Stingy Investor The Rothery Report
  Home | Articles | Screens | Tools | Links | SNW | Rothery Report
 
MoneySaver Articles
 2 Graham Stocks for 2017
 3 Stingy Stocks for 2016
 5 Graham Stocks for 2016
 3 Stingy Stocks for 2015
 3 Graham Stocks for 2015
 3 Stingy Stocks for 2014
 4 Graham Stocks for 2014
 8 Stingy Stocks for 2013
 6 Graham Stocks for 2013
 9 Stingy Stocks for 2012
 8 Graham Stocks for 2012
 Simple Way 2011
 5 Stingy Stocks for 2011
 7 Graham Stocks for 2011
 Simple Way 2010
 5 Stingy Stocks for 2010
 8 Graham Stocks for 2010
 Simple Way 2009
 Timing Temptation
 19 Stingy Stocks for 2009
 4 Graham Stocks for 2009
 Simple Way 2008
 Active at Passive Prices
 Unbundling ETFs 2008
 5 Stingy Stocks for 2008
 5 Graham Stocks for 2008
 Is your index too active?
 Graham's Simple Way
 Canadian Graham Stocks
 5 Stingy Stocks for 2007
 8 Graham Stocks for 2007
 Top SPPs
 The Simple Way
 A hole in your IPO?
 Monkey Business
 8 Stingy Stocks for 2006
 Graham Stock Gainers
 Blue-Chip Blues
 Are Dividends Safe?
 SPPs for 2005
 Graham's Simplest Way
 Selling Graham Stocks
 RRSP Money Market Funds
 Stingy Stocks for 2005
 High Performance Graham
 Intelligent Indexing
 Unbundling Canadian ETFs
 A history of yield
 A Dynamic Duo
 Canadian Graham Stock
 Dividends at Risk
 Thrifty Value Stocks
 Stocks in Short Supply
 The New Dividend
 Hunting Goodwill
 SPPs for 2003
 RRSP: don't panic
 Desirable Dividends
 Stingy Selections 2003
 10 Graham Picks
 Growth Eh?
 Timing Disaster
 Dangerous Diversification
 The Coffee Can Portfolio
 Down with the dogs
 Stingy Selections
 Frugal Funds
 Graham Revisited
 Just Spend It
 Ticker Temptation
 Stock Mortality
 Focus on Fees
 SPPs for the Long Term
 Seeking Solid Stocks
 Relative Strength
 The VR Approach
 The Irrational Investor
 Value Investing
 Eye on PI

MoneySense Articles
 Cdn Top 200 2016
 US Top 500 2016
 Retirement 100: 2015
 Cdn Top 200 2015
 US Top 500 2015
 Retirement 100: 2014
 Cdn Top 200 2014
 US Top 500 2014
 Retirement 100: 2013
 Cdn Top 200 2013
 US Top 500 2013
 Retirement 100: 2012
 Buffett Buys
 FB IPO
 Stocks that pay
 Value in the S&P500
 Cdn Top 200 2012
 US Top 500 2012
 Retirement 100: 2011
 Where to invest $100k
 Where to invest $10k
 Summer Simple Way
 A crystal ball for stocks?
 Cheap & safe
 Risky business
 Cdn Top 200 2011
 US Top 500 2011
 Retirement 100
 Dividend investing
 Value investing
 Momentum investing
 Low P/E P/B
 Dividends
 Dividend growers
 Cdn Top 200 2010
 US Top 500 2010
 Graham's prescription
 Income 100: 2009
 The case for optimism
 Cdn Top 200 2009
 U.S. Top 500 2009
 Wicked investments
 Simply spectacular
 Income 2008
 Small stocks, big profits
 Cdn Top 200 2008
 US Top 500 2008
 Value that sizzles
 So simple it works
 Income 100
 No assembly required
 Investing by the book
 Cdn Top 200 2007
 US Top 500 2007
 Invest like the masters
 A simple way to get rich
 Top Trusts 2006
 Stocks for cannibals
 Car bites dogs
 Cdn Top 200 2006
 US Top 1000 2006
 So easy, so profitable
 Top Trusts 2005
 Dogs of the Dow
 Top 200 2005
 Money for nothing
 Yield of dreams
 Return of the master

Globe & Mail Articles
 Indexing advice
 Media-shy stocks
 Curse of size
 Market uncertainty
 Be even lazier
 Scary beats safe
 Small, illiquid, value
 Use the numbers
 What value is good value?
 Sculpt for value
 Value vs CAPE
 Graham Rules
 CAPE vs PeakE
 Top value ratio
 Low Beta
 Value and dividends
 Walter Schloss
 Try unloved AIG
 Why I'm a value investor
 New world of ETFs
 Low P/Es possible
 10 yielders
 Be happier
 Long-Short
 Dividend Downside
 Shiller's P/E
 Copycat investing
 Cashing in on class
 Index roulette
 Theory collides
 Diving too deep
 3 retirement villains
 Scourge of inflation
 Economic omens
 Analyst Expectations
 Value stock scarcity
 It's all in the index
 How to pick good funds
 Low Beta Wins
 Hunt for dividend stocks
 Think garage sale

Advisor's Edge Articles
 Passive Rebundling
 Doing the math

Norm Speaks
Flip Books



2 Graham Stocks for 2017




Read the PDF version of the article




It's easy to get caught up in the casino-like atmosphere of the market. But betting on the hot stocks of the day often leads to disappointment because they rarely live up to expectations. It's one reason why Benjamin Graham, the father of value investing, advocated taking a measured and longer-term approach.

I'm pleased to say that my take on Mr. Graham's method for defensive investors trounced the market since it was launched in the Canadian MoneySaver just after the turn of the century. If you had purchased an equal dollar amount of each Graham stock in the first year and replaced them with the new crop of stocks each year thereafter, you would have turned $1,000 into $10,140. In comparison, $1,000 invested in an S&P 500 exchange traded fund (NYSE:SPY) would have grown to just $2,090. Translated into percentage terms, the Graham stocks gained 914% (16% annualized) over the full period while the S&P 500 ETF moved up 109% (5% annualized).

I hasten to add that the Graham stocks didn't outperform each and every year. After all, the market is far too wild and woolly for that. Last year was a bad one because the Graham stocks only gained 2% while the market climbed 12%. But this sort of thing has to be expected occasionally.

You can see the full performance record in the accompanying table. The return figures are provided in U.S. dollar terms, reflect periods between data collection, and include dividends that are reinvested each year when the new stocks are selected. They do not include inflation, taxes, fees, or trading costs like commissions.

TABLE 1: Performance of Past Graham Stocks
YearGraham S&P500 +/-
2000 - 2001 20.4% -22.2% 42.6
2001 - 2002 28.2% -15.1% 43.3
2002 - 2003 56.8% 16.5% 40.3
2003 - 2004 32.2% 9.4% 22.8
2004 - 2005 46.6% 12.8% 33.8
2005 - 2006 -3.8% 10.7% -14.5
2006 - 2007 34.4% 16.1% 18.3
2007 - 2008 -6.5% -22.1% 15.6
2008 - 2009 2.2% -6.2% 8.4
2009 - 2010 2.3% 9.1% -6.8
2010 - 2011 4.1% 3.1% 1.0
2011 - 2012 26.6% 27.9% -1.3
2012 - 2013 19.0% 19.1% -0.1
2013 - 2014 5.1% 18.2% -13.1
2014 - 2015 2.2% 3.1% -0.9
2015 - 2016 1.6% 12.2% -10.5
Total Gain 914% 109%

Benjamin Graham's method for defensive investors is described in his book The Intelligent Investor, which should be on every investor's bookshelf. While the original is a little dated, the 2003 edition (ISBN 0060555661) has more modern commentary from veteran columnist Jason Zweig. Serious Graham buffs should also invest in a copy of the sixth edition of Security Analysis (ISBN 0071592539), which includes commentary from some of today's most famous value investors. However, the second tome can be daunting for both new and old investors alike.

Mr. Graham's original rules for defensive investors set a very high bar for stocks to pass. Indeed, no North American stock was able to jump over that bar for most of the last two decades. That's why my version employs a slightly more lenient approach. The main criteria I use are summarized in the accompanying table.

TABLE 2: Graham-inspired rules
1. P/E Ratio less than 15
2. P/Book Ratio less than 1.5
3. Positive Book Value
4. Current Ratio more than 2
5. Annual EPS Growth (5-Yr Avg) more than 3%
6. Positive 5 Year Dividend Growth
7. Positive Annual Earnings for 5 Years
8. 1-Year Revenue more than $400 Million

For instance, I differ with Mr. Graham when it comes to dividends. He originally demanded a twenty-year record of uninterrupted dividend payments whereas I require only some dividend growth over the last five years.

Even with my slightly more relaxed requirements, very few U.S. stocks usually pass the test. At market lows, such as those seen in the spring of 2009, there might be dozens of defensive stocks. But in more normal times less than ten companies make the grade. This time around two stocks passed the test. They're highlighted in the accompanying table.

TABLE 3: U.S. stocks that pass my Graham-inspired rules
Name Price P/E P/B Yield
Trinity (TRN) $24.00 6.2 1.0 1.8%
Dillard's (DDS) $59.05 9.8 1.1 0.5%
Sources: yahoo.com, morningstar.ca, Septmeber 23, 2016

It is important to be aware that a well-diversified portfolio should hold at least ten stocks and usually many more. Holding a very concentrated portfolio is itself a source of risk. After all, a few individual disasters can really hurt in such cases. That's why it's best to add the defensive stocks to an already reasonably diversified portfolio.

As always, before buying each stock it is important to examine it in great detail. Dig through the numbers and consider the less tangible aspects of each company. Get up to speed by reading news stories about the company along with its press releases and regulatory filings.

While my take on Graham's defensive method has avoided serious trouble so far, it can't be expected to outperform all of the time. After all, despite its excellent long-term track record, it has trailed the market in seven of the last sixteen years and lost money twice.

So dive in only after you've taken the time needed to become comfortable with the method and value investing more generally. Even when you do, I suggest starting off in a small way with a modest amount of capital because sticking with value stocks through thick and thin can be harder than most investors expect. But those who stand the test of time will likely be rewarded handsomely.

Additional Resources:


First published in the November/December 2016 edition of the Canadian MoneySaver magazine. Performance numbers are based on the dates in the data table and do not represent calendar year figures.

 
Discover top U.S. and Canadian value stocks in
The Rothery Report
About Legal Contact Us
Disclaimers: Consult with a qualified investment adviser before trading. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. More...