GurusTheir tests. Today's market.

A bankruptcy score from 1968: five ratios, weighted and summed, fitted on manufacturers that went bankrupt or did not.

• Five ratios, each scaled by assets or liabilities, weighted and added into one score.
• Zones commonly quoted: below 1.81 distress, above 2.99 safe, grey between.
• Fitted on publicly traded manufacturers, not on banks, utilities or service firms.

Source: Journal of Finance, 1968.

A score built from eight measures on two years of accounts, estimated to flag likely earnings manipulators.

• Eight measures: receivables, margin, asset quality, sales growth, depreciation, overheads, debt, accruals.
• Commonly quoted cut-off: a score above minus 1.78 flags a likely manipulator.
• Fast, honest growth can raise the score too.

Source: Financial Analysts Journal, 1999.

Seven tests for a defensive investor: size, balance sheet, earnings, dividends, growth and two on price.

• A current ratio of at least 2, and long-term debt within net current assets.
• Some earnings in each of ten years, and twenty years of dividends.
• A price at most 15 times three-year earnings, and 1.5 times book.

Source: The Intelligent Investor, 1973, ch. 14.

A nine-test score, built from a company's own filings, for sorting cheap stocks into stronger and weaker ones.

• Nine yes-or-no tests: profit, cash, debt, liquidity, new shares, margin, turnover.
• He called a score of 8 or 9 high, and 0 or 1 low.
• He tested it only inside the fifth of stocks cheapest against book value.

Source: Journal of Accounting Research, 2000.

A booklet collecting over fifty studies of cheap, small and fallen stocks, and the five traits the firm looked for.

• Five traits: cheap on assets, cheap on earnings, insider purchases, a fallen price, small size.
• Only the first sets the firm's own level: below book or net current assets.
• About half the studies it collected were outside the United States.

Source: What Has Worked in Investing, 1992, revised 2009.

Shareholder letters that judged a business by owner earnings, returns on capital and little debt, in words.

• Owner earnings: profit after the spending needed just to hold its ground.
• A high return on equity, earned without undue debt or accounting tricks.
• A fine business can still cost too much, as the letters warn.

Source: Berkshire Hathaway shareholder letters, 1979 to 2014.

Four contrarian strategies, each ranking large companies by one price ratio and taking the cheapest end.

• Four separate sorts: price against earnings, book value, cash flow and dividends.
• A rank takes the cheapest end, however high or low the market is.
• The cheapest end is where the market is least enthusiastic.

Source: Contrarian Investment Strategies: The Next Generation, 1998.

Fifteen questions about a business and its people, answered mostly by asking around, not by reading accounts.

• Margins counted against the same industry, read over a series of years.
• A company could miss a few points, but never integrity.
• He allowed three reasons for a sale; a high share price was not one.

Source: Common Stocks and Uncommon Profits, 1958.

Two factors, earnings yield and return on capital, each used to rank the market rather than to filter it.

• Earnings yield: operating profit against enterprise value.
• Return on capital: operating profit over net working capital and net fixed assets.
• Financial companies and utilities left out, above a size floor.

Source: The Little Book That Beats the Market, 2005.

Value in three tiers: assets at reproduction cost, earnings power with no growth, and growth last.

• For a business worth entering, assets at what rebuilding them would cost.
• Earnings power: sustainable earnings over the cost of capital, no growth.
• Growth without a barrier to entry adds no value, they argued.

Source: Value Investing: From Graham to Buffett and Beyond, 2001.

Klarman held that safety lies in the price paid, well below a conservative estimate of value.

• Three valuation methods: future cash, liquidation, and market comparisons.
• When the methods disagreed, he leaned to the lower value.
• Risk came from the price paid, not from price swings.

Source: Margin of Safety, 1991, ch. 8.

One Up on Wall Street: price weighed against earnings growth, a balance sheet benchmark, and checklists by type.

• Six types of company, each judged by the tests that suit it.
• Fair price, in his rule: a P/E equal to the earnings growth rate.
• A normal balance sheet, in his book: three quarters equity, a quarter debt.

Source: One Up on Wall Street, 1989.

Marks asked what the price already assumes, and where the market stands in its cycle.

• The question was what the price assumes, not only whether the business is good.
• Risk meant permanent loss, which no price series measures.
• The useful question was where the cycle stands, not what comes next.

Source: The Most Important Thing, 2011; Mastering the Market Cycle, 2018.

Munger preferred a good business at a fair price to a mediocre one at a bargain price.

• Over decades, returns follow the business's return on capital, he argued.
• Little debt, kept so credit held in any conditions.
• Management and understanding mattered, and neither shows up in a filing.

Source: Berkshire Hathaway 2014 annual report; a 1994 talk at USC.

A low P/E against the market, with earnings growth and a dividend weighed together against the price.

• A P/E judged against the market's, not against a fixed number.
• Growth plus yield, over the P/E: the return weighed against the price.
• Very fast growth read as a warning, not a reason to pay more.

Source: John Neff on Investing, 1999.

Gross profits over total assets as the measure of profitability, and his evidence that it complemented value.

• Gross profit, before overheads and financing, divided by total assets.
• Sorted into fifths each June on NYSE breakpoints; no level was published.
• In his sample, profitable firms looked expensive, so profitability complemented value.

Source: Journal of Financial Economics, 2013.

Wrote What Works on Wall Street; his funds' SEC prospectus spelled out two screens condition by condition.

• Price to sales below 1.5: market value over the latest twelve months of sales.
• Fixed rules, fifty stocks, equal weights, rebalanced once a year.
• The final step was a rank, on price gain or on yield.

Source: O'Shaughnessy Funds prospectus, October 1996.

A short list of factors that uses book value as a starting point and warns against borrowing.

• Book value as the starting point for what a company is worth.
• His reason: assets usually change slowly, and earnings can change fast.
• A standing warning to be careful of borrowing.

Source: Factors needed to make money in the stock market.

An owner's manual that sets out in words what the fund seeks: high returns in cash, no need to borrow.

• Quality: a high return on capital, sustained, and counted in cash.
• Earnings per share set aside, because they ignore the capital employed.
• Price judged by free cash flow yield against bond yields.

Source: Fundsmith Equity Fund Owner's Manual, 2025 edition.

Templeton's sixteen rules called for bargains among quality companies, judged on value, not market trends or the outlook.

• He looked for low prices where most investors were pessimistic.
• Each company was judged on its own value, not on market trends.
• His rules called for diversification: safety in numbers.

Source: 16 Rules for Investment Success.