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The stock market spawns a plethora of stock-picking strategies, but a simple one has been producing gains for 86 years.

The idea is to buy 10 of the 30 blue-chip stocks in the venerable Dow Jones Industrial Average (DJIA) that have the lowest price-to-earnings ratios (P/E) each year.

The strategy was mentioned by money manager Benjamin Graham (the mentor of Warren Buffett) in the fourth edition of his book The Intelligent Investor, which was published in 1973. At the time, the results were pretty good.

The 10-stock low-P/E portfolio gained an average of 7.9 per cent annually from 1937 to 1962. The DJIA trailed over the same period, with average annual returns of 6.1 per cent. On the other hand, a 10-stock portfolio with the highest P/Es in the DJIA lagged badly, with average annual returns of 3.8 per cent.

Picking stocks with low P/Es is a classic value-investing technique. It’s one reason why I was pleased to see an update of Graham’s study several years ago from money manager James O’Shaughnessy, who wrote the excellent book, What Works on Wall Street.

Mr. O’Shaughnessy found that a portfolio composed of the 10 stocks with the lowest P/Es in the DJIA climbed at an average annual rate of 9.2 per cent from June 30, 1937, to June 30, 2004. The DJIA itself moved up 7.0 per cent annually over the same period. On the other hand, the 10 stocks with the highest P/Es trailed badly, with an average annual growth rate of just 3.2 per cent.

I recently decided to update the figures to see how the 10-stock low-P/E portfolio fared in more recent times. It turns out the portfolio gained an average of 8.3 per cent annually over the 19 years from June 30, 2004, to June 30, 2023.

That’s not bad, but the 10-stock high-P/E portfolio fared a touch better, with average annual returns of 8.9 per cent over the same period, while the DJIA climbed by an average of 9.1 per cent annually. (My figures are based on data from Bloomberg. They include dividend reinvestment but not fund fees, taxes, commissions or other trading costs.)

Glue the two studies together and the 10-stock low-P/E portfolio gained an average of about 9.0 per cent annually from June 30, 1937, to June 30, 2023. The DJIA climbed 7.5 per cent annually over the same period, while the recent strong showing for the 10-stock high-P/E portfolio managed to lift its long-term annual returns to near 4.4 per cent.

I hasten to add that combining the results of the studies may not be perfect because there could be methodological differences between the two. For instance, each study likely defines earnings in a slightly differently way.

Still, the recent results provide a reminder that good strategies can lag sometimes, and they can do so for uncomfortably long periods. I also suspect the unusually good returns of the high-P/E portfolio reflects the bubbly state of technology stocks in recent years.

Turning from annually rebalanced portfolios to ones rebalanced monthly, the accompanying chart shows the gains of the two P/E-based portfolios and the DJIA over the 25 years to June 30, 2023. In this case, the low-P/E portfolio gained an average of 9.1 per cent annually over the period, while the DJIA gained 8.0 per cent annually, and the high-P/E portfolio gained 6.9 per cent annually.

While most value investors look beyond the 30 large stocks in the DJIA for interesting low-P/E bargains, I’m tickled by the long-term returns generated by such a simple strategy. I look forward to checking back in on it from time to time to see how it fares.

Norman Rothery, PhD, CFA, is the founder of

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