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Graham margin of safety

✕ Avoid

Value investing — S&P 500 members, SEC financial statements

Graham's margin-of-safety idea on its own: buy profitable, financially sound companies trading below their Graham number √(22.5 × EPS × book value per share).

Tested offline on SEC EDGAR financial statements (manage.py rolling_backtest) — no in-app backtest.

How it works

An illustration of the rules on made-up prices, not real data.

Long-run result — 2012–2026, point-in-time S&P 500 + SEC financials

Annual return

10.4%

SPY 15.1%

Worst drawdown

-20.6%

SPY -33.7%

Its picks lagged: fully invested it made 8.3%/yr with a −51% drawdown; with T-bill padding (shown) 10.4%/yr. Only 0–11 names pass a year.

Rules

  1. Price below the Graham number √(22.5 × 3-year average EPS × book value per share)
  2. Positive earnings every year on record (≥ 5 years)
  3. Current ratio ≥ 1.5
  4. Hold up to 30 passing stocks equally (≥ 10 slots, rest in T-bills); review each April

Assessment

  • + The core of Graham: a discount to conservative intrinsic value
  • + Looser than the full defensive test, so it actually finds stocks
  • − Cheap can stay cheap — value traps
  • − Ignores dividend record and growth, so lower quality than the full test