# Are there any Graham stocks on the ASX?



## systematic (10 December 2012)

I haven't actually ever gotten into Ben Graham's works much - I've mainly learned from others who have no doubt also stood upon his shoulders.  I must change that, as he was more quant than I realised.

Anyway, after looking at the "Top Stocks" recently, which have a couple criteria in line with Graham's, I decided to look at Gaham's criteria in more depth, and there's a bit to it.

The below are those that meet the Graham criteria (to the best of my ability)...with a couple points first:

- I have not used 10 and 20 years for things like earnings and dividends.  I've used 5 years (which is co-incidental to Top Stocks).  Otherwise we might not get any stocks at all!  5 years will have to do.
- I've sorted the table via *Revenues*, because I have not applied that critieria.  As in, the blue chips, or highest revenues are the true Graham selections here, but some individual investors might not have any problems with the smaller companies.
- I've looked at liquidity but decided to leave them all intact.  So, as you would anyway - apply your own liquidity rules.
- "PGP" is what I call "Price to Graham Price".  Smaller is better.  Less than "1.00" means the current price is 'value' (less than) the current "Graham Price".

19 stocks have made it.  Many are a decent size and liquidity.

​

If you were to stick to the higher revenue companies (as per Graham), with decent liquidity you might go down to around "IRE".

Of course, for current purchases you'd want a PGP less than 1.00, which gives 2 current stocks for the ASX:
*FWD & SGH*.

7 other's have a value PGP but you'd want to check out size/liquidity for yourself etc.  And certainly, from what (little) I've read, there's no reason not to do that - except perhaps as you get smaller you might want to slightly increase your demand for value (a smaller PGP).  For example, LCM looks good on this basis, with good liquidity still.


Thanks to this thread for inspiring me to take a look.


----------



## So_Cynical (11 December 2012)

systematic said:


> I haven't actually ever gotten into Ben Graham's works much - I've mainly learned from others who have no doubt also stood upon his shoulders.  I must change that, as he was more quant than I realised.
> 
> Anyway, after looking at the "Top Stocks" recently, which have a couple criteria in line with Graham's, I decided to look at Graham's criteria in more depth, and there's a bit to it.
> 
> ...




FWD has issues with the mining camps going forward and SGH was allot cheaper 8 and 9 months ago.

i hold SGH and have done for awhile, average price of $1.71 ~ FWD im watching with some interest.

Interesting list.


----------



## kermit345 (11 December 2012)

I own HSN, hasn't really done much since I bought it in terms of growth but i'm happy to hold as it still pays a good yield and I still believe it has some growth in it.

IRE is a company i've had my eye on for at least 2-3 years now and its never got cheap enough for me to buy. Even at today's levels I feel its way over-priced. We use an IRESS application in our office though and given how their price works on a subscription basis per module etc, I understand why they are a good buy. Would just love to see them briefly drop to a cheaper level.


----------



## systematic (11 December 2012)

kermit345 said:


> IRE is a company i've had my eye on for at least 2-3 years now and its never got cheap enough for me to buy. Even at today's levels I feel its way over-priced. We use an IRESS application in our office though and given how their price works on a subscription basis per module etc, I understand why they are a good buy. Would just love to see them briefly drop to a cheaper level.




...Yep, they'd have to crash by something like 70% to price qualify here!


----------



## systematic (11 December 2012)

So_Cynical said:


> FWD has issues with the mining camps going forward




...which brings up a point I want to make.  My view on true "value" investing is that you will have a portfolio of stocks that look undesirable/troubled etc.  A long shot at the race track looks like a long shot in the form guide, but doesn't mean they don't win.  
Graham (from what I've been reading) often ended up with stocks that were "unfavoured by the analysts".
I simply mean: if a stock had every single (theoretical) box ticked, you wouldn't expect it to (at the same time) be neglected by the market.  (Your comment re: FWD simply reminded me of a comment I wanted to make - not directed at your comment itself of course...)





So_Cynical said:


> SGH was allot cheaper 8 and 9 months ago.




...Hmmm...I wonder if it's worth tracking the PGP over time?  Maybe.  You could have some cool, "Skaffold" looking charts.  Not sure though - in day to day application, if you need another stock for your portfolio _now_, it makes sense to look for 'the best' value stocks _now_.  Why would it matter that the share price 12 months or 3 years ago made it better or worse value?  Will have a think.  Any comments welcome!





So_Cynical said:


> Interesting list.




...Yeah, I thought so too.  Might keep my eye on it a bit.

I was actually just going to check out the Graham number and see which stocks were value, which many apparently do without realising the necessity of his other criteria (and I certainly haven't studied Graham's methods).  Applying the other criteria used to short list in the first place made it interesting.


----------



## odds-on (11 December 2012)

The following link maybe of interest...

http://www.serenitystocks.com/how-build-complete-benjamin-graham-portfolio

It is also worth reading some of serenitystocks posting on www.gurufocus.com

IMO, each company needs to be categorised using the criteria into either Defensive, Enterprising, Ok/NCAV and "Rubbish". Once you have categorised them correctly then calculate the graham price using the correct formula for the criteria.

Depending on the data you have available another screen would be to look for companies that meet the following criteria:
-Consistent ROA over a 5 to 10 year period
-Retained earnings
-Above average total asset growth in the last two years (or below average total asset growth, this depends on your interpretation of the total asset growth anomaly)
-1 or 2 year rebalancing

Or another screener idea:
-Price to sales < 1
-Small cap
-Reasonable operating history over the last few years
-Safe balance sheet
-6 month rebalancing

And finally...
-52 week lows
-Altman Z score in the "grey" area. Worth using the Z'' formula to remove the market value of equity from the equation.
-3 or 6 months rebalancing

When chasing excess returns using value investing i always remember a comment made by Mohnish Pabrai, most of his value ideas take around 18 months to play out, but sometimes they take longer....rebalancing/holding period is important. 

Cheers

Oddson


----------



## So_Cynical (11 December 2012)

systematic said:


> A long shot at the race track looks like a long shot in the form guide, but doesn't mean they don't win.




Thing is that for the vast majority of long shots it means exactly that...they wont win because the form says they can't, and the form is right, after all form is fact..its a study on what the horse has done and therefore is capable of.




systematic said:


> *
> ...Hmmm...I wonder if it's worth tracking the PGP over time?  Maybe.  You could have some cool, "Skaffold" looking charts.  Not sure though - in day to day application, if you need another stock for your portfolio _now_, it makes sense to look for 'the best' value stocks _now_.  Why would it matter that the share price 12 months or 3 years ago made it better or worse value?  Will have a think.  Any comments welcome!




My trading and wealth acquisition strategy is all based around time.


Best time to enter (low price)
Best time to average down (lower price)
Best time to hold (do nothing)
Best time to part sell (release capital)
Best time to sell out

The best time to buy SGH is gone, i however got a parcel at $1.505

https://www.aussiestockforums.com/forums/showthread.php?t=6931&page=2&p=718166&viewfull=1#post718166

This chart from the SGH thread.
~


----------



## systematic (11 December 2012)

Thanks odds-on, I'm finding the Graham stuff interesting (and I've been reading serenity stocks - an invaluable help), it's a nice diversion from what I usually do with quant value.  

I'm still sticking with what I do now, but I'm going to be tracking the Graham stuff more.  There's a version of his "intelligent investor" that Jason Zweig (I believe) adds comment and gives a modern rendering.  Going to look into that. 


Some great thoughts there.

The first screen you mention doesn't really strike me as a value screen.  From what I've learned, As a quality criteria, ROA and a couple others you mention can help with consistency of a method (not a bad thing!) but doesn't necessarily add to the absolute return.  Still, I'm leaning more towards adding in quality factors to my "pure value" approach, under a bit of duress mind you (David Dreman, an early influence, would understand); maybe it's an age thing, lol. A little bit of quality doesn't hurt.


The next screen you mention with Price to Sales is close to what I do. I just don't necessarily add safety criteria 
or quality.  Mind you, more recently I _have_ been looking at Financial Scores, and I like them - so I'm open. 


*You just have to be so careful about adding more into simple models, otherwise they don't remain simple - and that is not what you want, in my opinion*.

I had to bold that because it's a very important concept to me, and it's such an integral part of what I've learned in my investing education thus far.


Rebalancing frequency of 6 months isn't really necessary in my opinion - you're later quote from Pabrai is pertinent here.  I don't use rebalancing anyway.  It's typically used in the academic studies, but there's other more creative options.



The final screen - whoa, you'll have the trend followers coming after you, lol.  But seriously, 52wk lows, I wouldn't use it as a factor at all.  Not really correlated with value (in the way longer term negative return is).  And definitely not a momentum factor!

Altman Z - I've not bothered with a risk of bankruptcy score, but recently been looking at it (a little).
Firstly, I presume you meant "minimum" grey area (i.e. safe area is okay too?)

There are better models than Altman's Z, that are more complex to implement, and so at the moment I use neither.  See Shumway 2001 followed by Chava and Jarrow 2004 and Campbell 2010.
I might have a play with the main sentiments in simplified form from the last paper though (Harvard).  Notice (if you read it) that it adds other important factors like return and volatility to accounting factors.

Requiring a Z score in the safe zone practically halves the market universe (654 stocks after eliminating financial sector as well) and is easier to implement.  Interesting to look at.  I won't implement it but I'll maybe look at the subject area a bit more seriously.


Don't forget: in addition to financial ruin (which is what we're talking about here), there's also manipulation and fraud to account for (and models that attempt to do that).

The peace of mind comes from: *value works*, even without accounting for financial ruin, manipulation, fraud, quality or financial strength/consistency.  All those 5 areas are worth studying - and certainly quant models attempt to capture them all.  I'm just saying that for me, peace of mind comes from knowing that value works _without_ those factors.  That's why I wouldn't equal weight them.  i.e. Start with value (then you're in the real "safe zone") and play from there (can't go too wrong).


----------



## systematic (11 December 2012)

So_Cynical said:


> Thing is that for the vast majority of long shots it means exactly that...they wont win because the form says they can't, and the form is right, after all form is fact..its a study on what the horse has done and therefore is capable of.




...I was worried someone would say that, but it wasn't quite my point.  Without the horse racing analogy: it shouldn't be surprising that value stocks (particularly "deep value") stocks look like the type of stock list that you'd be too embarrased to read out loud at your local investors club (or post on a forum!).  But that's the point.  If they ticked all the right boxes, everyone would love them.  Hence my point: be careful about requiring your value stocks to tick all the right boxes.  Graham apparently found the same thing (at least to the degree that his stocks were often unloved by the analysts).




So_Cynical said:


> My trading and wealth acquisition strategy is all based around time.
> 
> 
> Best time to enter (low price)
> ...




...Cool, I get that. It does read though that your strategy requires being very good with your timing ("best time").  
My strategy: I'd rather not have to pick the best time, or the best stock - as I don't particularly trust myself very well to do either.  

But besides that, do you think it worthwhile tracking the value price over time?  Is that how you would decide when to enter?



So_Cynical said:


> The best time to buy SGH is gone, i however got a parcel at $1.505




Glad you got in at a good price.  Graham's price still says value, hopefully that means more upside for you!


----------



## systematic (11 December 2012)

odds-on said:


> IMO, each company needs to be categorised using the criteria into either Defensive, Enterprising, Ok/NCAV and "Rubbish". Once you have categorised them correctly then calculate the graham price using the correct formula for the criteria.





Hey again Odds on, hadn't addressed this part.

That's what I had done with this list - didn't make it very clear, sorry.

This list is the Defensive list.  The "PGP" uses the Graham price.  I've simply provided a ratio of current price to the Graham price (to save the effort of looking up and comparing) and given it a TLA (Three Letter Acronym), lol 


So as mentioned in my notes, I used 5 years for earnings and dividends, simply knowing that using 10 and 20 years respectively would restrict too much.  So, that's rules 3 & 4.
I applied rules 2A and 2B as is. Current assets at least twice current liabilities, and Long-term debt not exceeding the net current assets.
Applied rule 5 re: earnings growth over 5 years instead of 10, as mentioned above).
Rule 1 (minimum revenues) mentioned in my notes.  This is a bit like using a size factor, so listed the lot and mentioned where the cutoff could be (again, if you used 500m as mentioned, there probably wouldn't have been any selections, so we can settle for a lower figure on the ASX).

Rules 6 & 7, as you know, are covered by using the Graham price: sqrt. of the product of 22.5,EPS & BV.

You then have to compare current price to the Graham price anyway, so I did that inthe ratio: current price / graham price (smaller is better).


So this is the Defensive strategy of Graham's.  I like it.  Not sure why - I think it's the relation of the defensive strategy to the other 2 strategies.
This strategy allows for the highest price.  The other strategies loosen up the criteria and therefore require a cheaper price.  That idea just has a nice vibe to it.

Mind you, the defensive stocks are the easiest to manage, according to that site, and you can be the most aggresive with them (which makes sense): hence portfolios of only 10 stocks (which helps smaller investors too).

What surprised me a little was that 9 of the 19 were at a value price.  Only that some simply are not liquid enough.  Pity.  But I suppose you could build a portfolio over time.


----------



## systematic (11 December 2012)

systematic said:


> Rules 6 & 7, as you know, are covered by using the Graham price: sqrt. of the product of 22.5,EPS & BV.
> 
> You then have to compare current price to the Graham price anyway, so I did that inthe ratio: current price / graham price (smaller is better).




In other words: think of the PGP *Ratio* like a Price to Book ratio.  a value of 1.00 means "fair value", i.e. the Graham Price.

Examples:
MNY is a Defensive stock, and currently trading at half the Graham Price
WLL is a Defensive stock, and currently trading right on the Graham Price
Expensive IRE is a Defensive stock, and currently trading over 3 times the Graham Price.


----------



## craft (12 December 2012)

Has anybody ever read Graham's postscript in the intelligent investor?


----------



## RandR (12 December 2012)

craft said:


> Has anybody ever read Graham's postscript in the intelligent investor?




Yes. its mostly just about the acquisition of geico. Also reinforces the point of making the right investment decisions with a simple methodology rather then a whole lot of 'average' decisions chasing mediocrity........ or is it ?


----------



## craft (12 December 2012)

RandR said:


> Yes. its mostly just about the acquisition of geico. Also reinforces the point of making the right investment decisions with a simple methodology rather then a whole lot of 'average' decisions chasing mediocrity........ or is it ?





Postscript to The Intelligent Investor


By Benjamin Graham


"We know very well two partners who spent a good part of their lives handling their own and other people's funds in Wall Street. Some hard experience taught them it was better to be safe and careful rather than to try to make all the money in the world. They established a rather unique approach to security operations, which combined good profit possibilities with sound values. They avoided anything that appeared overpriced and were rather too quick to dispose of issues that had advanced to levels they deemed no longer attractive. Their portfolio was always well diversified, with more than a hundred different issues represented. In this way they did quite well through many years of ups and downs in the general market; they averaged about 20% per annum on the several millions of capital they had accepted for management, and their clients were well pleased with the results.

In the year in which the first edition of this book appeared an opportunity was offered to the partners' fund to purchase a half-interest in a growing enterprise. For some reason the industry did not have Wall Street appeal at the time and the deal had been turned down by quite a few important houses. But the pair was impressed by the company's possibilities; what was decisive for them was that the price was moderate in relation to current earnings and asset value. The partners went ahead with the acquisition, amounting in dollars to about one-fifth of their fund. They became closely identified with the new business interest, which prospered. 

In fact it did so well that the price of its shares advanced to two hundred times or more the price paid for the half-interest. The advance far outstripped the actual growth in profits, and almost from the start the quotation appeared much too high in terms of the partners' own investment standards. But since they regarded the company as a sort of "family business," they continued to maintain a substantial ownership of the shares despite the spectacular price rise. A large number of participants in their funds did the same, and they became millionaires through their holding in this one enterprise, plus later-organized affiliates. 

Ironically enough, the aggregate of profits accruing from this single investment-decision far exceeded the sum of all the others realized through 20 years of wide-ranging operations in the partners' specialized fields, involving much investigation, endless pondering, and countless individual decisions. 

Are there morals to this story of value to the intelligent investor? An obvious one is that there are several different ways to make and keep money in Wall Street. Another, not so obvious, is that one lucky break, or one supremely shrewd decision – can we tell them apart? – may count for more than a lifetime of journeyman efforts. But behind the luck, or the crucial decision, there must usually exist a background of preparation and disciplined capacity. One needs to be sufficiently established and recognized so that these opportunities will knock at his particular door. One must have the means, the judgment, and the courage to take advantage of them. 

Of course, we cannot promise a like spectacular experience to all intelligent investors who remain both prudent and alert through the years. We are not going to end with J. J. Raskob's slogan that we made fun of at the beginning: "Everybody can be rich." But interesting possibilities abound on the financial scene, and the intelligent and enterprising investor should be able to find both enjoyment and profit in this three-ring circus. Excitement is guaranteed."


----------



## systematic (12 December 2012)

I'd like to keep this thread focused on Ben Graham's stuff if possible.

I did have a quick look Oddson at the Z score in safe zone with 52wk lows....a bunch (about 34) of small / micro cap companies, nearly all in the materials sector.  
To keep this thread on Graham, I won't post the list here...can you pm me odds-on if you want them?


----------



## systematic (12 December 2012)

Here we apply Graham's Enterprising method, which essentially:
(a) loosens up the criteria a little, and
(b) demands a 'more value' price for doing so...

we get the 19 stocks included above (of course), which I've removed, along with an additional 7 stocks listed below.

The "PEP" is the "Price to Enterprising Price" ratio.  Like a price to book, 1.00 is neutral, less than 1 is value.  Only in this case, a value of 1.00 is the Graham Enterprising price.

Sadly, no value to be had.  The closest would be SDM, and that would have to fall to around 80c...

​
Once again sorted by revenues.


----------



## systematic (12 December 2012)

And for completeness, Graham's Bargain Issues.
Value here, but (to be expected with these stocks), mostly impossible to trade.
Maybe BND out of all of them?  PPP possibly for a small play?
Sorted by market cap this time, not revenues (as irrelevant to this method).

​


----------



## odds-on (12 December 2012)

systematic said:


> The first screen you mention doesn't really strike me as a value screen.




Perhaps a quality + growth screen?



systematic said:


> David Dreman




I am a fan



systematic said:


> The next screen you mention with Price to Sales is close to what I do.




You do not have to give all your secrets away but I would be interested what you have found works and does not work on the ASX. I currently do not use a mechanical investing system but am very tempted. Would definitely appreciate advise on portfolio management.



systematic said:


> You just have to be so careful about adding more into simple models, otherwise they don't remain simple - and that is not what you want, in my opinion




Agree simple works. I have read that Graham's last will was to use just Earnings Yield and Tangible Book to Liabilities.

Check out this link where they refine some of the Graham criteria

http://www.oldschoolvalue.com/blog/investing-strategy/graham-guru-stock-value-screen/

They are plenty of other screener backtests on this site - check out the CROIC screener $$$$$$$$



systematic said:


> The final screen - whoa, you'll have the trend followers coming after you, lol.  But seriously, 52wk lows, I wouldn't use it as a factor at all.  Not really correlated with value (in the way longer term negative return is).  And definitely not a momentum factor!
> 
> Altman Z - I've not bothered with a risk of bankruptcy score, but recently been looking at it (a little).
> Firstly, I presume you meant "minimum" grey area (i.e. safe area is okay too?)




Ok I was being a little silly here but it would be interesting to see the performance of stock selection if you went completely against what made logical sense. Search for expensive and highly leveraged. To keep it Graham and simple:
- Earnings yield less than 2/3rd of AAA government bond yield
- No limit on the debt

As for the Altman Z score if you break the formula down you will see it is more or less Graham type criteria presented another way. The Altman Z score measures working capital, cumulative profitability, recent profitability and so on. Just gives you one nice number to work with.

http://www.oldschoolvalue.com/blog/investing-strategy/altman-screen-performance/

Cheers

odds-on


----------



## odds-on (12 December 2012)

systematic said:


> Hey again Odds on, hadn't addressed this part.
> 
> That's what I had done with this list - didn't make it very clear, sorry.
> 
> ...




IMO, the Defensive criteria is supposed to be defensive. For me this means 10+ years without a loss or a missed dividend. You could probably remove the current ratio criteria as it is specific to the business/industry, see below:

http://www.creditguru.com/ratios/inr.htm

A modified defensive criteria :

-10 years of earnings
-10 years of dividends
-10 year average ROE of at least 15%
-Revenue and earnings growth

It would be interesting to see how many companies pass the above test. The safety criteria would have to be done on a case by case basis.

Cheers

odds-on


----------



## odds-on (12 December 2012)

craft said:


> Another, not so obvious, is that one lucky break, or one supremely shrewd decision – can we tell them apart?




Worth discussion on another thread.


----------



## systematic (12 December 2012)

odds-on said:


> IMO, the Defensive criteria is supposed to be defensive. For me this means 10+ years without a loss or a missed dividend. You could probably remove the current ratio criteria as it is specific to the business/industry




Hey odds-on, i'm cool to use 10 years for the Graham defensive.  started with 5 years to see if we got any at all.
Do you think you'd prefer to remove the current ratio for now, to apply to industry separately?

What I'm interested in here is:  I used the Graham Defensive criteria straight from the serenity site.  Are you saying it'd be better to modify the criteria somewhat rather than as is?  I'm just seeking your opinion on Graham's restrictive criteria is all.  What are _you_ looking for (compared to Graham's suggestion I mean).  Hope that makes sense.  Just elaborate a bit, if you will, on why tinker with Graham's rules?  (I totally agree mind you, but I like to get others views too - best way to learn).




odds-on said:


> The safety criteria would have to be done on a case by case basis.




...how about Z score for the safety?  Or?


----------



## systematic (12 December 2012)

odds-on said:


> Check out this link where they refine some of the Graham criteria
> 
> http://www.oldschoolvalue.com/blog/investing-strategy/graham-guru-stock-value-screen/
> 
> They are plenty of other screener backtests on this site - check out the CROIC screener $$$$$$$$




This site rung a bell; after I checked out your link realised it had been a while. Total respect to what they are doing (I love the stuff they are exploring), but I remember having a reservation or two about a couple things.  Let me see if I can find something...
...Yeah, take the Negative EV - I thought that sounded really cool, but asked a quant I know (in US) who'd tested it a while back as to what the go was.  Exceptional results, until you remove the lowest market caps.  It's the old micro-cap dilemma in back testing.  My rule of thumb (personally): ignore any tests that _require_ the micro of micro caps to be profitable.  Take out the bottom stocks (size wise) and the negative EV effect goes away.  Sad, I agree!  But true.

Anyway, never mind that!  Good site with lots of ideas!


----------



## systematic (12 December 2012)

odds-on said:


> Ok I was being a little silly here but it would be interesting to see the performance of stock selection if you went completely against what made logical sense. Search for expensive and highly leveraged.




Totally agree with checking stuff out, it's all good.  But no, I wouldn't go anywhere near expensive and highly leveraged unless looking for shorts.  It just goes against the way the market is.  Just my opinion!


----------



## RandR (12 December 2012)

systematic said:


> Hey odds-on, i'm cool to use 10 years for the Graham defensive.  started with 5 years to see if we got any at all.
> Do you think you'd prefer to remove the current ratio for now, to apply to industry separately?
> 
> What I'm interested in here is:  I used the Graham Defensive criteria straight from the serenity site.  Are you saying it'd be better to modify the criteria somewhat rather than as is?  I'm just seeking your opinion on Graham's restrictive criteria is all.  What are _you_ looking for (compared to Graham's suggestion I mean).  Hope that makes sense.  Just elaborate a bit, if you will, on why tinker with Graham's rules?  (I totally agree mind you, but I like to get others views too - best way to learn).
> ...




I honestly dont understand why a value investor following the principles of ben graham would scan for dividend yields... let alone use it as a deciding factor to eliminate investment options. seems crazy to me.


----------



## systematic (12 December 2012)

RandR said:


> I honestly dont understand why a value investor following the principles of ben graham would scan for dividend yields... let alone use it as a deciding factor to eliminate investment options. seems crazy to me.




...Because that was in at least two of Graham's methods?


----------



## craft (12 December 2012)

odds-on said:


> Worth discussion on another thread.




If this thread is about Graham’s systematic scans then that is one thing but if it is about what Graham would likely look for today on the ASX – then the postscript is very telling. 

I’m guessing now it’s just about the scans – so I’ll leave you to it, sorry for the interuption.

ps 

Did you see the James Montier – Value Investing link in the PV thread?


----------



## systematic (12 December 2012)

craft said:


> If this thread is about Graham’s systematic scans then that is one thing but if it is about what Graham would likely look for today on the ASX – then the postscript is very telling.




...What do you mean?  From what I've read of Graham (not much, so I could be way off!)...he was more a fan of using "scans" (investing in groups of stocks with desirable characteristics rather than individual securities) in later times?

Incidentally, James Montier like a good PE ratio and the like!


----------



## RandR (12 December 2012)

systematic said:


> ...Because that was in at least two of Graham's methods?




Great ... but the investing Ben Graham actually did was mostly arbitrage/liquidations/hedges and simply buying stocks at less then their book value on net current assets. I couldnt possibly see Ben Graham making investment decisions himself on either his own funds or those of his clients based upon dividend yields, nor any of his many students ...I know Ben compiled lists of things an investor should look for in stock selection (both 'defensive' and 'enterprising') in the intelligent investor. But do you think thats what he 'actually' used? As craft has pointed out with the postscript which is well worth a read and really shouldnt be disregarded as it provides a great insight into his actual investing thinking.

Ben also said the majority of investors should simply put their money in index funds and cash and re weight them periodically as the markets go up and down, which would probably have a better result I suspect then blindly purchasing whatever stocks meet a selection of scan criteria that Ben recommended for people who simply 'have' to pick stocks.


----------



## systematic (12 December 2012)

odds-on said:


> A modified defensive criteria :
> 
> -10 years of earnings
> -10 years of dividends
> ...




As above.  
10 years of consistent earnings and dividends.
Resulted in 101 companies

Revenue & Earnings growth (I thought I might as well add in Dividend growth while I was at it)...of at least 3% per year (to put it in line with Graham's one/third over ten years).
Leaves 51 companies.

10 year ave ROE at least 15%
Man, you're putting me to work, thanks odds-on, (lol). I had to create a new category here (closest I already had was 5 year average ROE).  Might as well go all in - all done now.
Left 32 final companies.


Nearly all of some sort of decent market cap/liquidity (from a cursory glance).


Added the PGP column.  For those who haven't read the earlier post, what this is is simply a ratio of current price, to the Graham Price.  Much like a PE or PB ratio.  Lower is better (less than 1.00 means the current price is under the Graham Price).
And, the Graham Price is the square root of (Earnings per share * Book Value Per Share * 22.5)
So the PGP just lets you know where the current price is to the Graham Price.  1.00 means the current price is exactly the Graham Price.  0.50 means the current price is half the Graham Price (value).  2.00 means the current price is twice the Graham Price (expensive).


Here's the table....


​

Basically picks up more stocks than before because we're not requiring rules 2A and 2B (current assets twice current liabilities, and, long term debt less than net current assets).  That makes quite the difference and loosens it up quite a bit - even when requiring a min. 15% 10 year average ROE.

Feel free to comment, offer thoughts - which are your fave (if any) stocks in the list etc?


----------



## systematic (12 December 2012)

RandR said:


> Ben also said the majority of investors should simply put their money in index funds and cash and re weight them periodically as the markets go up and down, *which would probably have a better result I suspect* then blindly purchasing whatever stocks meet a selection of scan criteria that Ben recommended for people who simply 'have' to pick stocks.




Incorrect.


I appreciate your different view however, and will re-read the post-script.  I intend on reading the book also - as soon as I can (which will probably be a long while away.  Don't get to read as many books as I used to, sigh...it's not right I tell you...)


----------



## odds-on (13 December 2012)

systematic said:


> Hey odds-on, i'm cool to use 10 years for the Graham defensive.  started with 5 years to see if we got any at all.
> Do you think you'd prefer to remove the current ratio for now, to apply to industry separately?
> 
> What I'm interested in here is:  I used the Graham Defensive criteria straight from the serenity site.  Are you saying it'd be better to modify the criteria somewhat rather than as is?  I'm just seeking your opinion on Graham's restrictive criteria is all.  What are _you_ looking for (compared to Graham's suggestion I mean).  Hope that makes sense.  Just elaborate a bit, if you will, on why tinker with Graham's rules?  (I totally agree mind you, but I like to get others views too - best way to learn).
> ...




From my reading on the Altman Z Score, the key factors to determine whether a company will go bankrupt are cumulative profitability and earnings stability over ten years. Profitability and stability...........sounds like *predictability* to me!

http://www.gurufocus.com/news/36158...08-part-i-introduction-of-predictability-rank

For a defensive investment i am looking for *predictability* first and foremost. I would be intending to hold for a year or more so I (and the "market") will need confidence that the company is still going to be making cash over the next few years. Once I have found companies that meet the *predictability* criteria then I would check the capital structure is appropriate for the business. I would not use the current ratio and debt as a screener at this stage. 

Now for *value* I would look be tempted to use  historical price to NTA. Do not set a limit just look at the historical premium to NTA the company has traded at. 

In summary....

Defensive Screening criteria

*Predictable*10 years of earnings and dividends
*Predictable*10 years of earnings stability
*Value*30% (?) discount to historical price to NTA

Once I have found companies that meet the above criteria I would check the capital structure is appropriate for the type of business. There is plenty of material on the web on what to check for industrials, banks, retailers....

Cheers

odds-on


----------



## odds-on (13 December 2012)

systematic said:


> Revenue & Earnings growth (I thought I might as well add in Dividend growth while I was at it)...of at least 3% per year (to put it in line with Graham's one/third over ten years).
> Leaves 51 companies.




Not really a surprise there. Wonder if you compared that list of 51 against an "investment grade" list produced my favourite prudent investing poster over at HC (his posts are worth reading) and see how many matched.....I bet at least 60% would.



systematic said:


> And, the Graham Price is the square root of (Earnings per share * Book Value Per Share * 22.5)
> So the PGP just lets you know where the current price is to the Graham Price.  1.00 means the current price is exactly the Graham Price.  0.50 means the current price is half the Graham Price (value).  2.00 means the current price is twice the Graham Price (expensive).




In addition to the Graham price you could use 
- discount to historical price to sales or
- discount to historical price to NTA. 

The type of stock that this screening criteria produce will rarely be cheap, I think it would be more appropriate to use price criteria based on historical valuation.



systematic said:


> Feel free to comment, offer thoughts - which are your fave (if any) stocks in the list etc?




ARB, CCP and MND are rated highly in the press and on forums. 

Cheers

odds-on


----------



## odds-on (13 December 2012)

RandR said:


> investors should simply put their money in index funds and cash and re weight them periodically as the markets go up and down.




RandR,

Do you have articles/experiences/links to where investors have successfully implemented this type of strategy for a period of a few years as I would be interested to read about. I suspect it could get a return of around 9% or so with little work. Some questions:

-Would you value average or just average?
-Would you rebalance every 3 months? 6 months? 12 months?
-Do you add some sort of weighting system i.e. the larger the spread between term deposit yield and the median dividend yield the more you put into the index tracker?

Cheers

odds-on


----------



## odds-on (13 December 2012)

craft said:


> If this thread is about Graham’s systematic scans then that is one thing but if it is about what Graham would likely look for today on the ASX – then the postscript is very telling.
> 
> I’m guessing now it’s just about the scans – so I’ll leave you to it, sorry for the interuption.
> 
> ...




I did but forgot to say thank you. Have not had a chance to read it properly yet as am working my way through some other investment books first.


----------



## systematic (13 December 2012)

I'm not really sure there's very much interest in Graham's actual methods, but anyway...


So, just briefly, I had a look at the 51 stocks mentioned above, produced by:
earnings and dividend payments over 10 years.
earnings, revenue and dividend growth over 10 years.

As per some of odds-on suggestions,  I added in the Altman Z score (safe zone only).
That narrowed those 51, consistently earning companies down to only 32.

Adding the ROE (10 year average) of minimum 15% now leaves only 20 companies.


Similar to some of odds-on's suggestions, instead of Graham price - here we will use a relative PE ratio.  Let me take a second to explain that.  It's basically what odds-on is talking about with relative premium to sales or NTA ratios.
To explain further:

The relative PE is simply current PE divided by 5 year low PE.

(I'm using 5 years because that's what I have already and don't have the time at the moment to create another 10 year ratio).

So, a score of 1.00 means the company's PE _is at_ the 5 year low PE.  If it's 1.45, that means the current PE is 45% greater than the low. So - the 5 year low PE is 10, and the current PE is 14.5, that gives a relative PE of 1.45  A current PE of 40 would mean a relative PE of 4.0

Small differences in numbers is irrelevant.  Just remember it's a percentage off the 5 year low (PE).  And, that you are looking for companies that are trading near their lows, as opposed to highs (presumably).  



Here are the 20 companies that meet all the criteria as before + the Z score safe zone...sorted by the extra column which is the relative PE ratio, describe above.

​

Feedback please: 
So now we have determined the inputs, _what do we make of the outputs_?  If we've done well with the input criteria, we should have our desirable stocks.

So...are GUD, MND, OKN & BHP (followed perhaps by REH & FWD)  excellent (consistent, quality & safe) companies - at a 'cheap' price?  In other words, does our criteria 'work'?  Why / why not?


----------



## Julia (13 December 2012)

When you are ascribing value to companies do you take into account the environment in which they operate?
Just as one example, MND, should the so called mining boom falter or even fall over.


----------



## systematic (13 December 2012)

Julia said:


> When you are ascribing value to companies do you take into account the environment in which they operate?
> Just as one example, MND, should the so called mining boom falter or even fall over.




Sorry Julia, I'm not sure I understand the question: as in, do you mean me personally?  Ben Graham's method?  Or was it a "thinking out loud" question (in which case, apologies for misunderstanding - and it's a good question!).

As for me personally (which isn't really relevant): No to the second part of the question (I don't at all take into account the environment a company operates in), because I don't do the first bit of the question anyway (i.e. I don't ascribe value to companies. I'm anti that approach).


But, relevant to this thread - good question.  Oddson was talking about applying debt criteria and the like individually.


----------



## Julia (13 December 2012)

systematic said:


> Sorry Julia, I'm not sure I understand the question: as in, do you mean me personally?  Ben Graham's method?  Or was it a "thinking out loud" question (in which case, apologies for misunderstanding - and it's a good question!).



Yes, I meant you personally.

Thanks for your response.  This is, I guess, where Graham devotees are different from eg trend followers.
Personally, I'd never buy anything without considering the company's prospects in a given physical and economic environment.  e.g. using MND as an instance, if mining really falls over, MND is going to be disadvantaged compared to when mining boom is at full swing.

PS  Absolutely not disposed to turn this into yet another FA v TA discussion.  I was just curious about this point.


----------



## odds-on (14 December 2012)

systematic said:


> I'm not really sure there's very much interest in Graham's actual methods, but anyway...
> 
> 
> So, just briefly, I had a look at the 51 stocks mentioned above, produced by:
> ...




A few questions...

1. Do you intend to start performing *business* *analysis* on each business in the list? That is a lot of work that requires many years of practice and will create human judgement risk!
2. Why not just use the above 20 to create a portfolio? Most of those companies seem from memory to be ok.
3. Why not use a *value* weighting system to create the portfolio? The stocks at the top of the list get more cash and so on down the list.

As far as I am concerned the purpose of the Defensive graham criteria is NOT to start doing in depth business analysis. Just buy a portfolio that meet the Defensive criteria and move on with life. Obviously the cheaper are going to be out of the favour with the market e.g.mining industry.

Cheers

Oddson


----------



## odds-on (14 December 2012)

Systematic,

Thank you for all your effort, I am enjoying this thread. I remember an article in the AFR Smart Investor about a retail investor who used a quant system on the ASX and made 25% per annum. In the article the investor states he does not ever know what the business is behind the three letter symbol he just knows that it is a good business if it meets his 25 (i think) criteria. The retail only uses information from the AFR share tables. He has a keen interest in statistics and spend some time going through old share table data looking for patterns eventually creating his criteria.

IMO, the key to make this quant systems working is sticking to the criteria with discipline. Some research has already been done on Joel Greenblatt's magic formula fund, there is an option which allows the investor to pick from the magic formula list performs unsurprisingly it performs worse than just following the magic formula!!!

Cheers

Oddson


----------



## systematic (14 December 2012)

Julia said:


> Yes, I meant you personally.
> 
> Thanks for your response.  This is, I guess, where Graham devotees are different from eg trend followers.
> Personally, I'd never buy anything without considering the company's prospects in a given physical and economic environment.  e.g. using MND as an instance, if mining really falls over, MND is going to be disadvantaged compared to when mining boom is at full swing.
> ...





No problem Julia. Enjoyed reading your thoughts.

Just to clarify - I'm (in this thread) looking at some Graham stuff - I don't use it myself as I've not yet explored his work really.

I totally can appreciate the idea of considering industry. I found your comment re: difference between Graham devotees and trend followers very interesting indeed.  Saying that a trend follower is more likely to consider a company's prospects in a given physical and economic environment is new to me - in my experience, trend followers are more likely than value investors to be following a systematic approach!

Which really, you can consider industries, outlooks, fundamentals, sentiment etc. whether you're a "TA" or an "FA".  I consider myself neither really, as it's the "A" in either that I don't do (as a deliberate philosophy, for want of a better word that I can't think of right now).

I appreciate your thoughts Julia and you're welcome to be as robust as you like!  There are some silly FAvsTA threads around, no doubt...but good robust discussion is always cool (with me, anyway).

So, although it's maybe a topic for another thread entirely: do you approach the industry/outlook thing as a TA? A trend follower? Using fundamentals, or?


----------



## systematic (14 December 2012)

odds-on said:


> A few questions...
> 
> 1. Do you intend to start performing *business* *analysis* on each business in the list? That is a lot of work that requires many years of practice and will create human judgement risk!
> 2. Why not just use the above 20 to create a portfolio? Most of those companies seem from memory to be ok.
> ...





I think you could guess my answers already 

1. Absolutely not!  There are not many who are truly good at it (many who think they might be though).  One of my main reasons for being 'systematic' is to protect me...from me!

2. Absolutely you could.  I wouldn't with this list personally – as it’s more about quality.  I prefer (a) value first and then (possibly) (b) quality.  Magic formula equal weights both, essentially.  From what I’ve seen, you do better with the former.  I’ve been happy without quality, but am looking at it recently.  However, only in the context of value first.  That’s not necessarily the right way of course, but what I’m comfortable with from what I’ve read.

3. That would be a great way to implement the whole list and tilt it to value.  It just (probably) won’t give as high an absolute return as being more value focused.  Which is totally fine – depends on what your investing goals are.  My goals are tilted more towards doing what’s needed to increase absolute return.  For me that means more value focused and more concentrated.  Paying the price of higher volatility is something I have to be prepared to do.  But it’s different goals for different investors.  Many others may well be better off going for a more reasonable and rounded approach, as if they ‘style drift’ due to volatility, they won’t get the benefits anyway.

Totally agree with your sentiments re: not doing in depth business analysis and sticking to your system.


----------



## systematic (14 December 2012)

odds-on said:


> IMO, the key to make this quant systems working is sticking to the criteria with discipline.




Absolutely agree!

Doesn’t matter whether you use market price, volume, liquidity, volatility or financial accounting data…if you’re a systematic investor, you have to agree with this.  System investing (of any kind) will sometimes have you investing in a stock that you wouldn't have from an "analysis" point of view (and that goes for fundamental or technical 'analysis').

I'd only add the words "over time" to the end of your sentence.  Spot on, in my opinion.


----------

