Benjamin Graham believed in the overall efficiency of securities markets, but he also believed that any conscientious investor could map a high trail through the slough of market efficiency by paying close attention to investment fundamentals and taking advantage of undervaluation and mispricing of individual securities. Among the maps he bequeathed to investors was a list of 10 criteria for identifying undervalued stocks.

The author screened New York and American Stock Exchange securities to select those issues that met various sets of Graham’s criteria and measured performances of portfolios formed from those issues over the years 1974 through 1981. Over that period, the CRSP index of NYSE-AMEX securities provided a mean annual return (including dividends) of 14 per cent. An investor who had used Graham’s advice to select from the NYSE-AMEX universe securities of firms with an earnings-to-price ratio at least twice the AAA bond yield and total debt less than book value would have achieved a mean annual return of 38 per cent!

Although the superior performance of the portfolios created from Graham’s selection criteria declined after 1976, the year the criteria were published, it did not disappear. Furthermore, excess returns remained after risk adjustment and adjustment for firm size effects.