1. Sound logic
2. Simplicity of application
3. An extraordinarily good performance record
I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. [I now recommend] a highly simplifed [approach] that applies a single criteria or perhaps two criteria to the price to assure that full value is present and that relies for its results on the performance of the portfolio as a whole -- i.e. on the group results -- rather than on the expectations for individual issues. [Such an approach] combines the three virtues of sound logic, simplicity of application, and an extraordinarily good performance record.
The Father of Value Investing and the namesake of our firm, Benjamin Graham, said that in 1976 at the end of his life and at the culmination of his broad and deep involvment in the money management business. That advice has been almost universally ignored, even by his closest adherents, but at GIM we paid attention, studied the evidence, and have followed it.
What evidence?
- Between 1925 and 1975, Graham found that his final formula, which he described as the "simplest way to invest," returned a consistent 15% per year, twice the return from the Dow Jones Industrial Average.
- Over thirty years, Graham earned 20% from his first formula, which is referred to as his net-net strategy. The opportunities to find net-net companies dried up in the bull market of the 1950s.
- Graham's net-nets, which found new life in the 1970s, showed returns of 29.4% versus 11.5% for the NYSE-AMEX index between 1970 and 1983, according to Henry Oppenheimer, Associate Professor of Finance at the State University of New York.
- John Dorfman, when he wrote a column for Bloomberg, used a real-time version of Graham's "simplest" formula, which he called the Robot Portfolio, for seven years beginning in the late 1990s through the ensuing bear market. It returned 727% over that time (29.2% per year versus 4.9% for the S&P 500 index).
- The American Association of Individual Investors has tracked Graham's formulas for Defensive and Enterprising investors since 1997 as they produced cumulative returns of 581% and 877%, respectively, versus 57% for the S&P 500.
- There have been other studies of Graham's formulas, but the point has been established.
At GIM, we have rephrased Graham's three virtues as simple, sensible, time-tested strategies. When used in conjunction with his three cornerstones, this is an incredibly potent way to invest, as you have just seen.
