Benjamin Graham is the father of value investing and the intellectual foundation of every subsequent systematic approach to equity selection — including Warren Buffett's, Joel Greenblatt's Magic Formula, and the Piotroski F-Score. His two major works, Security Analysis (1934, with David Dodd) and The Intelligent Investor (1949), introduced the core concepts that still underpin fundamental equity research: intrinsic value, margin of safety, and the Mr. Market metaphor.
Graham's investment approach was built on a specific belief: the stock market oscillates around fair value due to investor emotion, creating periodic opportunities to buy businesses at significant discounts to their true worth. The margin of safety — buying substantially below estimated value — protects against both analytical error and bad luck.
This guide translates Graham's documented criteria into screener filters and explains how to implement them across US and European markets in 2026.
Graham's two investment approaches
Graham distinguished between two levels of value investing:
The Defensive Investor — an individual with limited time and expertise who wants to build a sound portfolio with minimal research. Graham prescribed a simple, mechanical set of criteria to filter for financially solid companies at reasonable prices. The goal is to avoid bad investments rather than find spectacular ones.
The Enterprising Investor — an individual willing to invest significant time in research and comfortable with greater selectivity. Graham's criteria here are stricter, targeting genuine bargains — companies trading well below their conservative estimate of intrinsic value. His most extreme version was the net-net strategy: buying companies trading below their liquidation value.
Both approaches are implementable in a screener. The defensive criteria are broader and produce more candidates; the enterprising/net-net criteria are stricter and produce fewer, deeper-value names.
Graham's Defensive Investor criteria
From The Intelligent Investor (Chapter 14), Graham specified seven criteria for the defensive investor's stock selection:
- Adequate size — annual revenue of at least $100M (adjusted for inflation; approximately $1B+ in today's dollars for the US)
- Strong financial condition — current ratio ≥ 2.0; long-term debt ≤ net current assets
- Earnings stability — positive earnings in each of the past 10 years
- Dividend record — uninterrupted dividends for at least 20 years
- Earnings growth — at least 33% growth in EPS over the past 10 years (roughly 3% per year)
- Moderate P/E — current price no more than 15x average earnings of the past 3 years
- Moderate Price-to-Book — current price no more than 1.5x book value; or P/E × P/B ≤ 22.5
These criteria are deliberately conservative. In 2026, meeting all seven simultaneously — particularly 20-year uninterrupted dividend history and 10-year positive earnings — narrows the universe significantly. But the spirit is more useful than the literal application: Graham wanted to ensure he was buying financially sound businesses at fair prices.
Screener implementation (adapted for 2026):
| Graham Criterion | Screener Filter |
|---|---|
| Adequate size | Market cap > €500M / $500M |
| Strong financial condition | Current ratio > 2.0 |
| Earnings stability | Positive net income (5-year minimum in screeners) |
| Dividend record | Dividend yield > 0% (proxy for active dividend payer) |
| Earnings growth | EPS growth 5yr avg > 3% |
| Moderate P/E | P/E below 15x (trailing) |
| Moderate P/B | P/B below 1.5x; or P/E × P/B ≤ 22.5 |
The Graham Number
The Graham Number is the most widely referenced formula derived from Graham's defensive criteria. It calculates the maximum fair value price for a stock based on its earnings and book value:
Graham Number = √(22.5 × EPS × Book Value Per Share)
The 22.5 multiplier reflects Graham's combined threshold: P/E ≤ 15 times P/B ≤ 1.5 = 22.5.
A stock trading below its Graham Number is, by Graham's criteria, attractively priced. A stock trading significantly above it fails the defensive screen.
Example:
- EPS: €3.50
- Book value per share: €25
- Graham Number: √(22.5 × 3.50 × 25) = √(1,968.75) = €44.37
- If the stock trades below €44.37, it passes the Graham Number test
Most screeners do not calculate the Graham Number directly. Implement it by filtering P/E < 15 AND P/B < 1.5 simultaneously — the two-filter combination approximates the Graham Number without requiring a custom calculation.
Graham's Enterprising Investor and net-net stocks
For the Enterprising Investor, Graham prescribed stricter criteria — particularly the famous net-net approach, which he considered his most reliable method:
Net-Net Working Capital (NNWC) = Current Assets − Total Liabilities
A stock trading below its NNWC is priced below its liquidation value — theoretically, an investor buying at that price could liquidate the company and receive more than they paid, even if the business itself has no value.
Graham's net-net strategy:
- Identify companies where share price < 2/3 × NNWC per share
- Diversify across 20–30 such names
- Hold until either price exceeds NNWC or 2–3 years passes
Net-net in modern markets: Graham's net-net opportunities were abundant during the Great Depression and rare today in major US and European markets. They do appear periodically:
- During severe market dislocations (2008–09, March 2020)
- In markets with structural complexity (Japan has historically had high concentrations of net-net stocks)
- In European microcap markets, particularly in Eastern European exchanges
See the dedicated guide: Net-Net Stocks in Europe — how to find and screen liquidation-value bargains on European exchanges.
How to implement a Graham screen in 2026
The practical Graham screen (defensive approach)
| Filter | Threshold | Rationale |
|---|---|---|
| Market cap | > €500M | Adequate size (adjusted for inflation) |
| P/E | < 15x | Moderate earnings price |
| P/B | < 1.5x | Moderate asset price |
| Current ratio | > 2.0 | Strong financial condition |
| Dividend yield | > 0% | Active dividend payer |
| Net income | Positive (TTM) | Earnings stability |
| EPS growth (5yr) | > 3% | Minimum earnings growth |
| Debt-to-equity | < 1.0 | Manageable leverage |
Step by step
Step 1 — Apply P/E < 15 and P/B < 1.5 simultaneously. This is the Graham Number constraint in filter form. Most screeners support both simultaneously. In a full US or European universe, this typically returns 200–400 names — far more than the other Graham criteria will accept.
Step 2 — Add current ratio > 2.0. Current assets at least double current liabilities. This eliminates companies with tight near-term liquidity — Graham's definition of "strong financial condition." This filter removes a significant portion of the screener output.
Step 3 — Filter for positive earnings. Require positive trailing twelve-month net income. Graham wanted 10 consecutive years of positive earnings for defensive investors — modern screeners typically show 1–5 years of earnings history. Apply as many years as your screener allows.
Step 4 — Add EPS growth > 3%. Filters out companies whose earnings have been stagnant or declining — Graham wanted modest but real growth as evidence the business is not in permanent decline.
Step 5 — Sort by P/E × P/B ascending. This produces the composite Graham Number ranking — companies cheapest on the combined P/E and P/B basis appear first.
A European application of this screen typically returns 30–80 names. A US application returns 40–100 names. The combined universe of 70–180 names is the raw Graham defensive portfolio for further research.
Graham vs Buffett: the evolution of value investing
Graham was Buffett's teacher at Columbia Business School and employer at Graham-Newman Corporation. But their approaches diverged significantly as Buffett matured:
| Dimension | Graham | Buffett |
|---|---|---|
| Quality requirement | Low — any cheap stock qualifies | High — only wonderful businesses |
| Valuation | Very cheap (P/B < 1.5, P/E < 15) | Fair (P/E 15–25) |
| Competitive moat | Not required | Essential |
| Holding period | Short (2–3 years until re-rating) | Indefinitely |
| Portfolio size | Diversified (20–30 names) | Concentrated (10–20 names) |
| Qualitative analysis | Minimal — mechanical criteria | Central — moat analysis required |
Graham's approach is more mechanical and requires less judgment — his criteria can be implemented almost entirely in a screener. Buffett's approach requires significant qualitative analysis of competitive positioning that a screener cannot provide.
Neither approach dominates the other. In markets with structural inefficiencies and poor institutional coverage (European microcaps, post-crisis dislocations, out-of-favor sectors), Graham's mechanical approach captures value that qualitative investors miss. In stable, efficiently priced markets, Buffett's quality-first approach outperforms because cheap-but-mediocre businesses continue to disappoint.
See: Warren Buffett Stock Screen for the Buffett implementation and a direct comparison of both strategies.
Applying the Graham screen in European markets
European markets offer more Graham-style opportunities than US markets for structural reasons:
Lower average valuations. The STOXX 600 trades at a consistent 20–30% discount to the S&P 500 on P/E and P/B basis. Graham thresholds (P/E < 15, P/B < 1.5) that narrow the US universe aggressively produce more candidates in Europe.
Higher proportion of asset-heavy businesses. European markets have more industrials, utilities, and manufacturing companies — sectors where book value is a meaningful anchor and P/B is a relevant metric. US markets are more skewed toward capital-light technology where book value has little relationship to intrinsic value.
Family-controlled businesses with conservative balance sheets. Germany, Switzerland, France, and Scandinavia have high concentrations of family-controlled businesses with low debt and multiple generations of dividend history — matching Graham's financial strength criteria well.
Eastern European markets. Poland (GPW), Hungary (BUDAPESt SE), Czech Republic (PSE), and Romania (BVB) still contain genuine net-net situations — companies trading below liquidation value — that have largely disappeared from US and Western European markets.
Frequently asked questions
Who is Benjamin Graham?
Benjamin Graham (1894–1976) was an American economist, investor, and professor widely regarded as the father of value investing. His books Security Analysis (1934, with David Dodd) and The Intelligent Investor (1949) established the intellectual framework for systematic fundamental equity analysis. His most famous student is Warren Buffett, who called him "the second most influential person in my life" after his father.
What is the Graham Number?
The Graham Number is a formula that calculates the maximum price a defensive investor should pay for a stock based on its earnings and book value: √(22.5 × EPS × Book Value Per Share). It combines Graham's two main criteria — P/E ≤ 15 and P/B ≤ 1.5 — into a single fair value estimate. Stocks trading below their Graham Number are candidates for the defensive investor's portfolio.
What is a net-net stock?
A net-net stock is a company trading below its Net-Net Working Capital (NNWC) — current assets minus total liabilities divided by shares outstanding. Graham considered stocks trading below 2/3 of NNWC to be in "bargain" territory because an investor could theoretically liquidate the company and receive more than they paid. Net-net opportunities are rare in large-cap markets today but appear in microcap and distressed situations.
Does Graham's approach work in 2026?
Graham's criteria applied literally (P/E < 15, P/B < 1.5, 20-year dividend history) find fewer candidates in 2026 than in Graham's era — markets are more efficiently priced and information is more accessible. However, the underlying principles — buying below intrinsic value with a margin of safety, requiring financial strength, demanding real earnings — remain valid. Adapted versions of the screen (with looser size thresholds and fewer years of history required) continue to identify value opportunities, particularly in European microcaps and out-of-favor sectors.
What is the difference between Graham and Buffett's approach?
Graham's approach is mechanical: buy cheap stocks (P/E < 15, P/B < 1.5) meeting financial strength criteria. Buffett's approach adds a quality layer: only buy wonderful businesses (high ROE, consistent margins, durable competitive moat) at a fair price. Graham accepts any cheap business; Buffett only accepts exceptional businesses at reasonable prices. Graham diversifies across 20–30 names; Buffett concentrates in his highest-conviction ideas.
Related guides
- Warren Buffett Stock Screen — Berkshire Hathaway's quality-at-fair-price approach
- Net-Net Stocks in Europe — finding liquidation-value bargains on European exchanges
- Price-to-Book Ratio Screening — deep dive into P/B as a value metric
- P/E Ratio for Stock Screening — how to use price-to-earnings correctly in a screener
- Piotroski F-Score — quality filter for Graham-style value screens to reduce value trap risk
- How to Find Undervalued Stocks — full process from screening to investment decision
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