Back to basics with Ben Graham
Posted on January 16, 2009 by Richard Beddard
Filed Under Investing |
Bargains galore!
Just a quick one today to point you to an article I wrote for the New Year’s edition of Money Observer, Back to basics (here it is, with tables, in PDF form: Page 1, page 2, page 3), an article about Benjamin Graham.
Graham’s approach to investing; to build in a margin of safety by avoiding dodgy companies altogether, and refusing to overpay for good ones, is pertinent now. Prices are so low, many stocks meet his criteria, and company shares have suffered an abysmal year so safety sounds sensible, suddenly.
But Graham would argue that his approach is always pertinent, even if it forces investors out of the market during bull markets, when prices are irrationally high.
A reader wrote to the editor of MO requesting that we publish updates of the tables of bargain stocks that meet Graham’s value criteria and I’m pleased to say we will. I’m working on it now.
I’m torn between criteria developed by Graham and popularised by James Montier, the behavioural investing guru from SG, detailed in my article, and a simpler derivation I found in an interview with Graham in 1976*1, which I’ll explain in a future blog.
Thirty-nine companies in the FTSE All-Share meet the first set of criteria, essentially cheap companies with high dividends and relatively low debt. If I allow all companies listed on the London Stock Market, including the Alternative Investment Market, that number goes up to 125.
The simpler set of criteria involves only two, the price earnings ratio and gearing, and 150 companies in the FTSE All-Share are sufficiently cheap and unencumbered by debt. If I widen the screen to all companies, 634 fit the bill. So many, screening this way is almost useless.
I’d also likely to do is screen for UK net-nets, the strictest criteria Graham used (see the article for an explanation, or this blog) but sadly I don’t have the data, yet.
Say what you like about the state of the market. It’s a great time to be a value investor.
Footnotes:
- Which I found in the excellent ‘Rediscovered Benjamin Graham’. I can’t say it any more plainly: read this book!
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4 Responses to “Back to basics with Ben Graham”
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“It’s a great time to be a value investor.”
Is it? We’ll revisit that in six months time.
I’m not saying you’re wrong, I just don’t know!
Thanks for your comment, LastChip, and I’m definitely not saying you’re wrong (nobody knows!) but if prices are lower in six months time then it’s still a great time to be a value investor! If they’re lower in five years time then it may not turn out to have been such a good time
“The simpler set of criteria involves only two, the price earnings ratio and gearing”
With banks in the deepest crisis in human history and the disappearance of leverage, i think we are in a new paradigm of fundamental revaluation
Hi F9, Maybe… but don’t forget Graham developed his techniques in the thirties and forties, i.e. the great depression, the second world war and their aftermaths. So, if you’re right about the current crisis, his approach seems relevant.