The Successful Investor value investing approach follows the basic model set by the old-fashioned Graham/Dodd approach. Basically, it tries to identify well-financed companies that are well-established in their businesses and have a history of earnings and dividends. They are likely to survive any economic setback that comes along, and thrive anew when prosperity returns, as it inevitably does.

When we recommend a stock as a buy, we first look to see if it meets these value-investing criteria. And a key component of our value-investing system is our ratings system, which identifies stocks with positive prospects and lower risk.

We have six Successful Investor ratings. The top rating is Highest Quality; next is Above Average; next is Average; below that, Extra Risk; below that, Speculative; and, at the bottom of the scale, our riskiest, lowest-quality rating of Start-Up.

We base our Successful Investor ratings on a system we’ve developed over the years. We use it to assign “quality points” based on nine key factors that successful investors use in value investing to determine a company’s ability to survive a business setback and go on to greater success when conditions improve.

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These nine Successful Investor factors and the points they earn are:

• One point for a long-term record of profit.
• One point for a long-term record of dividends.
• One point for industry prominence — two points for industry dominance.
• One point for an attractive balance sheet, with adequate equity and working capital, and manageable debt.
• One point for Canada or U.S.-wide operations, or two points for multinational operations. You may want to invest in firms that are concentrated geographically, but geographical diversification cuts risk.
• One point for being able to serve the needs of all shareholders. To merit this point, firms must be free of excess government regulation, free of too much dependence on a single supplier and free of insider abuses.
• One point for freedom from business cycles.
• One point for the ability to profit from a secular trend, or two points for the ability to profit from two or more secular trends. Secular trends (such as the global move toward economic liberalization and free trade) go far beyond mere business cycles; they reflect ongoing changes in the world.
• One point for offering products or services that profit from habitual behaviour.

Here’s how we then assign Successful Investor value-investing ratings:

Companies with 11 or 12 points fall in the top Successful Investor rating category: Highest Quality. Those with eight to 10 points are Above Average. Six or seven points mean they are of Average quality. If a stock has just four or five points, it carries Extra Risk (that is, more risk than average); two to three points, Speculative; one or no points, Start-Up.

Unlike computerized risk assessments, our Successful Investor value-investing ratings demand many judgment calls. But we find Successful Investor value-investing gives us a deep-seated measure that goes to the heart of a company’s staying power and yields few unfortunate surprises.