Wednesday, October 7, 2009
Graham's strategy still stands tall
In the sports world, some of the most intriguing debates involve comparisons that cross generations. How many goals could Bobby Hull score in today's NHL? How about Maurice Richard? Could Babe Ruth hit 60 home runs?
In investing, you can ask similar questions - and get much more definitive answers.
Take Benjamin Graham. Born in 1894, Mr. Graham is considered the father of both value investing and the field of security analysis. He's also known as Warren Buffett's mentor. He earned his reputation by producing annual returns of about 20 per cent from the mid-1930s through the mid-1950s, far exceeding the 12.2-per-cent annual returns of the broader market.
We'll never know for sure how well Mr. Graham would have performed in today's market - but we can get a pretty good idea. That's because in his classic book The Intelligent Investor, Mr. Graham laid out a step-by-step, quantitative stock-picking method for the "defensive investor" - a method I've replicated in my Graham-inspired "Guru Strategy" computer model.
Based on the performance of that strategy, has Mr. Graham's approach been passed by? Hardly. In fact, the 10-stock Graham-inspired portfolio I track has been my best long-term performer, more than doubling in value since its July, 2003, inception.
Even amid the huge market shakeup of the past two years, the Graham portfolio has continued its strong performance. It lost less than the broader market last year, and quickly made up all of its 2008 losses.
Mind the Business
How can a 60-year-old strategy fare so well today? It's because Mr. Graham's strategy wasn't gimmicky, or designed to capitalize on specific market conditions.
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