20 years.

Earnings Growth

The company should have at least grown its earnings per share by more than 33% over the past decade.

Price-to-Earnings Ratio

The firm’s price-to-earnings ratio should be less than 15 times its average earnings per share (EPS) for the past three years.

Price-to-Assets Ratio

Its price-to-book ratio should be less than 1.5 times.

Benjamin Graham highlighted these criteria for a defensive investor, which means it is supposed to be rather conservative pointers for investors to consider.

From the seven pointers, we can see that he placed the safety of a company – such as having a strong dividend and earnings record, and strong balance sheet – over its potential growth potential.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.