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Cabot Benjamin Graham Value Letter
The Classic Buy-Low-Sell-High Investing Strategy
Dear Fellow Investor,
Do you like to follow the market during the day and keep a close eye on your stocks, buying and selling in response to the latest fluctuations?
Or do you prefer to buy and hold, trusting your stocks to advance over time while you focus on other areas of your life?
If you prefer the second, I have an investing system I think you'll be interested in.
It's based on the teachings of Benjamin Graham, the father of investing, and the long-term results are truly marvelous, averaging roughly 20% per year.
Of course, recent years for the average investor have been especially difficult; the S&P 500 today is no higher than it was near the end of 1998!
Yet this system is not average! It's thrived in comparison, returning a compound annual return of 13.4% since 1995 for the Wise Owl Model and 12.2% for the Classic Model. To put those returns into real figures, $10,000 invested in the Wise Owl Model back in 1995 would be worth nearly $59,000 today!
If those numbers sound attractive to you, especially for a system that requires so little work (and entails so little risk) let me give you a little background.
Benjamin Graham was born in London in 1894. (His original name was Grossbaum, but he changed it as a young man, the better to fit into the Wall Street environment.)
His parents moved to New York City when he was one year old. Graham was a brilliant student and won a scholarship to Columbia University. In 1914, he graduated second in his class, at age 20, and was invited to teach at the school. But he refused. His father had died, the family was poor, and Graham needed a larger income to support the family.
So he went to Wall Street and worked for the firm of Newburger, Henderson and Loeb for $12 per week.
His early duties included being a runner, delivering securities and checks, writing descriptions of bond issues, and later writing the daily market letter of the firm. Before long, he began to analyze companies, and at the age of 26 he was promoted to full partner.
In 1923, he left to set up his own partnership, and in 1928 he began teaching investment classes at Columbia. Over time, working with former student David Dodd, the lessons of his classes were gathered into his first book, titled "Security Analysis," which was published in 1934.
The book has sold over a million copies. Warren Buffet says he's read it at least four times. I've only read mine once (it's the second edition, published in 1940, with 851 pages), but it remains a valuable reference. You can buy a fancy new leather-bound sixth edition on Amazon for $132. Or you can get a used one for $31. Or buy the Kindle electronic version for $42.53.
Or, you could simply read Graham's second book, the more user-friendly "The Intelligent Investor," which was published in 1949 and is less than half the size of its predecessor.
I recommend them both.
In 1950, a fellow named Warren Buffett enrolled in graduate school at Columbia to study under Graham, and he learned well. In fact, Buffett has often said that after his father, Benjamin Graham was the most important influence in his life.
Benjamin Graham passed away in 1976 at the age of 82.
So what is it that made Graham's work so special?
In short, he systematized the entire process of evaluating companies, all with the goal of finding low-risk (or no-risk) investments that would reward over the long run.
Graham liked to analyze--and quantify--a business according to six factors.
1. Profitability
2. Stability
3. Growth in earnings
4. Financial position
5. Dividends
6. Price history
More precisely, he required that a potential investment have the following:
1. An earnings-to-price yield at least twice the AAA bond yield.
2. A P/E ratio less than 40% of the highest P/E ratio the stock had over
the previous five years.
3. A dividend yield of at least two-thirds the AAA bond yield.
4. A stock price below two-thirds of tangible book value per share.
5. A stock price below two-thirds of "net current asset value."
6. Total debt less than book value.
7. Current ratio greater than two.
8. Total debt less than twice "net current assets."
9. Annual earnings growth in the prior 10 years of at least 7% annual compounded.
10. No more than two declines of 5% or more in year-end earnings in the prior 10 years are permissible.
And this was all in the days before calculators! Granted, Graham was a whiz with a slide rule, and no doubt he did a lot of the calculations in his head. Nevertheless, that's a lot of work.
Happily, there's a way to get the results of Ben Graham without all the work, because on our Cabot staff we have a man by the name of Roy Ward, who studied under another of Graham's students, Dr. Wilson Payne. Roy Ward and Wilson Payne collaborated in 1969 to turn Graham's formulas into
computer code. And Roy has been using the system ever since, in both his professional and private investing.
This is not a casual undertaking. Every month, Roy tracks 44 (!) separate items that size up thousands of companies using four sets of factors, QUALITY, VALUE, GROWTH and TECHNICAL.
QUALITY encompasses measures like Current Ratio, Earnings Stability and Price Growth Stability.
VALUE tracks items like P/E 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 five- and 10-year historical revenue growth trends, Quarterly Earnings Acceleration and five-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. Plus (and this is very important), he gives you specific Maximum Buy Prices, as well as Minimum Sell Prices (i.e., target prices), and updates them in every issue.
Admittedly, there are more exciting ways to invest, and Cabot has newsletters that can satisfy thrill-seekers as well.
But this is a time-tested system that works. For example, back on December 14, subscribers to Cabot Benjamin Graham Value Letter received this special email message:
Sell Alert: AT&T (T) Minimum Sell Price = 28.31
"AT&T reported sales and EPS were down 2% for the third quarter. The company's cell phone services are performing well, but demand for landline services continues to decline. AT&T pays a generous dividend yielding 5.8% and has been a sound holding for long-term investors, but AT&T's share price has now exceeded our Minimum Sell Price of 28.31. AT&T has increased 32.3% from its low in March of 2009 and is now overvalued. We recommend selling your AT&T (T) shares."
Today AT&T is trading around 27.
On the same day, editor Roy Ward also advised selling FactSet Research Systems (FDS) Minimum Sell Price = 76.15
"Sales edged 1% higher and EPS rose 10% in the quarter ended 9/30/09. Product upgrades in FactSet's main product lines will help sales and earnings to increase 3% to 5% in 2010. Selling at 24.8 times our 2010 EPS estimate, FDS shares are overvalued. FactSet was recommended in the January 2009 issue of the Cabot Benjamin Graham Value Letter and has soared 75.0%. During the same time period, the Standard & Poor's 500 Index has increased 21.3%. We now recommend selling your FDS shares."
Today, FDS is trading around 77.
Prior to that alert, back on November 9, subscribers to Cabot Benjamin Graham Value Letter received this special email message:
Sell Alert: BP plc (BP) Minimum Sell Price = 59.75
"BP reported third quarter EPS of 1.60 compared to 3.21 a year ago. Although down 50%, EPS exceeded our forecast of 1.10, and BP shares reacted positively to the news. The share price has now exceeded our Minimum Sell Price of 59.75 and is overvalued. BP was recommended in the December 2008 issue of the Cabot Benjamin Graham Value Letter and has jumped 34.8%. During the same time period, the Standard & Poor's 500 Index has increased 21.5%. We now recommend selling your BP shares."
Today, BP is trading around 40.
In sum, following Roy's specific advice on buying and selling the stocks in his models is all you need to do to be a successful (and calm) investor.
Roy Ward is a matter-of-fact guy. He crunches numbers, he finds values, and tells subscribers, in plain English, what to buy and what to sell, as well as specific prices to buy and sell at.
So, if you like the idea of buying low and calmly sitting tight ...
If you like the thought of taking a vacation and not having to worry 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 newsletter that's right for you.
So today I'm going to make you an offer that makes it easy for you to find out.
While the regular price for a year of Cabot Benjamin Graham Value Letter is $249, today I'm offering first-time subscribers a one-year subscription for just $87.
Plus, I'll include a Free Special Report, "5 Top Value Stocks Every Investor Must Own."
It's the best deal I've ever offered, and now is a great time to take advantage of it.
To start your no-risk trial subscription now, simply click here.
Cordially,
Timothy Lutts
Publisher
P.S. After a one-year bull market, a lot of stocks are now extended, so it's critically important that you avoid overpaying for stocks. And when you follow the advice of Cabot Benjamin Graham Value Letter, you never will. With Roy Ward's time-tested system, you can buy with confidence,
secure in the knowledge that your stocks will appreciate in the long run and bring you the profits you deserve. Try it today!