Why We Publish Investment Newsletters
Benjamin Graham and Warren Buffett
Ben Graham Results Without All the Work
I recently received the following question from a reader … short and to the point.
“If so much money is made on your recommended stocks, why are you doing newsletters?
Here’s what I answered.
Thanks for writing. Easy question, complex answer.
One, the regular income is good.
Two, I believe in work. It fulfills and defines.
Three, I like this business. I like providing employment to my co-workers and I like the mental engagement and the challenge, on both the investing side and the publishing side.
Four, I like corresponding with most of my readers, including you. I like to think I help them.
Five, it is in part a family duty. My father built the business, I have perpetuated it, and for the past three years I’ve been fortunate to have my second child, Chloe, working hard as the editor of the Dick Davis Digests, which we publish.
I could go on, but I assume that will do.”
In fact, it did do for Ron, who was thankful for my answer.
But now I want to add a little more.
When I write, I write to the “average reader,” though in fact none of you are exactly average.
My average reader is a male, in his late 50s, who is not employed in the investment industry and who lives in the U.S.
But some of you are women. Some of you are in your 20s, and some are in your 80s. Some of you are investment professionals who’ve been customers of Cabot for decades, and some of you just started investing this year. And some of you live far from the U.S.
But all of you share a desire to manage at least some of your money yourself, and to do it successfully. And I sincerely want to deliver to you the tools that help you achieve your goals.
These tools include, but are not limited to, the following:
Understanding the forces behind great growth companies,
Understanding the value of value investing,
Understanding what really moves the stock market,
Understanding the value of market timing,
Understanding the value of chart-reading,
Understanding the value of proper portfolio management,
Understanding the world,
And understanding yourself.
Adding them up, they contribute to the building of an investment system tailored to your own personal needs and circumstances. Without such a system, you’ll be moved by the whims of your emotions, the news of day, and other transitory forces—and that seldom turns out well.
One method that works for a lot of investors is the value investing system developed more than 80 years ago by Benjamin Graham, the fellow who was instrumental in teaching Warren Buffett at Columbia University back in the 1950s.
In our culture of hero-worship, Warren Buffett is celebrated as an investing genius. Maybe. But a lot of credit for his success goes to the fundamental value investing system he learned when he was young, and I’m pleased to say that it’s one of the systems used by Cabot.
I’ve described this system to you in detail previously, and the response was so overwhelmingly positive that I’m repeating it here today.
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 scene.)
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 firm’s daily market letter. 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 from 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 new hardcover sixth edition on Amazon for $46. Or you can get a used one for $28. Or buy the Kindle electronic version for $33.
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, 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 appreciate over time.
Graham liked to analyze--and quantify--a business according to six factors.
3. Growth in earnings
4. Financial position
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% 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 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 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 Cabot Benjamin Graham Value Letter, a 12-page monthly letter that tells you in plain English what to buy and why. And for every stock, he gives you specific Maximum Buy Prices, as well as Minimum Sell Prices (i.e., target prices), and updates them in every issue. He also sends out a mid-month update with his latest advice.
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. And the long-term results are excellent.
In fact, Roy’s Classic Value Model has advanced 27.6% during the past 12 months compared to an increase of 23.8% for the Dow. Since its inception on 11/30/02, the Classic Model has achieved a total return, not including dividends, of 184.0% compared to a return of just 51.9% for the Dow Jones Industrial Average.
Furthermore, Roy’s Modern Value Model is up an amazing 43.7% during the past 12 months compared to an increase of 27.7% for the S&P 500. During the past decade, the Model has increased a remarkable 118.6% compared to an increase of 58.5% for the S&P 500. The Model continues to set all-time highs!
And that’s not all!
Roy also advises on the very best bond funds, so you can get high yield with safety!
In his latest update, Roy recommended an investment grade corporate bond ETF with a dividend yield of 3.9%, and a global income fund with a hefty 5.7% yield and an “inflation-proof” ETF with a yield of 2.4%.
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 a 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 the link below. https://secure.cabot.net/?id=90&s&source=ee34
Cabot Wealth Advisory Publisher
and Editor of Cabot Stock of the Month
P.S. The market gyrations of the past year have underscored how important it is to have an investing system with a record you can trust. 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. Click here now.