Benjamin Graham: Minimum Size of the company
In the book "Intelligent Investor", Graham recommends a minimum annual sales figure of 100 Million $ as one of the criteria.
How do we adjust this figure for Inflation and a country other than the USA - i.e. a particular minimum sales may indicate a good size in the USA, but the figure may be different for different countries. Does anyone have an idea as to how Graham reached this figure - so that similar figures can be reached for other countries.
From the book, Chapter - Stock Selection for the Defensive Investor
Adequate Size of the Enterprise.
All our minimum figures must be arbitrary and especially in the matter of size required. Our idea is to exclude small companies which may be subject to more than average vicissitudes especially in the industrial field. (There are often good possibilities in such enterprises but we do not consider them suited to the needs of the defensive investor.) Let us use round amounts: not less than 0 million of annual sales for an industrial company and, not less than million of total assets for a public utility.
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If you look at the value as a composite, as Graham seems to, then look at its constituent parts (which you can get off any financials sheet they file with the SEC):
Total annual sales
Total assets
Total debt
Profit margin
Each of those as percentages of the state/national GDP
For example, if you have a fictitious company with:
B sales
B assets
0m debt
25% profit margin
ie 0m annual gross profit
Compared to the US GDP (~T) you have approximately:
Sales
1/150%
Assets
1/75%
Debt
1/600%
Gross Profit
1/600%
Now, scale those numbers to a region with a GDP of, say, 0B (like Belgium), the resultant numbers would be:
m sales
m assets
m debt
m gross profit
Benjamin Grahams strategy was to invest in REALLY SAFE stocks. In his time lean businesses weren't as common as they are now and he found many companies with assets greater than the value of their shares.
Putting a number figure on it isn't really necessary but the concept is useful. Its the idea that bigger companies are less turbulent (Which is something to avoid for an investor).
Most companies in the top 500 or whatever will satisfy this.
Smaller markets can actually be more volatile so it's not a good idea to lower Graham's criteria for them.
The only real adjustment possible is inflation adjustment. 0 million in 1973 United States works out to 0 million today based on the difference in CPI/Inflation from 1973.
This number will be different for other markets where the rate of inflation since 1973 has been different.
So the real question to ask is - what is to 0 million in the United States in 1973 worth today in your market?
Source: www.serenitystocks.com/how-build-complete-benjamin-graham-portfolio
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