Do Not Call
Benjamin Graham, often referred to as the "father of value investing", introduced the idea of a defensive investor — someone who seeks consistent returns with minimal effort and lower risk exposure. In his legendary book The Intelligent Investor, Graham laid out a structured framework to help conservative investors identify sound investments that could deliver stability over time.
This article explains Graham’s 7 key criteria for defensive investing and how modern investors in India can interpret and apply them in today’s market landscape.
A defensive investor is someone who prefers a cautious, long-term approach to investing. Rather than chasing high-risk, high-reward opportunities, they focus on building a resilient portfolio made up of well-established, fundamentally strong companies.
This approach is ideal for individuals who may not have the time, expertise, or temperament for active investing but still want to grow their wealth gradually over time.
Graham proposed seven filters to evaluate the suitability of a stock for defensive investors. Let’s examine each one in detail:
Graham advised investing in companies with a sufficient scale of operations, believing that large, established firms are generally more stable and less prone to sudden downturns.
Modern Interpretation:
Focus on large-cap or strong mid-cap companies with stable revenue, broad market presence, and consistent operations. These firms typically withstand economic volatility better than smaller, untested companies.
A healthy balance sheet is crucial. Graham recommended:
Current assets should be at least twice current liabilities
Long-term debt should not exceed net current assets
This ensures the company can meet its obligations even in tough times.
Modern Interpretation:
Look for a solid current ratio (above 2), low debt-to-equity ratio, and sufficient cash reserves. Strong financial condition reduces the risk of default or distress.
The company should have positive earnings in each of the last 10 years. This reflects operational consistency and eliminates companies with volatile or unpredictable performance.
Modern Interpretation:
Use financial statements to check for sustained profitability over a long period. Avoid firms with frequent losses or erratic earnings patterns.
A company must have paid uninterrupted dividends for at least 20 years. This signifies a shareholder-friendly approach and long-term financial strength.
Modern Interpretation:
While 20 years may be a high bar today, consistent dividend payouts over 5–10 years can be considered acceptable. Ensure dividends are supported by earnings and free cash flow.
Graham looked for a minimum increase of at least one-third in per-share earnings over the last 10 years.
Modern Interpretation:
This equates to a compound annual growth rate (CAGR) of around 2.9% or more in EPS over a decade. While modest, it ensures steady progress and avoids stagnation.
The stock’s P/E ratio should not exceed 15 times the average earnings of the past 3 years. This ensures the investor doesn’t overpay.
Modern Interpretation:
Avoid overvalued stocks based on market hype. Use average P/E comparisons within the sector and consider the company’s earnings consistency and potential.
Graham recommended that the product of the P/E and P/B ratios should not exceed 22.5. This rule combines earnings and asset valuation for a conservative assessment.
Formula:
P/E × P/B ≤ 22.5
Modern Interpretation:
While this ratio may vary across sectors (like banks vs tech), it remains a useful screening tool to avoid overpriced or overhyped stocks.
Defensive investing is highly relevant in India, where retail participation is increasing and volatility remains a constant feature of the stock market. Here’s how Indian investors can use Graham’s model:
Focus on large-cap stocks from the NIFTY 50 or Sensex
Check 10-year financial data from trusted platforms
Screen for consistent dividend payers like FMCG and utility firms
Avoid IPOs and small caps that lack historical performance
Use SIPs in diversified mutual funds if picking individual stocks feels overwhelming
While Graham’s filters are valuable, they may exclude growth-oriented companies like those in the tech or new-age sectors, which may not meet criteria like long dividend history or low P/E ratios.
Therefore, it’s important to:
Combine Graham’s principles with modern tools like sector analysis, macroeconomic trends, and business model evaluation
Use his model as a foundation, not a strict rulebook
Benjamin Graham’s 7 criteria provide a solid foundation for investors seeking stable, long-term growth. By focusing on financially strong, fairly valued companies, this approach suits Indian retail investors aiming for steady returns and lower risk.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
A defensive investor is someone who prefers a passive, low-risk investing strategy focusing on stability, consistent earnings, and minimal monitoring.
Yes. While some filters may need adjusting, the core principles remain highly relevant for long-term, risk-averse investors.
Absolutely. Investors can use financial screening tools and long-term data to apply these criteria to Indian companies.
This is a valuation guideline that suggests the product of a stock’s P/E and P/B ratios should not exceed 22.5, keeping the stock within a fair value range.
You can still consider it, but Graham’s model suggests preferring companies that meet most of the criteria to ensure safety and consistency.
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