Classic value investing beat the market last year, but what would Ben Graham buy today?
What portfolio strategy has delivered gains of nearly 80% over the past year? Hint: It doesn't require knowledge of the Black-Scholes formula or the Greek alphabet.
The answer is good old-fashioned value investing, as espoused by Ben Graham.
The results so far
I've run two Graham filters to date, 18 months ago and 12 months ago, and the results (assuming even weightings) are as follows, excluding dividends:
| | Aug '08 to
Feb '10 | Feb '09 to
Feb '10 |
|---|
| Portfolio 1 (Aug '08) | 11.3% | – |
| Portfolio 2 (Feb '09) | – | 76.2% |
| FTSE All-Share | -4.1% | 40.2% |
But before we get too carried away with our results so far, one caveat: 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.
What to buy today
Nevertheless, encouraged by this statistically insignificant victory, let's 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.
Applying all ten criteria produces, bizarrely, exactly one company -- Interior Services Group (LSE: ISG), currently priced at 163.5p. This also popped up last year as being very cheap on an enterprise-value-to-sales ratio (ESR) basis.
Opinions about this firm are mixed amongst other Motley Fool contributors; you can read reviews here and here.
But an important point about Graham's method is that we are aiming to construct a portfolio of shares, rather than find one or two companies. If we just apply his four main criteria, we get a list of 24 companies, but many of these are quite small.
As Graham preferred larger companies, restricting our search to market capitalisations above £100m gives us the following portfolio of twelve shares:
| Company | Sector | Price
(p) | Market cap
(£m) |
|---|
| Balfour Beatty (LSE: BBY) | Construction & Materials | 269.2 | 1,859 |
| Debenhams (LSE: DEB) | General Retailers | 63.4 | 790 |
| Findel (LSE: FDL) | General Retailers | 29.5 | 146 |
| Game Group (LSE: GMG) | General Retailers | 79.4 | 278 |
| Greggs (LSE: GRG) | Food & Drug Retailers | 414.1 | 431 |
| HMV (LSE: HMV) | General Retailers | 69.8 | 289 |
| Hogg Robinson (LSE: HRG) | Support Services | 33.8 | 103 |
| Huntsworth (LSE: HNT) | Media | 64.0 | 136 |
| Interserve (LSE: IRV) | Support Services | 203.4 | 250 |
| Menzies (J) (LSE: MNZS) | Support Services | 314.0 | 185 |
| Morgan Sindall (LSE: MGNS) | Construction & Materials | 567.0 | 242 |
| National Express (LSE: NEX) | Travel & Leisure | 202.5 | 1,010 |
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.
Let's see how this lot performs over the next year.
More from Padraig O'Hannelly:
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