The Thrifty 30: the story so far
Posted on March 20, 2009 by Richard Beddard
Filed Under Investing |
Taking risk out of returns
Money Observer is just about to publish the Thrifty 30, resurrecting an investing formula devised by Benjamin Graham. Keeping my promise to readers, here’s some further reading:
Graham didn’t call his system the Thrifty 30. I derived the name from the Nifty 50, the so called superstocks of the early 1970s.
The Nifty 50 let investors down, or rather investors let themselves down. By-and-large, the companies went on to prosper. The problem was investors paid too much for the shares, money that vapourised in the crash of 1973 and 1974.
For a discussion of the Nifty 50’s returns, see The Not-so Nifty Fifty.
My take on the Nifty 50 reintroduces a measure of reason by buying good companies at cheap prices using a system Graham designed.
I’ve explained the buy and sell rules for Graham’s system and the need for diversification (hence thirty stocks) in the article and also in this series of blogs:
Graham outlined his system in an interview published in Medical Economics, and you can still read it in one of my favourite investment books: The Rediscovered Benjamin Graham, by Janet Lowe.
The Thrifty 30 invests only in companies with price earnings ratios of less than 7 to 10, depending on bond yields, and only in companies that own more than they owe. The purpose of the criteria is to reduce two kinds of risk, both explained in this blog post: Are you a speculator who thinks he’s an investor?
Financial risk, that a company is overly indebted, say, is easy enough to understand, especially as we witness over encumbered companies blowing up in the current crisis.
Speculative risk, that investors are paying too much for shares, is less intuitive. Rising prices tend to reassure us, and falling prices tend to scare us - it’s human nature.
But, if you were to buy a business, you wouldn’t want to pay too much for it. The more you pay the better the investment has to perform to earn you a good return and the more likely you are to be disappointed.
The same is true for part-ownership of a company, i.e. shares.
In a speech in 1984 Warren Buffett, recently demoted to second richest person in the world, explained how a small group of Graham’s students, he called them The Superinvestors of Graham and Doddsville, all exploited the fact that falling prices reduce risk, and increase the potential for return in otherwise sound companies like Graham’s bargain stocks.
Following the Thrifty 30
In the near future I hope to bring you regular lists of companies that meet Graham’s criteria, and my own selection, in my opinion: The Thriftiest 30.
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That would be a good list to see. great post.
Thanks Cityunslicker.
I’m still working on it, which is one of the reasons for the lack of posts recently! Here’s the article (pdf): http://beddard.net/uploads/MoneyObsOther/Thrifty30.pdf
[...] Friday 27 Mar 2009 Home / Editors’ Blog About « « The Thrifty 30: the story so far [...]
[...] (PRV) does, thankfully, and the company fits the Thrifty 30 template. The shares are cheap, its 10 year PE ratio is nine, and it owns more than twice what it [...]
[...] Given its cyclicality, it’s probably more of a buy and sell (when it recovers), than buy and hold, in keeping with the Thrifty 30 system. [...]
[...] The company owns more than twice what it owes and it’s ten year price earnings ratio is seven, so it’s cheap and financially sound according to my Thrifty 30 template. [...]
[...] Carnival (CCL), which calls itself “the world’s most profitable vacation company,” is a rarity, a FTSE 100 company that meets the basic criteria for a Thrifty 30 portfolio. [...]
[...] this one to turn around. But I will keep watching Molins as there’s no tobacco bar in the model Thrifty 30 portfolio I’m putting together, and it sure is [...]
[...] Thrifty 30 is the name I made up for a screen invented by the grandfather of value investing, Benjamin Graham. As far as I know, he didn’t give it a name. Thrifty 30 companies: [...]
[...] not ruling it out as a safety first stock yet, though. The comparison with newspapers may be imperfect. For a start, Communisis is in [...]
[...] spread of thirty of these companies may be a profitable and safe strategy (I’ve dubbed it the Thrifty 30), individual companies may be very risky. I analyse each potential buy [...]