John Reese is an expert in analyzing the investment criteria of "legendary" advisors with time-tested strategies. And one market approach that may be of particular interest to investors during the current period of market turmoil is the value strategy developed by Benjamin Graham. (For more on this strategy, see our other post, "Three Rules of Value Investing".)
In his Validea newsletter, John reese explains, "Benjamin Graham -- considered the greatest investment guru by Warren Buffett -- built his reputation by using an extremely conservative, low-risk approach to investing." Buffett, incidentally, was Ben Graham's student.
Reese continues, "To Graham, preserving one's original capital was every bit as important as netting big gains. Having lived through the 1929 market crash, it's no surprise that the strategy Graham laid out in his classic book The Intelligent Investor was a conservative, loss-averse approach.
"To Graham, an investment wasn't something that could be turned into quick, easy profits; anything that offers such 'easy' rewards also comes with substantial risk, and Graham abhorred risk. In terms of specifics, Graham's approach limited risk in a number of ways, and my Graham-based model lays out several of those methods.
"For example, one key criterion is that a firm's current ratio -- that is, the ratio of its current assets to its current liabilities -- is at least two, showing that the firm is in good financial shape.
"The approach also targets financially sound firms by requiring that long-term debt not exceed long-term assets.
"Two other criteria the Graham method uses to find low-risk plays: the price/earnings ratio and the price/book ratio. By using conservative, fundamental-focused measures, Graham earned himself the moniker 'The Father of Value Investing'.
"And as the father of that school of thought, he inspired a number of famous 'sons' -- Mario Gabelli, John Neff, John Templeton, and, most famously, Buffett, are all Graham disciples who went on to their own stock market greatness.
"Perhaps the most intriguing part of Graham's strategy is that, while it was published almost 60 years ago, it still works today.
"Since I started tracking it more than five years ago, a 10-stock portfolio picked using my Graham model has gained more than 160%. That gain is more than ten times the S&P 500's during that time. "Here are the current holdings of the 10-stock Graham portfolio:
1. JAKKS Pacific (NASDAQ: JAKK)
2. Men's Wearhouse (NYSE: MW)
3. Ashland Inc. (NYSE: ASH)
4. Movado Group (NYSE: MOV)
5. Mueller Industries (NYSE: MLI)
6. Scholastic Corporation (NASDAQ: SCHL)
7. Ceradyne, Inc. (NASDAQ: CRDN)
8. Columbia Sportswear (NASDAQ: COLM)
9. Reliance Steel & Aluminum (NYSE: RS)
10. Carlisle Companies (NYSE: CSL)
"As you can see, the portfolio has a pretty diverse mix, with holdings that range from basic materials firms to aerospace & defense companies to retailers.
"The 2008 year has, so far, been one of the Graham strategy's best -- and that's saying something. The portfolio was up more than 23% for this year through September, during a period while the S&P had fallen 17.8%. The model's continued strength, both over the long term and through this difficult 2008, is a testament to the enduring greatness of Graham."
Steven Halpern's TheStockAdvisors.com offers a daily look at the latest market commentary and favorite stock picks and investment ideas from the nation's leading financial newsletter advisors.
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Reader Comments (Page 1 of 1)
10-24-2008 @ 1:43PM
Limoman said...
Re on Validea port?
Well, I must be missing something , but this guys Portfolio?
A. Only is for the Last BULL Market ( 03' -07') and as Warren Buffet says?
Buy Co.'s that do well in a Bear, Anyone can do well in a Bull"
B. And My Balanced Funds of FPACX,OAKBX, WMRIX have done Better for the same timeframe..
C..Thus I don't think so on this guys Port
and his YTD? -21%? again, I don't think so...
10-25-2008 @ 10:34AM
nick said...
This is not a good time to put both feet in the water. We have to wait to see who wins the election. If we turn hard left which it looks like were going to. This was caused by the present Bush adminstration asleep at the wheel and paying to much attention to Iraq and spending too much money over their without getting a discount for the oil. Also some Republicans have lost their way. Until we get back to a true conservative approach to governnent I will stay out of the market. Alot of Republicans and Bush included tried to play softball and appease ass holes like SEN DODD and SEN SHUMMER. With these thugs this doesn't work. Now we will have to go through the upheavel of an Obama and radical left Congress for at least 4 years. The spread the wealth is a real agenda of this Obama Chi town approach to doing things. You will be stunned by what REP PELOSI AND SEN REID have in store. The white folks who stayed home and didn't get out and help their local House and Senate members will really fell bad. The only time this country does well if you have a checks and balance in place, now with the radical left about ready to take over everything you will see laws passed you would never have dreamed would pass. You will see people like REP MAXINE WATERS and REP JOHN LEWIS try to get laws passed to pay for the sins of white forefathers, this stuff is going to split the nation right down the middle. The hate will be such as we have never seen.
1-10-2009 @ 5:42PM
Jim said...
There is only 1 company out of this list Ben Graham would have been interested in. This list doesn't come close to passing a Grahamanian approach to investing.
NET-NET was his key approach. There is only 1 NET-NET in this list.