Benjamin graham is considered as the dean of value investing. Warren buffet was graham’s student and considers him as his mentor. Buffett’s followed graham’s approach to value investing in the early part of his career. However later, he expanded on graham’s approach and started focussing on the quality of the business too.

Graham’s approach is basically picking stocks which are statistically cheap. What that means is that the stock is cheap based on various quantitative measures such as mcap being less than Net current assets, or the stock is selling for less than cash on books. The disadvantage of this approach is that you may end up buying some complete dogs which are cheap for a reason. The underlying business would be going downhill and so the value is just an illusion.

Graham understood this and he circumvented it by diversifying. So the key point in building a portfolio of cheap graham style stocks is to diversify the holding. It makes sense to hold 15-20 stocks at a time and to keep selling the stocks when they reach 80-90% of intrinsic value and to replace them with other cheap issues.

With the current drop, I can see more of such opportunities coming up. The last time I saw such an opportunity was in 2002-2003 time frame.

The initial filter criteria I am using is as follows
Mcap less than 500 crs
Debt / equity ratio less than 0.5
No loss in the preceeding 5-6 years
PE less than 7
ROE atleast 8-10%

I have been developing a list of such ideas and have loaded a list of possible ideas in google groups (stock screen graham). I have holdings in HTMT global, LMW and Denso india. I am still analysing the other stocks in the list and have yet to make up my mind on them.

The key point, and I repeat, is to hold a large portfolio of these stocks via diversification. Some will turn out to be clunkers, but on an aggregate the portfolio should do well.

Now you may have a valid counterpoint – why buy this stuff when there are good companies getting cheap by the day. That is true ..but if like me you also take a long time to analyse each company, then the  above mechanical approach is a quick way to assemble a decent portfolio. If you have the cash and the nerve (I could use a stronger word here 🙂 ) to invest when everyone is pessimistic, then the mechanical graham style of investing can be used to quickly assemble a decent portfolio while the opportunity lasts.

Please keep in mind that this list is just raw analysis and not a final list of stocks from which I plan to build my graham style portfolio. I will keep adding and dropping stocks and will upload the revised list when I do so.

2 Comments

  1. Gopinath says:

    If anybody had bought the whole list of stocks(from the spreadsheet) selling less than book value they would have made a ton of money within a year!

    Too bad, I just stumbled across your blog today! There are still few companies(from the spreadsheet) selling less than book value/or investments. I am going to research the once left out 🙂 Thanks!

  2. admin says:

    hi gopi
    thats partly true ..i did a similar analysis myself and found that if one bought the whole list, one would have beaten the market by 2-3%. a more selective approach, with a focus on quality would have resulted in a much better result

    rgds
    rohit

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