Graham set the rule. Buffett set the condition. We keep the two answers apart.
Graham and Buffett's value investing, brought up to date and automated: the same principles, recalibrated on today's market and applied by a machine that does not tire, does not grow attached, and does not forget to look again tomorrow. This page describes how we work in as much detail as we can give without handing over the calibration itself — what each rating measures, what puts a stock into each ranking and what takes it out, the part we keep to ourselves, and what none of it establishes.
Where the method comes from
Benjamin Graham — the price
Graham was the first to write that a share is a piece of a business, and that you must never pay more for it than it is worth. He turned that into measurements: discount to net assets, multiple of earnings, ratio to book value. This is the question that protects you from the price — the first of the two, never half of a total.
Warren Buffett — the business
Buffett added the condition Graham weighed less heavily: the business still has to deserve owning. Return on capital, margins, balance-sheet strength, consistency of earnings. This is the second question, the one that rules out value traps — shares that are cheap for good reasons, and will stay cheap. It is not averaged with the first: it is asked beside it.
And where we go further
- Ranks, not thresholds
- Graham wrote “P/E below 15” in 1949. A fixed threshold describes its author's market, not today's. Every stock is scored against the whole universe of the day, and within its own sector: an 8% margin does not mean the same thing in retail as in software.
- Leaving a list, not just entering one
- Neither Graham nor Buffett ever formalized when to stop looking at a company. Each of our rankings has two frontiers, not one: a stock enters by crossing, and leaves only by crossing back with a margin. Without that gap, a name would flicker in and out from one morning to the next on a rounding difference.
- Rules written before they are applied
- No rule is kept because it sounds plausible. It is written down first, replayed on real data using at each date only what was known that day, and kept only if it still holds when the year closes. Several convincing ideas were dropped at that stage.
What each rating measures
The families of criteria are public, and taught in full in the Curriculum. They are the ones any serious value investor uses: our work is not having found them, it is having calibrated them — and having refused to merge them.
Health — can it hold up?
Return on equity, operating margin, net debt to operating profit, interest cover, and how steady earnings have been. Health estimates how unlikely a business is to fall apart. It is read in the accounts, never in the share price: a stock that has already fallen is not thereby fragile, and one that has not is not thereby safe.
Upside — can it move up?
Discount to net current assets, price to book, multiple of earnings, enterprise value to operating income, free cash-flow yield, and the quarter-on-quarter direction of earnings and margin. Upside estimates the room a stock has to rise. It is not the mirror image of health: a fragile company can carry a wide upside, and a solid one can be priced for perfection.
Odds — upside per unit of risk
Odds relates the second answer to the risk of loss, never to health. A wide upside bought at a heavy risk is not the same bargain as a modest one bought safely, and only a ratio says so. It is the rule expressed as a number, not a third opinion — and it is read alongside health, never instead of it.
Listed property trusts are excluded and financial companies are handled separately: their accounts cannot be read with the same ratios, and mixing them would build a ranking that means nothing to anyone. The universe is bounded to U.S. market capitalizations between $200M and $5B — where the fundamental data is deep enough and clean enough to support a daily ranking.
What we do not publish
The exact weights inside each rating, the percentile frontiers that put a stock into a ranking, and the margin it must cross back to leave one, all remain ours. This is not coyness: the calibration is precisely what separates a list of well-known criteria from a method that produces a result.
That calibration is not fixed, and it is where the work lives. At every closed year, every rule is re-examined against up-to-date data and kept only if it still holds. Several settings that had a good reason to exist in 2021 have since been removed, because the reason had stopped being true — and the result improved for it.
What you can check for yourself is left whole: the three rankings are published every morning, every rating and every position is dated. The method works in plain sight, even if its calibration does not read.
How a rule earns its place
A historical test is easy to make flattering: you only have to forget one detail. Here is the complete list of what ours handles before a rule is kept. Every point is there because its absence had produced a result that was wrong — and believable.
- Strictly point-in-time
- At every calculation date, selection uses only the data published by that date. No later information ever enters.
- Real filing dates
- A financial year becomes usable on its actual filing date, not its closing date. A company closing on 31 December reports in February or March: using it from 1 January would mean collecting the market's reaction to results nobody has seen. Where the filing date is missing, a 90-day lag applies. Filing dates that precede the close — the provider does produce them — are discarded.
- Delisted companies included
- The universe holds 2,242 companies that disappeared over the period: bankruptcies, takeovers, delistings. A backtest built only on survivors can literally never lose money on a bankruptcy.
- Delisting treated as such
- A liquidated company leaves the selection at its last quoted price. Without that rule it would sit there for ever, marked at a price that no longer exists, occupying a slot without ever costing or earning anything.
- The market cap of the day
- The size filter uses capitalization reconstructed at each date — the share count of the time multiplied by the price of the time — not today's. Keeping a 2021 company because it grew into a mid cap by 2026 is knowledge of the future.
- Eligibility over the observable window
- A company enters the universe if it occupied the size band during the period tested, not if it occupied it ten years earlier. That single rule made a material dent in the result we were about to publish — the kind of correction that only surfaces when eligibility is judged on the observable window rather than on what a company became later.
- Ratios refreshed to today's price
- Enterprise value and free cash-flow yield are recomputed at today's price from the price observed at the report date. A ratio frozen at publication ages by several months between two financial years.
- Dividends reinvested
- Distributions are collected and reinvested, on the selection and on the comparison indices alike. Gross: tax depends on each investor's wrapper and residence, and computing it would mean inventing a figure.
- Transaction costs, and what they cover
- Every buy and every sell bears a cost of 10 basis points. We do not model the bid-ask spread line by line — it depends on a given day's order book, which no historical database restores honestly. Sensitivity is therefore tested up to 100 basis points, ten times the working assumption: at that level the simulated cost comfortably absorbs the bid-ask spread of a liquid U.S. small cap. A method whose result rested on an optimistic cost assumption would not be one.
- Whole shares
- The backtest buys whole numbers of shares with finite capital, like any investor. Fractional positions would produce a result nobody can reproduce.
- Like-for-like comparison
- Indices are recomputed from the backtest's exact start date. Comparing two different periods is not comparing — that is how a positive gap once displayed as negative.
The club no longer publishes a model portfolio: it rates individual stocks. Performance figures describing those portfolios have been withdrawn.
Warning
Past performance is no guarantee of future results. Investing in equities carries a risk of capital loss, up to and including the entire amount invested. Value Investing Club is an information and education service; it provides no personalized investment advice and takes no account of your situation, your objectives or your tolerance for risk.
One point deserves to be said plainly, because it decides the outcome more surely than the selection itself: this method demands that you hold. A discount takes months, sometimes years, to close, and the path is never a straight line. Nothing guarantees that it closes at all. An investor who sells at the trough, driven out by noise, does not collect a smaller return: they collect the loss. If price swings keep you awake, or if you may need this money in the short term, this approach is not for you.