Ben Graham’s ‘Enterprising’ Strategy Explained
An alternative strategy to his famous net-net approach for those wanting to be more active...
Mr Deep-Value also offers separately managed accounts for accredited investors and specialist deep-value software for those implementing directly.
These days, most investors are obsessed with the net-net approach, popularised by Benjamin Graham, through his books and interviews.
However, he also recommended several other strategies that investors could use to generate long-term outperformance, with small downside risk.
One of these approaches was the ‘Enterprising Strategy’.
This was specifically suggested for people that want to be more active and invest more time into the stock selection process.
Graham rationalised that doing so would inevitably lead to market-beating returns over the long-run.
Whenever I tell people what I do, the first question they ask is:
“What’s the best stock to buy right now?”.
This is ludicrous, because it implies a single, reliable basis for selecting stocks that work above all others, at all times.
This simply doesn't exist.
Even in a portfolio of deep-value stocks, like mine, there are some stocks that offer much more protection via assets and others via earnings.
None of them are ‘better’ because they perform a different function as part of a diversified group.
Instead, you need a ‘framework’ to work under. This lets you look for specific criteria, while allowing for the realities of stock market investing.
I was fortunate because I came from a background of buying and selling businesses in the real-world. My logical framework was already present when I started looking at stocks.
For those less fortunate, the enterprising strategy is a framework that anyone can use to construct a portfolio of diversified stocks, based on rational common sense.
Let’s take a closer look…
Who the Enterprising Strategy Was Designed For
Graham divided investors into two broad groups:
Defensive Investors: Seeking safety, minimal effort, and steady returns.
Enterprising Investors : Willing to work harder for potentially higher rewards.
The Enterprising Investor strategy was built for the second group. These investors are not speculators chasing the latest market trends.
Instead, they want a disciplined approach that offers greater upside potential than a conservative defensive strategy, downside protection through strict financial requirements, and a rational, repeatable process for selecting undervalued stocks.
By carefully analysing companies using Graham’s checklist, the Enterprising Investor accepts slightly more risk in exchange for meaningfully better returns over time.
It’s not the ‘best’ approach, but it provides a clear frame-work that will work very well for anyone stumbling around trying to find a process.
The Enterprising approach attracts investors who enjoy research and analysis rather than relying on market tips, understand that effort can improve results if applied intelligently, and want to avoid the emotional traps of speculation by using objective rules.
Graham was clear:
“The determining trait of the enterprising investor is his willingness to devote time and care to the selection of securities that are both sound and more attractive than the average.”
In other words, if you’re willing to study financial statements, compare valuations, and diversify intelligently, this strategy rewards your time and discipline with superior long-term performance.
The Exact Criteria for Enterprising Investors
In Chapter 15 of The Intelligent Investor, Graham laid out five specific tests to identify suitable stocks for the Enterprising portfolio.
Each requirement serves as a margin of safety, ensuring you pay a low price for companies with strong fundamentals.
Here are the criteria, exactly as Graham presented them:
1. Price-Earnings Ratio: “Selling at Multipliers Under 10”
The stock should sell at no more than 10 times its average earnings for the past three years.
A low P/E ratio ensures you are not overpaying for earnings, and it limits downside risk if earnings decline temporarily.
Historically, paying under 10× earnings has delivered above-average returns when combined with the other criteria.
2. Financial Strength: Current Assets vs. Liabilities
Two separate tests ensure balance sheet strength:
The current assets of the business should be at least 1.5x the current liabilities and the total debt should be less than 110% of the net-current-assets.
These rules prevent investment in companies carrying excessive debt or liquidity risks, which can destroy shareholder value in downturns.
3. Earnings Stability: No Losses in the Past 5 Years
Graham required a record of profitability over at least five years.
Why?
Because consistent earnings show a company can withstand recessions, and reduces the risk of the business becoming a value-trap.
4. Dividend Record: A History of Payouts
The company must pay some current dividend.
This serves two purposes:
It proves the company generates real cash flows, not just accounting profits, and dividends offer a tangible return even if the stock price stagnates.
5. Earnings Growth: Recent Earnings Higher than 4 Years Ago
Specifically, last year’s earnings must exceed those from four years earlier.
This ensures the business shows at least modest growth rather than long-term decline.
6. Price Relative to Assets: Below 120% of Net Tangible Assets
Finally, Graham insisted the price should not exceed 120% of the company’s net tangible assets.
This rule provides a margin of safety through real, saleable assets, and protects investors if earnings decline, since assets can often be liquidated to recover value.
Portfolio Size and Diversification
Graham recommended holding 20–30 Enterprising-grade stocks, and limiting each to no more than 5% of total capital (ideally closer to 3–3.5%).
Diversification prevents a single mistake from causing catastrophic losses.
Why These Rules Still Work Today
I think Graham’s principles remain powerful because they focus on buying at low prices relative to assets and earnings.
They also help investors avoid weak balance sheets, and insist on profitability and dividends to filter out speculation.
But mostly, I think it works because it gives people a repeatable process to follow consistently.
Nothing could be worse than chopping and changing your portfolio in response to what the ‘market’ is doing at any given time.
This type of ‘hopping around’ causes terrible destruction of capital.
Simply avoiding this provides an edge, and the enterprising strategy helps you do just that.
How to Apply the Enterprising Strategy Today
If you want to implement this approach, here’s a practical roadmap:
Step 1: Set Up a Stock Screener
For manual screening, I like the TradingView screener, mostly because it has a dark-mode and it’s free 😀
Search for:
P/E ratio < 10 (calculate 3yr averages after)
Current ratio > 1.5
Debt ≤ 110% of net current assets
Positive earnings for 5+ years
Price < 1.2 × tangible book value (book value as a proxy)
Step 2: Verify Financial Statements
Screeners provide a starting point, but always double-check:
Balance sheet strength
Dividend history
Five-year earnings growth
Annual reports and SEC filings offer the most reliable data. I can’t tell you the amount of times that source documents conflict with platform data.
ALWAYS double check before you invest.
Step 3: Diversify Across 20–30 Stocks
Avoid concentrating too heavily in any single company or sector.
Graham emphasised that even with strict criteria, not every stock will succeed. Diversification spreads risk while preserving upside potential.
Step 4: Stay Disciplined
Do not chase glamour stocks or market fads.
Stick to the rules, especially when everyone is buying tech stocks at 467x earnings.
Rebalance periodically as prices and fundamentals change.
Wrapping Up
Benjamin Graham’s Enterprising Investor strategy offers a clear, rules-based roadmap for investors willing to devote time and effort to stock selection.
By demanding low valuations, strong balance sheets, consistent earnings, and asset-backed margins of safety, Graham designed a method to capture higher long-term returns while avoiding the worst risks of speculation.
As Graham famously wrote:
“The essence of investment management is the management of risks, not the management of returns.”
Follow his rules, and you shift the odds in your favour—transforming investing from a gamble into a systematic pursuit of value.
And remember, no ‘strategy’ is the ‘best’.
The most important thing is that you buy things that make it hard to lose money, you buy a group of them and that you follow an approach you can implement over and over again, regardless of what the S&P 500 is doing.
Good luck, and maintain a diversified portfolio of cheap stocks!
Mr Deep-Value also offers separately managed accounts for accredited investors and specialist deep-value software for those implementing directly.