Graham's 10 Rules of Value Investing

Adequate Size of Enterprise

Annual sales > $100M (1973 dollars) — roughly $700M today

Graham wanted to exclude small companies whose business could vanish in a single recession. The original $100M threshold was designed to keep you in companies with real scale and real audit scrutiny. Scaled to 2026 inflation, this is roughly the bottom of the mid-cap universe.

Strong Financial Condition

Current assets ≥ 2× current liabilities; long-term debt ≤ working capital

The balance sheet test. Can the company survive 18 months of no new borrowing? Graham wanted businesses that could fund themselves through their own operations even when credit markets froze. This rule eliminated banks, insurers, and most utilities — Graham covered those separately with specific industry tests.

Earnings Stability

Positive earnings in each of past 10 years

No losses for a decade. This is Graham's most demanding rule because it forces you to invest only in businesses that have already proven they can navigate full economic cycles. Cyclical commodity businesses, startups, turnaround stories — all excluded by definition. You are left with consumer staples, entrenched industrials, healthcare giants, and boring utilities.

Dividend Record

Uninterrupted dividends for 20+ years

The owner-friendliness test. A company that has paid dividends for two decades straight has demonstrated two things: it generates real cash, and it sees shareholders as owners rather than afterthoughts. No cuts, no suspensions, no special dividends substituting for cash payments. The dividend aristocrats list is the modern shorthand.

Earnings Growth

At least 33% growth in per-share earnings over 10 years (3-year averages at endpoints)

Not a growth rule — a non-stagnation rule. Graham wanted to exclude businesses that were quietly dying. The three-year averaging at each endpoint prevents cyclical noise from producing false positives or negatives. A business that grows EPS 33% in ten years is barely beating inflation, but it is proving it can still create value.

Moderate Price-to-Earnings Ratio

P/E ≤ 15 on average earnings of past 3 years

The first valuation test. Graham used three-year average earnings rather than trailing twelve months to smooth out cyclical distortions. In 1973 the market P/E was about 12, so 15 was a real constraint. In 2026 with the S&P 500 trading at 22-25, strict application finds almost nothing — which tells you something about the current market.

Moderate Price-to-Book Ratio

P/B ≤ 1.5, OR P/E × P/B ≤ 22.5

The second valuation test. The combined rule — P/E times P/B should not exceed 22.5 — is the most famous mechanical filter in all of value investing. It means a high-P/E stock needs a low P/B and vice versa. This rule naturally excludes asset-light tech companies and concentrates portfolios in capital-intensive, tangible-asset businesses. That is a feature, not a bug, for Graham's defensive investor.

The stock's earnings yield (inverse of P/E) must be at least twice the yield on high-grade corporate bonds. If AAA bonds yield 5%, look for stocks with earnings yield above 10% (P/E below 10). This links stock selection to the bond market — when bonds yield more, you demand more from stocks; when bonds yield less, you can accept more expensive stocks.

The stock must be trading at less than 40% of its own recent 5-year peak P/E. This is a relative-to-itself valuation test. A stock that usually trades at P/E 25 should be bought at P/E 10 or below. This rule captures companies falling out of favor without regard to absolute valuation — useful in extended bull markets where nothing is cheap in absolute terms.

Dividend yield should be at least two-thirds of the AAA corporate bond yield. If bonds yield 5%, dividends should yield 3.3%. This rule forces you into companies that distribute real cash to owners rather than promising future returns through buybacks or reinvestment. It is the single best rule for retirees and the single most restrictive rule for modern tech investors.

Buy for less than two-thirds of tangible book value — stripping out goodwill and intangible assets. This is pure Graham: if you can buy a business for less than the net tangible assets would fetch in liquidation, the margin of safety is huge. Almost nothing passes this test during bull markets. Stocks that do pass are either deeply troubled or deeply mispriced. Either way, interesting.

The famous net-net rule. Net current asset value equals current assets minus total liabilities. Buy for less than two-thirds of that. This means the stock is being given to you for less than the liquidation value of just the cash, inventory, and receivables — ignoring all fixed assets entirely. Warren Buffett's early partnership returns were built on this single rule. Graham called these 'bargain issues.' They are nearly extinct in US large-caps today but still found in small-cap Japan and Korea.

Total debt should be less than tangible book value. This is a solvency test — can the company theoretically retire all its debt using its tangible assets? Companies with debt greater than book value are betting the farm on continued cash flow; any hiccup can trigger bankruptcy. This rule excludes most airlines, cable companies, and highly-leveraged buyouts.

Current assets at least twice current liabilities. The liquidity test. A company with current ratio below 2 is vulnerable to any disruption in cash collection or credit availability. The 2008 crisis, the 2020 COVID liquidity crunch, and the 2023 regional bank failures all killed companies that violated this rule first. Graham's single most effective bankruptcy predictor.

A tighter debt test than rule 6. Debt should not exceed twice the company's net current assets. Combined with rules 6 and 7, this forms a three-layer balance-sheet defense. Businesses that pass all three have balance sheets so conservative they can withstand multi-year recessions without capital raises.

Earnings per share must have grown at least 7% per year over the past decade. This is the only growth rule on the 1976 list, and it is more demanding than the defensive 33%-total-growth rule. Graham wanted businesses that were actively expanding, not just surviving. 7% annualized growth compounds to roughly 2x over ten years — real, meaningful expansion.

Growth must be stable — no more than two years of 5%+ EPS declines in the past decade. This filters out cyclical businesses that look good on 10-year averages but swing wildly year to year. A company meeting this rule has delivered smooth, predictable compounding. Very few genuinely pass. Those that do are usually either recession-resistant consumer staples or entrenched service businesses.