Benjamin Graham's defensive strategy is designed for the conservative investor who prioritizes capital preservation over aggressive growth. Outlined in his seminal book The Intelligent Investor, this approach uses strict financial criteria to identify companies with proven track records of stability.
The 7 Defensive Criteria
- Adequate size — Revenue above a minimum threshold to ensure the company is established
- Strong financial condition — Current ratio of at least 2.0, indicating the company can cover its short-term obligations
- Earnings stability — Positive earnings for at least 10 consecutive years
- Dividend record — Uninterrupted dividends for at least 20 years
- Earnings growth — A minimum increase in per-share earnings over the past 10 years
- Moderate P/E ratio — Current price should not exceed 15 times average earnings of the past 3 years
- Moderate price-to-assets ratio — Price should not exceed 1.5 times book value
Two of the seven criteria above are price tests, the moderate P/E and the moderate price to book. The five rules the GuruScreens defensive screen actually evaluates include neither of them, so the screen measures financial consistency rather than cheapness. A comparison of eight value screens run on one universe sets out which screens carry a valuation rule and which companies the defensive list shares with each of the other seven.
Why This Screen is So Strict
With requirements like 20 years of uninterrupted dividends and 10 years of positive earnings, very few stocks pass this screen. As of our latest update, only about 7 out of 3,910 evaluated stocks qualify. This is by design — Graham wanted the defensive investor to hold only the most rock-solid companies.
How to Use This Screen
The defensive screen works best as a starting shortlist. Stocks that pass all 7 criteria have demonstrated remarkable financial consistency. From there, you can:
- Verify current fundamentals by checking recent earnings reports
- Assess valuation relative to peers in the same sector
- Consider portfolio diversification across different industries
Historical Performance
Historically, stocks passing Graham's defensive criteria have shown lower volatility and competitive risk-adjusted returns compared to the broader market. The screen naturally selects for quality companies with established dividend histories.