John Reese is founder and CEO of Validea.com and its Canadian site Validea.ca, as well as Validea Capital Management, and is a portfolio manager for the Omega American & International Consensus funds. Globe Investor has a distribution agreement with Validea.ca, a premium Canadian stock screen service. Try it. Globe readers can get a 25-per-cent discount for a limited time.
The statistics are daunting. Over the past two decades, while the S&P 500 market index gained 7.8 per cent a year on average, U.S. equity fund investors earned less than half that – 3.5 per cent, according to the research firm Dalbar Inc.
Numbers like that lend support to those who believe it’s impossible to beat the market over the long term.
And, to be sure, it’s not easy.
Our own emotions and biases, as well as the high fees many funds charge, make beating the market over lengthy periods a difficult task.
Difficult – but not impossible, I think. And Warren Buffett agrees.
In a 1984 speech he gave at Columbia University entitled “The Superinvestors of Graham-and-Doddsville,” Mr. Buffett examined the remarkable track records of a small group of investors who studied under Benjamin Graham, the man known as the father of value investing.
He explained that from 1954 to 1956, four “peasant level” employees worked under Mr. Graham.
Three of those peasants – Walter Schloss, Tom Knapp, and Mr. Buffett himself – established easily traceable track records after leaving Mr. Graham’s firm, and all of those track records were tremendous:
Mr. Schloss: Gained 16.1 per cent and 21.3 per cent annualized at two partnerships over a 28-year period against 8.4 per cent for the S&P
Mr. Knapp: Gained 20 per cent and 16 per cent annualized at two funds over a 15-year period versus 7 per cent for the S&P.
Mr. Buffett (pre-Berkshire): Annualized returns of 29.5 per cent and 23.8 per cent at two partnerships over a 13-year period compared with 7.4 per cent for the S&P.
The results show that Graham-style value investing works.
My success with Mr. Graham’s strategy only bolsters the already impressive case.
Since mid-2003, I’ve run computerized portfolios that pick stocks using the Defensive Investor approach Mr. Graham laid out in his 1949 classic The Intelligent Investor.
My 10-stock Graham-based portfolio has returned 13.8 per cent annualized compared with 4.3 per cent for the S&P, while the 20-stock version has returned 16.6 per cent annualized.
Can such results continue?
The high-tech world makes information easily accessible.
In theory, that should make an approach such as Mr. Graham’s stop working.
If good value strategies do well over time, and it’s easy to find good value stocks, those stocks should be available at cheap prices for just a blink of an eye before everyone piles into them.
But the same technological forces that make it easier to find good value stocks also make it harder to stick with those stocks.
Turn on the TV, pop open your laptop, click on your phone – all of them give you a front row seat on every up and down of every stock in your portfolio.
Because we are emotional creatures, many investors end up acting on those short-term ups-and-downs far more than they should.
For disciplined investors, that's a good thing.
When others bail on good stocks that are having short-term dips, those focused on the long term can swoop in and pick up the bargains left behind.
With that in mind, here are a few bargains that my Buffett- and Graham-inspired models are keen on right now:
This global financial data provider is a favorite of my Buffett-based model.
The company has raised earnings in every year of the past decade, has no long-term debt, and has averaged a 10-year return on equity of 27.6 per cent.
The U.S.-based men's clothing and accessories chain recently announced 2012 earnings will fall short of 2011 earnings, causing many to flee the stock.
My Graham- and Buffett-based models think that's unwise.
Prior to the 2012 dip, Bank raised earnings every year for more than a decade; it has no long-term debt and an 18.4-per-cent 10-year average return on equity.
It also has a current ratio of 4.42 and a reasonable 13.4 price/earnings ratio (using three-year average earnings per share).
This Montreal-based consumer products company is a favourite of my Graham-based model, thanks to its 2.57 current ratio and its 0.96 price/book ratio.
Disclosure: I own shares of Jos. A. Bank Clothiers.