Value Criteria

• The Bottom Line: Value criteria are your personal, non-negotiable checklist of business and financial standards that a company must meet before you even consider it as a potential investment.
• Key Takeaways:
• What it is: A set of predefined, objective rules—both quantitative (e.g., debt level) and qualitative (e.g., competitive advantage)—used to filter out subpar or speculative companies.
• Why it matters: It is the single most powerful tool for enforcing investment discipline, removing emotion from decision-making, and systematically applying the Margin of Safety principle.
• How to use it: By creating your own checklist based on your investment philosophy, you build a repeatable process to identify high-quality, potentially undervalued businesses.

Imagine you’re buying a house. You wouldn't just drive up to the first one with a “For Sale” sign and make an offer. You’d have a checklist, either in your head or on paper. It might include things like:

• Must have at least three bedrooms.
• The foundation must be free of cracks.
• It must be in a good school district.
• The roof must be less than 10 years old.

This checklist is your “housing criteria.” It’s your system for filtering out unsuitable properties before you waste time and energy falling in love with a house that’s fundamentally flawed. Value criteria in investing is the exact same concept, but for businesses. It's an investor's personalized, rigorous checklist used to scrutinize a company. This checklist isn't about finding stocks that are “hot” or popular. It’s about finding businesses that are strong, durable, and financially sound. These criteria are typically broken down into two categories: 1. Quantitative Criteria (The Numbers): These are the hard, measurable financial metrics you can pull from a company’s reports. Think of this as checking the foundation, the plumbing, and the electrical systems of the house. Examples include a maximum price-to-earnings (p_e_ratio) ratio, a minimum level of profitability (return_on_equity), a low debt-to-equity ratio, or a history of consistent earnings growth. These are non-negotiable hurdles. 2. Qualitative Criteria (The Story): These are the less tangible, more judgment-based aspects of the business. This is like assessing the quality of the neighborhood, the reputation of the builder, and the long-term appeal of the home's design. Examples include understanding if the company has a durable competitive advantage, if its management is trustworthy and capable, and whether you understand its business model (your circle_of_competence). Legendary investor benjamin_graham, the father of value investing, was a master of the quantitative checklist. He sought out “cigar-butt” companies that were so statistically cheap they were almost guaranteed to have some value left in them. His student, Warren Buffett, later evolved this approach, famously saying:

“It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

Buffett and his partner Charlie Munger began to place enormous weight on qualitative criteria—like the strength of a brand (Coca-Cola) or the loyalty of customers (Apple)—recognizing that these “soft” factors were the true engines of long-term intrinsic_value. Ultimately, your value criteria are your personal investment philosophy codified into a set of rules. They are your guardrails, keeping you on the road of rational investing and away from the ditches of speculation and emotional folly.

For a value investor, developing and sticking to a set of value criteria isn't just a good idea—it's everything. It's the practical application of the entire philosophy. Here’s why it is so critically important:

• It Automates Discipline: The biggest enemy of the individual investor is not the market; it's themselves. Fear makes us sell at the bottom, and greed makes us buy at the top. A predefined checklist acts as a circuit breaker for these emotions. If a stock is plummeting but still meets all your criteria for a healthy, undervalued business, your checklist gives you the courage to buy. If a stock is soaring but its valuation now fails your criteria, your checklist tells you to stay away, no matter how tempted you are.
• It Forces a Focus on Business Fundamentals: The stock market is a cacophony of noise: daily price swings, news headlines, and “expert” predictions. Value criteria force you to ignore all of it. Instead, you're focused on the underlying business. Does it generate cash? Is it drowning in debt? Can competitors easily crush it? It transforms you from a stock-picker into a business analyst.
• It Is the Foundation of the Margin of Safety: The margin_of_safety is the cornerstone of value investing—buying a dollar's worth of assets for 50 cents. Your value criteria are how you first determine that the business is actually worth a dollar. The checklist's first job is to identify a quality, stable company. Only after a company has passed all these quality tests do you apply the final, most important criterion: Is the price cheap enough to provide a significant margin of safety? Without the initial quality check, a cheap price might just be a sign of a failing business (a “value trap”).
• It Creates a Repeatable and Improvable Process: Great investors have a process they can rely on, in good markets and bad. By using a consistent set of criteria, you can analyze any company with the same rigorous lens. This makes your approach repeatable. Furthermore, you can look back at your past decisions and see which criteria served you well and which ones didn't, allowing you to refine and improve your process over time.

In short, value criteria are the bridge between value investing theory and real-world execution. They are what separate disciplined investing from gambling.

“Value criteria” is a concept, not a formula. The goal is to build your own framework. While every investor's list will be unique, the process of building it is universal.

Here is a four-step guide to creating your own set of value criteria. Step 1: Define Your Core Philosophy First, decide what kind of value investor you want to be.

• Deep Value (Graham-style): Are you looking for statistically cheap, unloved “cigar-butt” companies, focusing almost exclusively on a rock-bottom price relative to assets?
• Quality at a Fair Price (Buffett-style): Are you looking for excellent businesses with durable competitive advantages, willing to pay a reasonable price for that quality?

Your answer will guide which criteria you prioritize. Step 2: Establish Your Quantitative Hurdles (The “Numbers” Test) These should be clear, yes/no questions based on financial data. Start with these fundamental areas:

• Valuation: How will you define “cheap”?
  • `Price-to-Earnings (P/E) Ratio` below 15?
  • `Price-to-Book (P/B) Ratio` below 1.5?
  • `Price-to-Free-Cash-Flow (P/FCF)` below 20?
• Financial Health: Is the company at risk of going broke?
  • `Debt-to-Equity Ratio` below 0.5? ¹⁾
  • `Current Ratio` above 1.5? ²⁾
• Profitability: Is the business an efficient generator of profit?
  • `Return on Equity (ROE)` consistently above 10%?
  • `Operating Margin` consistently above 15%?
• Consistency: Has the business proven its resilience over time?
  • Positive earnings for the last 10 consecutive years?
  • History of stable or growing revenue?

Step 3: Define Your Qualitative Hurdles (The “Business” Test) These questions require more research and judgment. They are just as important as the numbers.

• Understandability (circle_of_competence): Can I explain, in simple terms, how this business makes money? If not, it's an immediate “pass.”
• Competitive Advantage (economic_moat): Does the company have a durable moat that protects it from competitors? (e.g., a strong brand, network effects, high switching costs, cost advantages).
• Management Quality: Is the leadership team honest, competent, and shareholder-friendly? (Read their annual letters to shareholders. Do they admit mistakes? Do they have a clear long-term vision?)
• Long-Term Prospects: Is the industry in which the company operates stable or growing? Or is it facing terminal decline due to technological change?

Step 4: The Final Hurdle - Price vs. Value A company can pass all the criteria above and still be a terrible investment if the price is too high. The final step is to perform a valuation to estimate the company's intrinsic_value. Your final criterion is always:

• Is the current market price at least 30-50% below my conservative estimate of its intrinsic value? This is your margin_of_safety.

The result of applying your criteria is not a score; it's a binary decision: “Investigate Further” or “Discard.” A company that passes your initial quantitative and qualitative screens is a candidate worth spending more time on—to conduct a deep dive and calculate its intrinsic value. A company that fails even one of your crucial, non-negotiable criteria (like having too much debt or being outside your circle of competence) should be immediately discarded, regardless of how exciting its story sounds. This process is not about finding hundreds of stocks. It's about filtering out 99% of the market to identify the handful of truly exceptional opportunities that fit your specific, disciplined approach.

Let's apply a simplified checklist to two fictional companies: “Steady Brew Coffee Co.”, a well-established coffee chain, and “QuantumLeap AI Inc.”, a hyped-up tech startup. Our Simplified Value Criteria Checklist: 1. Understandable Business: Yes/No? 2. Debt-to-Equity Ratio: Below 0.5? 3. 10-Year Earnings History: Consistently profitable? 4. P/E Ratio: Below 20? 5. Durable Moat: Yes/No? Here's how they stack up:

This example, while simple, demonstrates the power of the criteria. It quickly and emotionlessly separates a potential investment (Steady Brew) from a gamble (QuantumLeap), saving the investor from a potentially catastrophic mistake.

• Reduces Emotional Bias: A checklist is a rational, unemotional tool that provides a buffer against the market's psychological traps of greed and fear.
• Improves Consistency: It ensures you apply the same high standards to every potential investment, leading to a more disciplined and systematic approach.
• Manages Risk: By filtering out companies with weak balance sheets, unproven business models, or outrageous valuations, it systematically weeds out the riskiest propositions.
• Saves Time and Effort: A good set of criteria allows you to quickly reject 99% of companies, letting you focus your deep research efforts on only the most promising candidates.

• Can Be Too Rigid: A checklist created for industrial companies might unfairly penalize a growing software company. The criteria must be thoughtfully applied and adapted to different industries. For example, a “no debt” rule would exclude most healthy banks.
• Based on Historical Data: Criteria are, by nature, backward-looking. A company can have a stellar 10-year track record but be on the verge of disruption from a new technology. The checklist is a starting point, not a substitute for forward-looking judgment.
• Danger of “Paralysis by Analysis”: Setting impossibly high standards may lead to you never finding a company that passes. The goal is not to find the “perfect” company, as none exist, but to find great businesses at fair prices.
• False Precision: Over-focusing on quantitative criteria to the exclusion of qualitative ones is a classic mistake. A company might look cheap on paper but be a “value trap” with a dying business model that the numbers haven't caught up with yet.

• intrinsic_value
• margin_of_safety
• circle_of_competence
• economic_moat
• benjamin_graham
• p_e_ratio
• balance_sheet