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

Last updated on June 29th, 2015 at 11:34 am

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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.




About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray received a PhD, and was a finance professor at Drexel University. Dr. Gray’s interest in entrepreneurship and behavioral finance led him to found Alpha Architect. Dr. Gray has published three books: EMBEDDED: A Marine Corps Adviser Inside the Iraqi Army, QUANTITATIVE VALUE: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors, and DIY FINANCIAL ADVISOR: A Simple Solution to Build and Protect Your Wealth. His numerous published works has been highlighted on CBNC, CNN, NPR, Motley Fool, WSJ Market Watch, CFA Institute, Institutional Investor, and CBS News. 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.