Value Investing Across Countries And Economies

Customizing the seventeen-rule framework of Benjamin Graham — Warren Buffett's mentor — for non-U.S. currencies, bond yields and inflation rates.

See Graham's Framework

Even though Graham's framework comprises primarily of ratios that are self-calibrating, there are a few region-specific parameters that may need to be customized if one is investing in countries other than the United States.

Example - U.K.

This discussion will demonstrate such a customization using the currency conversion rates, interest rates and Consumer Price Index (CPI) values of the United Kingdom.

1. Size in Sales

The first region-specific parameter in Graham's framework is the Size rating.

Graham recommended a minimum Sales figure of $100 million for Defensive grade stocks, which works out to around $500 million today based on the increase in CPI in the United States.

Since the Pound Sterling (GBP) is worth roughly 1.28 times the United States Dollar (USD) today, and since Serenity lists values for U.K. stocks in GBP, the Sales rating will simply need to be reduced by 1.28 times to screen for Defensive grade U.K. stocks.

100 ÷ 1.28 = 78%

500 ÷ 1.28 = 390

This yields a Sales figures of £390 million, which corresponds exactly to the $500 million required for a U.S. stock. Rounding up yields a Size in Sales filter value of 80%.

Size in Sales = 80%

A Size in Sales filter value of 80% yields a Sales figures of £400 million.

Sales = £400 million

Size in Assets

For Public-Utilities and Financial Enterprises in the U.S., Graham recommended a Total Assets figure of $50 million which works out to $250 million today.

A similar calculation yields a Size in Assets filter value of 80%.

Size in Assets = 80%

A Size in Assets filter value of 80% yields a Total Assets figures of £200 million, which corresponds closely to the $250 million required for U.S. stocks.

Total Assets = £200 million

2. Earnings Growth

An Earnings Growth rating of 100% on Serenity corresponds to an actual earnings growth of 33% over the past ten years, just as Graham recommended for U.S. stocks.

Since the change in CPI in the U.K. over the last decade is almost identical to this number — 32% — this rating requires no real adjustment for the U.K. (and actually requires adjustment today in the U.S.).

Earnings Growth = 100%

3. Graham Number(%)

A Graham Number(%) of 70% on Serenity corresponds to the 10-year AA corporate bond yield of 3.3% in the U.S. today.

Since similar bond yields in the U.K. are now close to 2.3%, this allows for a P/E ratio of up to 43. The Graham Number of a stock would need to be multiplied by 1.70 to adjust it to a P/E of 43. This corresponds to an Graham Number(%) of 59% on Serenity, which can be rounded up to 60%.

Graham Number(%) = 60%

Intrinsic Value(%)

a. Defensive

The Intrinsic Value of a Defensive grade stock is the same as its Graham Number.

Intrinsic Value(%) = 60%

b. Enterprising

Enterprising grade stocks too would need to have their Intrinsic Value(%) adjusted similarly, as both calculations are based on similar principles.

Intrinsic Value(%) = 60%

c. NCAV

NCAV (or Net-Net) values are calculated based on assets alone, and so NCAV grade stocks do not require having their Intrinsic Value(%) adjusted.

Intrinsic Value(%) = 100%

Graham Stock Screeners

The below links will open the Classic Graham Screener and Advanced Graham Screener with all U.K. exchanges selected. The Advanced Graham Screener will have the adjusted parameters discussed above selected as well.

Graham Resources