1. Strong Financial condition:

– current assets at least 1.5 times current liabilities

– total debt to net current assets ratio less that 1.1

2. Earnings Stability

– positive earnings for at least 5 years

3. Currently pays a dividend

4. Current earnings greater than years ago

5. Stock price less than 120% of net tangible assets

(Benjamin Clark at ModernGraham.com does an excellent job of analyzing several hundred stocks to examine whether they meet the criteria for the defensive or enterprising investor.)

In addition, Graham offered two simple alternative methods for choosing high probability stocks. One: purchase stocks with a low price/earnings ratio from a quality list (i.e. Dow Jones Industrial Average List), and two: purchase a diversified group of stocks selling under their working capital value (Net Net Stocks).

The common principle for the enterprising investor is finding bargains. You should avoid lower tier issues unless they are validated as bargains.

In the commentary, Jason Zweig provides excellent content on Return On Investment Capital (ROIC) and how it can be used to compare one company to another. He also points out that successful investors have two things in common: First, they are disciplined and consistent, and second, they put a great deal of thought into their process, but give little thought to what the market is doing.

This article was republished with permission from Arbor Investment Planner.