This year marks the 60th and 75th anniversaries of Ben Graham's two highly influential investment books. Applying his thinking today, what would we buy?
Last August I trawled through all the companies on the market to see what met Benjamin Graham's famous value criteria. Graham, you may recall, is often called the “Father of Value Investing”.
The results so far are not good, basically matching the performance of the FTSE All-Share index.
| Company | Sector | Price 28th Aug '08 (p) | Price 25th Feb '09 (p) | Change |
|---|
| Ladbrokes (LSE: LAD) | Travel & Leisure | 219.50 | 179.00 | -18.5% |
| Rentokil Initl. (LSE: RTO) | Support Services | 71.75 | 44.75 | -37.6% |
| Persimmon (LSE: PSN) | Household Goods | 348.75 | 319.25 | -8.5% |
| Signet Grp. (LSE: SIG) | General Retailers | 1,190.00 | 520.00 | -56.3% |
| William Hill (LSE: WMH) | Travel & Leisure | 273.50 | 240.75 | -12.0% |
| Bellway (LSE: BWY) | Household Goods | 594.00 | 613.50 | 3.3% |
| Barratt Devel. (LSE: BDEV) | Household Goods | 132.50 | 82.50 | -37.7% |
| Debenhams (LSE: DEB) | General Retailers | 48.00 | 38.00 | -20.8% |
| Johnston Press (LSE: JPR) | Media | 47.50 | 6.80 | -85.7% |
| Smiths News (LSE: NWS) | Support Services | 80.00 | 57.00 | -28.8% |
| Mucklow (A&J) (LSE: MKLW) | Real Estate | 221.00 | 235.75 | 6.7% |
| Mountview Est. (LSE: MTVW) | Real Estate | 3,400.00 | 2,250.00 | -33.8% |
| Aga Rangemaster (LSE: AGA) | Household Goods | 180.25 | 78.50 | -56.4% |
| Boot(H) (LSE: BHY) | Construction & Materials | 91.50 | 68.00 | -25.7% |
| AVERAGE | | | | -29.4% |
| FTSE All-Share | | 2848.6 | 1949.0 | -30.2% |
Six months on, and the world has changed dramatically. But what would a Graham filter produce now, 60 years after he published these ideas in The Intelligent Investor, and 75 years after his first book, with David Dodd, Security Analysis?
As a result of my previous article, ADVFN have improved their filter to facilitate searching based on Graham's criteria, so I was keen to give it a try.
Initially searching only on his four major criteria (see the original article), and restricting the list to companies with market capitalisation greater than £100m, as I did last time, now yielded 32 companies. This compares to 14 originally.
But unlike last time, we can now include Graham's six minor criteria also. Doing this produces only one result, Aga Rangemaster (LSE: AGA), and even this falls below my somewhat arbitrary £100m size requirement.
Relaxing or dropping some of the minor criteria, and going back above £100m in size, gives us the following short-list:
| Company | Sector | Price (p) | Market Cap. (£m) |
|---|
| 3i Grp. (LSE:III) | General Financial | 197.00 | 773 |
| Derwent London (LSE:DLN) | Real Estate | 475.25 | 539 |
| Euromoney Inst. (LSE:ERM) | Media | 181.50 | 195 |
| Ite Grp. (LSE:ITE) | Media | 54.00 | 130 |
| Land Secs. (LSE:LAND) | Real Estate | 500.00 | 2,461 |
| Lon.Stk.Exch (LSE:LSE) | General Financial | 428.00 | 1202 |
| Misys (LSE:MSY) | Software & Computer Services | 109.50 | 599 |
| Nat.Express (LSE:NEX) | Travel & Leisure | 235.50 | 363 |
| Persimmon (LSE:PSN) | Household Goods | 294.25 | 957 |
| Stagecoach (LSE:SGC) | Travel & Leisure | 116.50 | 867 |
| Wincanton (LSE:WIN) | Industrial Transportation | 116.25 | 154 |
But it's not really correct for to refer to this as a 'short-list', as the intention here is not to pick individual shares, but to construct a portfolio that might beat the market. Individual companies within that portfolio may crash and burn, but it's the overall performance that matters.
Dividends and earnings are particularly unpredictable at the moment, so that obviously adds to the risk. And it could also be argued that relaxing the criteria, albeit the less important ones, defeats the purpose of the exercise, and might suggest that investors should wait for even better value.
I'll be tracking these portfolios to see how they perform over the longer term.
What's on Maynard Paton's buy list? You can find out right now by taking a free 30-day trial to our Champion Shares stock-picking service.
