What are we looking for?
Let's get an update on a portfolio we created a year ago based on the strategy of Benjamin Graham, the legendary value investor. As you'll see, more than three decades after his death, Mr. Graham's approach is still beating the market.
The Graham approach
Being a thrifty fellow, Mr. Graham aimed to buy stocks at a steep discount to their intrinsic value. In his widely praised book, The Intelligent Investor, he recommended focusing on companies with little debt, a long history of uninterrupted dividend payments and relatively low price-to-earnings ratios.
The screen
We used the Graham Value Investor screen developed by Validea.com. The screen looks for companies with the following attributes:
Current assets must be at least double current liabilities, and long-term debt must not exceed net current assets (current assets minus current liabilities);
Earnings per share must have grown by at least 30 per cent over the past 10 years (we're referring here to total earnings growth, not an annual average);
The company must not have posted a loss in any of the past five years;
The current price/earnings ratio and the P/E based on average earnings of the past three years must be 15 or less;
The price-to-book ratio multiplied by the P/E must be less than 22.
The results
We ran the screen on Sept. 12, 2008, just as global stock markets were melting down. So the portfolio got off to a rocky start, but it has still managed to beat the market handily. Assuming an equal $10,000 (U.S.) investment in each of 16 stocks, the portfolio is up 2.1 per cent, excluding dividends. That compares with a 14.9-per-cent loss for the S&P 500 over the same period.
Over longer time frames, the Graham strategy has performed even better. According to Validea.com, its Benjamin Graham model portfolio - which is not the same as ours - has posted an annualized return of 14.8 per cent since inception in July, 2003, assuming quarterly rebalancing. (Note: trading fees and taxes are not included.) That crushes the S&P 500's annualized return of 1 per cent over the same period, and is second only to the portfolio based on the strategy of U.S. money manager and columnist Kenneth Fisher, at 15.5 per cent.
Tomorrow, we'll take a closer look at the Fisher method.
John Heinzl