On last Sunday, I ran my usual Benjamin Graham’s inspired value investing filters across all 562 of the companies I track. And usually that includes different profitability metrics like return on invested capital, net margins, earnings growth, revenue growth, as well as balance sheet strength to do with debt level, debt service stability, and then of course valuation levels with price to earnings ratio and PEG.

And surprise surprise — almost nothing survived. But not for the reason I expected. The businesses are there. It's what they cost. And that, to me, is a signal to start preparing my watchlist.

Now for those who don’t know, all the rules I use are from Benjamin Graham, the father of value investing. It's really quite strict. So with my rules, I kind of simplified it down to suit the modern day value investing approach better.

But here’s the old criteria and how it applies to today: Take everything a company could turn into cash inside a year — cash, receivables, inventory. Subtract every debt it owes. Not just the short-term ones. All of them. What's left is what Graham called net current asset value.

Then he set the bar: only buy if the whole company costs less than two-thirds of that number.

That's the original bar, and almost nothing has cleared it in decades. Mine is deliberately looser, because I'm trying to find good businesses at fair prices rather than dying companies at liquidation prices. But the structure is the same: earn well, survive being wrong, and don't overpay.

Here's the part I didn't expect. For those that know, my main criteria from first principles is just Good business, Strong balance sheet. Consistent profitability, Strong returns on capital and Reasonable valuation.

252 of the 562 clear a reasonable bar on business quality — the profitability and balance-sheet side. Raise it, and 129 still clear it. Raise it again, to the level where I'd call a business genuinely excellent, and 41 are still standing.

41 excellent businesses out of 562. That's a decent hunting ground.

Now apply the same standard to price. Of the 252, 117 survive. Of the 129, 36 survive. Of the 41 — six.

15%. And notice the direction: the better the business, the less likely it is to be sensibly priced. The survival rate falls from 46% to 28% to 15% as the quality bar rises. It gets harder, not easier, the further up the quality scale you go.

And mind you, this 6 out of 41 is already me being quite relaxed on the valuation criteria. Because if I do try to keep it with the same strictness as Benjamin Graham, it would be 0. And, as a disclaimer, with the list emptying, it doesn't mean that there's nothing good to own. It's just empty because almost everything good has already been priced in. So there's quite a lot of quality at the moment, but there's not a lot of margin of safety in terms of pricing.

Now, I want to be clear about this. The fact that I'm finding fewer stocks doesn't ensure that a crash is coming tomorrow. And it's mainly because markets can remain expensive for a very long time. Great companies can continue growing into seemingly expensive valuations if the government decides they want to extend cheap credits.

So I'm not really using this screener as a market timing tool; I'm just using it as an opportunity filter. It's for me to put all of the highest quality stocks that might not meet my margin of safety requirements on a list for further research.

There is another important lesson here. A quantitative screen is a starting point for research, not the final answer. A company can pass every numerical requirement and still have major risks.

For example:

This is why I combine quantitative analysis with business analysis, industry conditions, economic-cycle analysis and valuation.

The numbers narrow the universe. They don't eliminate the need to think.

My personal positioning and opinion — not advice. Nothing here is a recommendation to buy or sell any security.

— Ace
Smart X Capital

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Ace — Smart X Capital’s Founder