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Simply spectacular

It's been a rough year for investors. But you wouldn't have known it if you had followed Benjamin Graham's advice. Instead of bemoaning losses, you would be counting profits.

Graham knew all about making money in hard times. He honed his investing techniques during the Depression, when he managed money on Wall Street and invented value investing. He later taught Warren Buffett how to invest. Before Graham died in 1976, he boiled his experience down to what he called The Simplest Way to Select Bargain Stocks.

If you're a long-time reader of MoneySense, you already know about Graham's Simple Way. Every year for the past four years, we've compiled a list of Simple Way stocks. Each year our list has outperformed the S&P 500. Assuming you had purchased equal dollar amounts of each Simple Way stock for your RRSP and rolled the profits into new Simple Way stocks every year, you would be up 93% in 56 months, not including dividends. Over the same period, the S&P 500 advanced only 17%. We're particularly pleased with the Graham picks over the past year. They gained 22% while the S&P 500 lost 8%.

In 1976 Graham calculated that a Simple Way investor would have achieved fairly consistent 15% average annual returns during the prior 50 years. Our performance since 2004 has been close, with annualized returns of 15.4%.

Picking stocks using the Simple Way is like doing the two-step. In the first step, you seek stocks that are cheap and in the second you keep those that are relatively safe. Graham defined a cheap stock as one with an earnings yield that was at least twice as large as the average yield on long-term AAA corporate bonds. The yield on 20-year AAA U.S. corporate bonds was 6.1% when we selected this year's batch of Graham stocks, so we looked for stocks with earnings yields of 12.2% or more which is equivalent to a priceearnings ratio of 8.2 or less.

We now come to the safety step. Graham detested excessive debt and insisted his picks be well capitalized to protect against bad times. He stuck to stocks with leverage ratios (the ratio of total assets to shareholders' equity) of two or less.

Graham suggested selling his picks when you had achieved a 50% profit or no later than the end of the second calendar year after purchase. To make things even easier, we sell a crop of Graham stocks when we pick a new bunch.

With Graham's criteria in hand, we used the MSN.com stock screener to find a short list of this year's candidates. We narrowed it down by focusing on U.S.-listed stocks with market capitalizations of more than $2 billion. (All figures are in U.S. dollars.)

I have high hopes that Graham's method will continue to do well, but all the usual warnings apply. Use Graham's list as a starting point for your research not the final destination. If you don't understand a company, pass it by. After all, there are lots of Graham-style bargains out there and you don't have to buy every one.

The 2008 bargain bin
Ben Graham's Simple Way identifies U.S.-listed stocks that are both cheap and safe. Nine stocks made our list.
CompanyIndustryMarket Cap (B)PriceP/ELeverageYield
Corning (GLW)Communications$32.6 $20.68 5.9 2.0 1.0%
Petro-Canada (PCZ)Oil & Gas$21.1 $43.605.92.01.7%
Western Digital (WDC)Data Storage$6.4$29.09 7.6 1.8 0.0%
NVIDIA (NVDA)Semiconductors $6.1 $11.00 7.9 1.4 0.0%
Allegheny (ATI)Metals$4.8 $48.177.51.81.5%
Mohawk (MHK)Textiles$4.5 $66.49 7.0 1.8 0.0%
Cimarex (XEC)Oil & Gas $4.2 $49.96 7.3 1.6 0.5%
Manitowoc (MTW)Machinery$3.1 $24.17 7.7 2.0 0.3%
DryShips (DRYS)Shipping $2.9 $67.89 4.2 1.9 1.2
Source: MSN.com, August 8, 2008


From the October 2008 issue of MoneySense magazine

 
Globe & Mail Articles
 Portfolios

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 Extreme yields
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 Smaller stable dividend
 250 Megastars for 2023
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 Blended momentum
 Dividend monster
 Frugal dividend
 Stable dividend
 Speads and recessions
 TSX 60 for value investors
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 Oh, bother!
 Low P/E DJIA
 Indexing advice
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 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

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 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
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 Simple Way 2011
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 Simple Way 2010
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 Simple Way 2008
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 Unbundling ETFs 2008
 5 Stingy Stocks for 2008
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 Is your index too active?
 Graham's Simple Way
 Canadian Graham Stocks
 5 Stingy Stocks for 2007
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 Top SPPs
 The Simple Way
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 Monkey Business
 8 Stingy Stocks for 2006
 Graham Stock Gainers
 Blue-Chip Blues
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 SPPs for 2005
 Graham's Simplest Way
 Selling Graham Stocks
 RRSP Money Market Funds
 Stingy Stocks for 2005
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 Unbundling Canadian ETFs
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 A Dynamic Duo
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 Cdn Top 200 2008
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 US Top 500 2014
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 Cheap & safe
 Risky business
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 Value investing
 Momentum investing
 Low P/E P/B
 Dividends
 Dividend growers
 Graham's prescription
 The case for optimism
 Wicked investments
 Simply spectacular
 Small stocks, big profits
 Value that sizzles
 So simple it works
 No assembly required
 Investing by the book
 Invest like the masters
 A simple way to get rich
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