Benjamin Graham Value: A Carved-in-Stone System that Works
By Timothy Lutts, Cabot Chief Investment Strategist and Editor of Cabot Stock of the Month Report
From Cabot Wealth Advisory 6/21/08
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Most investors have no system. They buy stocks that have been recommended by trusted sources. They buy stocks that are familiar, perhaps because they've worked in the industry. And they buy stocks with good stories; for example, I know I've sold more than a few investors on the idea of investing in solar power stocks.
But most investors have no idea what it will take to make them sell a stock. Sometimes they hold on to losers for years before giving up in disgust. Many have little concept of risk management; they buy too high, and they take small profits when they might get larger ones. As a result, the vast majority of investors have a very hard time accumulating sizable gains.
What they need, of course, is a system. And my contention is that the looser the person, the tighter the system that's needed. (In this way, it's a bit like marriage. Complimentary characteristics can be the ticket to success.)
So today my suggestion, especially if you're the type of investor who needs a strong dose of rigidity injected into his life, is to try a newsletter with a carved-in-stone investing system that works.
It's Cabot Benjamin Graham Value Report, edited by J. Royden Ward, but based on the teachings of the legendary Benjamin Graham. He's the fellow who taught Warren Buffet about value investing back at Columbia University. Another student of Graham was Wilson Payne, who earned a doctorate and became a teacher at Babson College ... where he taught Roy Ward. Eventually, Dr. Payne and Roy Ward teamed up to turn the Graham system into a computer program.
Still with me?
Throughout the '70s, '80s and '90s, Roy used this system in his investing work, growing increasingly comfortable with it. Having found a system that not only works but also suits his personality, there was no reason to change. In that regard, Roy's a paragon, a perfect example to emulate.
In 2003 Roy joined the Cabot family, adding this long-established value investing system to our stable of growth-oriented letters so that thousands of investors worldwide could benefit from his system.
Now, technically, anyone could reproduce this system; after all, Benjamin Graham's teachings are no secret; he wrote two great books detailing his methods. But practically, I've got to say it's a bear of a job. For each stock in his universe, Roy tracks 44 (!) separate items that size up the company using four separate sets of factors, QUALITY, VALUE, GROWTH and TECHNICAL.
QUALITY encompasses measures like Current Ratio, Earnings Stability and Price Growth Stability.
VALUE tracks items like PE ratio, Historical Price/Book Value relative to Current Price/Book Value, and Historical Price/Dividend ratio versus Current Price/Dividend Ratio.
GROWTH looks at things like 5- and 10-year historical revenue growth trends, Quarterly Earnings Acceleration and 5-year projected cash flow.
TECHNICAL measures things like Relative Strength, Price Stability and Industry Strength.
And there are 32 more items! But you don't need to worry about those details, because Roy does all the work and presents the results, each month, in a 12-page letter that tells you in plain English what to buy and why.
Last month, for example, Roy highlighted four stocks in his two Models:
Cardinal Health (NYSE: CAH),
Garmin (NSDQ: GRMN),
Hewlett-Packard (NYSE: HPQ) and
Rockwell Collins (NYSE: COL), explaining why they were good values that would reward investors in the long run.
Roy also recommended six "Superior Companies with Low Price/Book Ratios" as a Special Feature. Roy has six of these special stock-picking techniques and cycles through them in a six-month rotation, so most of these stocks are held just six months.
And the results?
Since the issue was published, the Dow Industrials have lost 6.0% and the S&P 500 has lost 3.3%. The four highlighted stocks in Roy's two portfolios have lost an average of 3.3%. And the six stocks in the Special Feature have gained an average of 1.5%!
In short, Roy beat the market. Benjamin Graham's system, of course, is very big on keeping risk low. You only buy a stock when it's below its Maximum Buy Price. And you don't sell a stock until it reaches its Minimum Sell Price.
The result? For more than 80 years, through Benjamin Graham, then Warren Buffet, Wilson Payne and now Roy Ward, this system has delivered an annualized return of 20% in almost every kind of market.
More specifically, since inception in 2002, Roy's Classic Model has earned a compound annual return of 20.7% compared to the Dow Industrials' 7.1% and since inception in 1995, Roy's Wise Owl Model has earned a compound annual return of 16.5% compared to the S&P 500's 6.8%.
Admittedly, there are more exciting ways to invest, and Cabot has newsletters that can satisfy thrill-seekers as well. But if you like the idea of buying low and calmly hanging on ... If you like the thought of going on a cruise and not worrying about being out of touch with the market for days at time while your stocks appreciate ... And if you like the "low risk" that comes from buying stocks when they're dirt cheap, I'm guessing Cabot Benjamin Graham Value Letter is the advisory that's right for you.
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