We look at the performance of some Graham portfolios, and consider what he'd buy today.
Good old-fashioned value investing, as espoused by Ben Graham, has served many investors well over the years … except when it hasn't. And that's the problem: Most strategies they have their moments in the sun, but finding that elusive formula that consistently outperforms is a real challenge.
I've been experimenting with Graham's approach over the past couple of years, and thought it was a good time to give an update on progress, and see what makes the cut in today's market.
The results so far
I've run three Graham filters to date, 2 years ago, 18 months ago and 6 months ago, and the results (assuming even weightings) are as follows, excluding dividends:
Portfolio 1 (Aug '08):
| | Aug '08 to
Feb '09 | Aug '08 to
Feb '10 | Aug '08 to
Aug '10 |
|---|
| Portfolio 1 (Aug '08) | -29.4% | 11.3% | -14.3% |
| FTSE All-Share | -31.6% | -4.1% | -6.6% |
Portfolio 2 (Feb '09):
| | Feb '09 to
Feb '10 | Feb '09 to
Aug '10 |
|---|
| Portfolio 2 (Feb '09) | 76.2% | 91.0% |
| FTSE All-Share | 40.2% | 38.7% |
Portfolio 3 (Feb '10):
| | Feb '10 to
Aug '10 |
|---|
| Portfolio 3 (Feb '10) | -7.0% |
| FTSE All-Share | -2.6% |
Not the most convincing set of returns, I have to admit.
Bear in mind also that I've just checked the prices at the start and end of each period, and have not been monitoring actively throughout that time. One of Graham's sell signals was if a share price had risen more than 50% since buying; on that basis, many companies would have been dropped before achieving their current levels.
And while we might be tempted to wait for the two-year-old portfolio come come good in the end, two years was the limit of Graham's holding period when applying this strategy.
The car crash that is Findel (LSE: FDL) was enough to push the February 2010 portfolio from outperformance to underperformance; the February 2009 portfolio, on the other hand, has gone from strength to strength.
What to buy today
To satisfy my curiosity, I went on to see what a Graham filter would produce today.
You can find the selection criteria in my biog article on Graham, and I've used ADVFN's Filter-X application to trawl through the data.
No company met all ten criteria, and the one that came closest was a company I hadn't heard of before: Bluestar (LSE: BSST).
With a market capitalisation of just £23m, this Chinese digital surveillance company is not really what Graham had in mind -- he had a strong preference for bigger businesses. Small-cap hunters might want to take a closer look at this one, however, and it was discussed recently on our boards.
Reverting to just the major criteria, and restricting the search to companies bigger than £100m, we get the following portfolio:
| Company | Sector | Price
(p) | Market
cap
£m |
|---|
| Land Securities (LSE: LAND) | Real Estate
Investment Trusts | 598.5p | 4,596 |
| British Land (LSE: BLND) | Real Estate
Investment Trusts | 447.5p | 3,968 |
| Balfour Beatty (LSE: BBY) | Construction
& Materials | 235p | 1,634 |
| HMV (LSE: HMV) | General Retailers | 58p | 250 |
| Interserve (LSE: IRV) | Support Services | 194p | 246 |
| Severfield (LSE: SFR) | Industrial
Engineering | 201p | 180 |
| Mountview Est. (LSE: MTVW) | Real Estate
Investment Trusts | 3,875 | 151 |
As always when working with filters, it's a good idea to manually check the relevant data for any shortlists or portfolios, as errors are not uncommon. In particular, considering the number of property companies on this list, you might want to take a view on the accuracy of the book value of the assets.
Some of these names, such as Interserve (LSE: IRV), we've also seen on previous Graham filters, so be on the lookout for possible 'value traps'.
Let's see if these can rescue Mr Graham's reputation over the next year.
More on the markets:
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