Did Ben Graham Value Investing Work in the Recent Bull Market?

Did Ben Graham Value Investing Work in the Recent Bull Market?

June 2, 2015 Uncategorized
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(Last Updated On: June 29, 2015)

Forbes outlines one of Ben Graham’s basic value investment strategies and analyzes how it has performed from 1949 through 2012.

Even with all of the fiscal cliff and European debt drama in 2012, the Graham-based portfolio has had a particularly good year. While the S&P 500 has notched a solid 13.7% gain (all performance figures through Dec. 17), the Graham portfolio is up more than twice that, gaining 28.5%.

It’s been a few years since this study was performed and we’ve been in a raging bull market. We were curious to see how the deep value strategy performed and what stocks fit the screen.

We deploy the following value screens posed by Graham:

  1. Current Ratio > 2.0
  2. EPS growth over last 5 years > 30%
  3. No negative EPS over last 5 years
  4. P/E < 15
  5. P/Average EPS  last 3 years < 15
  6.  max(P/E, P/Average EPS) * P/B  < 22
  7. Market Cap cut is 10th percentile( around 330M as of 2015/03)

Results are gross of management fee and transaction costs for illustrative purposes only. These are simulated performance results and do not reflect the returns an investor would actually achieve. All returns are total returns and include the reinvestment of distributions (e.g., dividends).

  • SP500 = SP500 Total Return Index
  • Graham_ew = Ben Graham value strategy, equal-weighted
  • Graham_vw = Ben Graham value strategy, value-weighted
  • LTR = Merrill Lynch 7-10 year Government Bond Index (prior to 6/1982, Amit Goyal Data)

 Summary Value Investing Performance 2012/01 to 2014/12

graham value investing screen results
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.
graham value investing screen results--annual returns
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

2012 and 2013 were great; 2014 was painful. Overall, since the value strategy underperformed by over 2% and the strategy is “busted,” value-investing no longer works, and Graham’s ideas are outdated. This general pattern of returns is similar to live performance on many value strategies over this time period.

What Names Pass the Value Investing Screen Now? (as of 4/27/2015)

There was only 1 name that fits the criteria outlined above:

HGR US EQUITY, Hanger Inc:

  1. Current Ratio 3.94
  2. EPS growth over 5 years: 59%
  3. No negative EPS over last 5 years
  4. P/E: 14.38
  5. P/3 years average EPS: 13.24
  6. PB adjust ratio: 20.71
  7. Market Cap: $846MM

Note, this is NOT a stock recommendation. We are simply highlighting the output of the screen proposed by the Ben Graham system in real-time.

Thoughts?


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Please remember that past performance is not an indicator of future results. Please read our full disclaimer. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. This material has been provided to you solely for information and educational purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The factual information set forth herein has been obtained or derived from sources believed by the author and Alpha Architect to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from Alpha Architect.


Definitions of common statistics used in our analysis are available here (towards the bottom)




About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes, ETF.com, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.


  • IlyaKipnis

    Seems a better idea is to leave value investing up to you guys now =)

  • davidcarris

    1999 redux?

  • Pete Werner

    From what I have seen, it is very rare that a systematic approach will outperform during a raging bull market

  • jimhsu

    Funny how factor analysis confirms this very outcome:

    HML, sum for each year:
    2012: +5.80%
    2013: +0.49%
    2014: -6.89%
    Average: +3.95% (1926-2015)

  • dph

    Has there ever been historical studies that show correlation between a low number of stocks passing Graham or similar screens and negative future market performance?

  • azazza

    What’s your selling rule? I’m asking because with value holding period is very important and in my experience tends to be longer than the time a stock appears on a given screen (in other words a stock coming off the screen should not be sold straight away as it means that value has just started working)

  • Justin

    I’d say that Graham was full of common sense but these metrics are “static” and are trying to screen for absolute cheapness relative to earnings. So we could argument that cheapness relative to earnings isn’t the only (or best) measure to use. We could also argue that a sub-15 P/E could be useful when the market is expensive or priced at fair value…but less influential when the market is already trading at a discount. There’s no relative strength in the equation basically. We could also argument that there’s no risk-management instrument to this (like a simple moving average rule). But most importantly, any value appoach will deliver after market declines. In a bull mkt run, by definition value takes the back seat.

  • quixoticinvestor

    In your book Quantitative Value, you highlight how Graham said that the minimum period for determining the likely performance of his strategy is five years.

    Also in your book, you discovered in 2004 that there was only one stock that met Graham’s stringent requirements. 2004 and 2015 would really test an investor’s devotion to Graham’s approach.

  • sandy

    This is a joke right? “Overall, since the value strategy underperformed by over 2% and the strategy is “busted,” value-investing no longer works, and Graham’s ideas are outdated”

  • Yes. A bad joke, but a joke nonetheless

  • Yep. Value is a long term proposition. This post is tongue in cheek

  • quixoticinvestor

    I’ve been following your articles for several months and finally started your book. It’s a great read, I’m really enjoying it!

  • Charles Harper

    I would like to expand on azazza’s comment below. Reviewing the records of my 25-year investment career, I would estimate that my net worth would be at least 10 times what it is now if I had simply held to present all of the stocks which I have bought. Several stocks which I sold happily for 50-100% gains went on to later become 10+ baggers, and 3 went on to become 100+ baggers. One which I bought in the early 90’s (Gilead Sciences) went on to become a 400+ bagger and is still going strong. Many of my stocks, of course, did little and some perished.

    My advice to any young investors would be to learn from my mistakes and to look for companies with good long-term prospects, selling at reasonable prices, invest 2.5-5% of your funds in each company, and to hold on.

  • sage advice and uber tax efficient.

  • Matt Jones

    Overall, since the value strategy underperformed by over 2% and the strategy is “busted,” value-investing no longer “works, and Graham’s ideas are outdated”

    That is supposed to be sarcasm, right? Sometimes it’s hard to pick up in print.

    nevermind, I see now that it was a joke

  • 100% sarcasm. Sorry for confusion

  • Ciaran Youd

    What was performance like between 2009-2012?

  • Jack Vogel, PhD

    From 1/1/2009-12/31/2012, the VW Graham CAGR was 20.11% while the SP500 CAGR was 14.67%.