Comments on: Graham’s 50 Year Study – Foolproof? http://www.grahaminvestor.com/2010/01/03/grahams-50-year-study-foolproof/ Intelligent Value Investing Thu, 12 Jan 2012 23:17:07 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: The Graham Investor http://www.grahaminvestor.com/2010/01/03/grahams-50-year-study-foolproof/comment-page-1/#comment-167 The Graham Investor Thu, 12 Jan 2012 23:17:07 +0000 http://www.grahaminvestor.com/?p=571#comment-167 Look forward to that, Thomas. Look forward to that, Thomas.

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]]> By: Thomas Tenentka http://www.grahaminvestor.com/2010/01/03/grahams-50-year-study-foolproof/comment-page-1/#comment-166 Thomas Tenentka Wed, 11 Jan 2012 11:32:03 +0000 http://www.grahaminvestor.com/?p=571#comment-166 Hi Investorfriends, I´ve purchased on the 02 nd and 3 th february last year (2011) 10 net nets from your screener and I will represent the results next month. Best regards from Germany Hi Investorfriends,

I´ve purchased on the 02 nd and 3 th february last year (2011) 10 net nets from your screener
and I will represent the results next month.
Best regards from Germany

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]]> By: Luis Castillo http://www.grahaminvestor.com/2010/01/03/grahams-50-year-study-foolproof/comment-page-1/#comment-92 Luis Castillo Mon, 25 Oct 2010 20:44:01 +0000 http://www.grahaminvestor.com/?p=571#comment-92 Great Article!! Regarding the Graham's three methods (the earning yield, the 2/3 of price/book and the 2 years 50% of the high price). Did Graham or anyone around him test the three methods together? I mean, screening the whole stock market with the 3 criterials at the same time. I did it, and by today october 25th , MTU reached the 3 criterial: EY= 9.10%, price/book= 0.646 and the current price is $4.71 the 50% is $7.065 ( high on october 24 of 2008 was around $ 7.04). Even though, ROE is low (5.82%), no insiders nor institutions have investment there. I would like to know, what you think putting together the 3 criterial. Luis Great Article!!

Regarding the Graham’s three methods (the earning yield, the 2/3 of price/book and the 2 years 50% of the high price). Did Graham or anyone around him test the three methods together? I mean, screening the whole stock market with the 3 criterials at the same time. I did it, and by today october 25th , MTU reached the 3 criterial: EY= 9.10%, price/book= 0.646 and the current price is $4.71 the 50% is $7.065 ( high on october 24 of 2008 was around $ 7.04).

Even though, ROE is low (5.82%), no insiders nor institutions have investment there. I would like to know, what you think putting together the 3 criterial.

Luis

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]]> By: Gene http://www.grahaminvestor.com/2010/01/03/grahams-50-year-study-foolproof/comment-page-1/#comment-90 Gene Sat, 23 Oct 2010 18:10:14 +0000 http://www.grahaminvestor.com/?p=571#comment-90 Good work! Is there a way to update the Piotroski screen, now? Thanks. Good work! Is there a way to update the Piotroski screen, now? Thanks.

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]]> By: Jim Allen http://www.grahaminvestor.com/2010/01/03/grahams-50-year-study-foolproof/comment-page-1/#comment-87 Jim Allen Mon, 27 Sep 2010 00:41:18 +0000 http://www.grahaminvestor.com/?p=571#comment-87 Perhaps one way to judge if the market is "dangerously high" would be that there is a dearth of opportunities to acquire issues at a price that affords good value with an adequate margin of safety. I am wary of applying a test, such as 2/3rds tangible book value" mechanically. A few years back, I came across one stock that was selling for less than net cash per share. I was elated! But when we went in to check it out, the company had never made a dime in any year of its existence, and was burning through the cash until it did. It had yet to demonstrate, let alone prove, it was a viable business. I am a firm believer in getting your hands dirty in annual reports, with all footnotes, for as many years back as one can stand, and not relying on summaries, compilations, or databases. You can never be sure when the database has been corrupted through blunder, or misunderstanding between the compiler and you. Blundering into some Enron-type bogus accounting mess by applying tests mechanically, without verifying your figures rigorously would be disastrous. Perhaps one way to judge if the market is “dangerously high” would be that there is a dearth of opportunities to acquire issues at a price that affords good value with an adequate margin of safety.

I am wary of applying a test, such as 2/3rds tangible book value” mechanically. A few years back, I came across one stock that was selling for less than net cash per share. I was elated! But when we went in to check it out, the company had never made a dime in any year of its existence, and was burning through the cash until it did. It had yet to demonstrate, let alone prove, it was a viable business.

I am a firm believer in getting your hands dirty in annual reports, with all footnotes, for as many years back as one can stand, and not relying on summaries, compilations, or databases. You can never be sure when the database has been corrupted through blunder, or misunderstanding between the compiler and you. Blundering into some Enron-type bogus accounting mess by applying tests mechanically, without verifying your figures rigorously would be disastrous.

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]]> By: Christian Troche http://www.grahaminvestor.com/2010/01/03/grahams-50-year-study-foolproof/comment-page-1/#comment-85 Christian Troche Fri, 09 Jul 2010 06:53:16 +0000 http://www.grahaminvestor.com/?p=571#comment-85 Answers for Preston (see comment above): 1) Graham sought a 50% return on price. He did not mention annualizing returns, nor did he consider dividends received in his return objectives. (I believe he saw dividend yields more as a measure of value than as a component of return). His stated selling targets of either (a) a 50% increase above cost or (b) completion of a two-year holding period was his way of enforcing intelligent investing behavior. Fifty percent was not an arbitrary number, but the logical result of Graham's value discipline when buying stocks. For example, if a company's tangible book value was $9/share, Graham would consider buying shares at $6, or 2/3 of the book value. Not only would $6/share provide a sufficient margin of safety between price and value, but a 50% increase in price from $6 would bring the stock price to the $9 tangible book value. Selling the shares at $9 would not only be logical (obtaining fair value for what was purchased at a discount, i.e. tangible assets), but enforces a value discipline, as the margin of safety that once existed in the stock price has disappeared. (2) Regarding your second question, I'm not sure Graham answered that question specifically, but his many writings, lectures, interviews, etc. provide helpful clues. First, a value investing strategy should be pursued at all times except when the broad market valuation is "dangerously high" (Graham's term). During those periods, intelligent investors should be content with a cash position until the overvaluation is corrected. Second, Graham would have likely approved an investor committing funds over an extended period of time, perhaps several quarters. (Joel Greenblatt, a noted value investor, endorses this strategy in his "magic formula" concept.) This way, various groups of stocks "mature" at different points in the market cycle. Of course, the 50% selling discipline forces an investor out of stocks in a rising market, and the margin of safety concept doesn't allow reinvestment of funds until values are available. (Note: in a taxable account, selling into a bear market can create "assets" for the investor in the form of tax-losses that can be used to offset capital gains taxes for both current-year and future gains, and new investment opportunities should be readily available.) In the end, regardless of bull or bear market, taxable or qualified account, the 2-year selling discipline should still be enforced, because if a catalyst for a higher stock price hasn't materialized within two years, it is reasonable to assume better opportunities exist for the intelligent investor. Answers for Preston (see comment above):
1) Graham sought a 50% return on price. He did not mention annualizing returns, nor did he consider dividends received in his return objectives. (I believe he saw dividend yields more as a measure of value than as a component of return). His stated selling targets of either (a) a 50% increase above cost or (b) completion of a two-year holding period was his way of enforcing intelligent investing behavior.

Fifty percent was not an arbitrary number, but the logical result of Graham’s value discipline when buying stocks. For example, if a company’s tangible book value was $9/share, Graham would consider buying shares at $6, or 2/3 of the book value. Not only would $6/share provide a sufficient margin of safety between price and value, but a 50% increase in price from $6 would bring the stock price to the $9 tangible book value. Selling the shares at $9 would not only be logical (obtaining fair value for what was purchased at a discount, i.e. tangible assets), but enforces a value discipline, as the margin of safety that once existed in the stock price has disappeared.

(2) Regarding your second question, I’m not sure Graham answered that question specifically, but his many writings, lectures, interviews, etc. provide helpful clues. First, a value investing strategy should be pursued at all times except when the broad market valuation is “dangerously high” (Graham’s term). During those periods, intelligent investors should be content with a cash position until the overvaluation is corrected.

Second, Graham would have likely approved an investor committing funds over an extended period of time, perhaps several quarters. (Joel Greenblatt, a noted value investor, endorses this strategy in his “magic formula” concept.) This way, various groups of stocks “mature” at different points in the market cycle. Of course, the 50% selling discipline forces an investor out of stocks in a rising market, and the margin of safety concept doesn’t allow reinvestment of funds until values are available.

(Note: in a taxable account, selling into a bear market can create “assets” for the investor in the form of tax-losses that can be used to offset capital gains taxes for both current-year and future gains, and new investment opportunities should be readily available.)

In the end, regardless of bull or bear market, taxable or qualified account, the 2-year selling discipline should still be enforced, because if a catalyst for a higher stock price hasn’t materialized within two years, it is reasonable to assume better opportunities exist for the intelligent investor.

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]]> By: Christian Troche http://www.grahaminvestor.com/2010/01/03/grahams-50-year-study-foolproof/comment-page-1/#comment-84 Christian Troche Fri, 09 Jul 2010 05:38:03 +0000 http://www.grahaminvestor.com/?p=571#comment-84 Regarding Jeremy's question (above), the answer is yes. Graham sought an earnings yield (the inverse of the P/E) at least twice the current AAA-corporate long bond yield. (See http://research.stlouisfed.org/fred2/series/AAA for the current yield.) The current yield is 4.96%, so an intelligent investor should currently seek an earnings yield of at least 9.92% (that translates to a P/E multiple of 10). Recall, however, Graham ALWAYS sought a margin of safety. Problems can arise when screening for low P/E stocks, as current earnings (i.e. trailing four quarters) can be distorted by recent events (e.g. spiking commodity prices, introduction of a "hot" new product, one-time asset sales, etc.). Graham suggested investors use a moving average of earnings (i.e. 5-, 7-, or even 10-years) under the current price to smooth out the cyclical earnings volatility experienced by many businesses. James Montier (formerly of SocGen, now at GMO) has written about this metric, referring to it as the "Graham and Dodd P/E." It is also the same technique Robert Shiller of Yale uses to value the S&P 500, after adjusting for inflation. Regarding Jeremy’s question (above), the answer is yes. Graham sought an earnings yield (the inverse of the P/E) at least twice the current AAA-corporate long bond yield. (See http://research.stlouisfed.org/fred2/series/AAA for the current yield.) The current yield is 4.96%, so an intelligent investor should currently seek an earnings yield of at least 9.92% (that translates to a P/E multiple of 10).

Recall, however, Graham ALWAYS sought a margin of safety. Problems can arise when screening for low P/E stocks, as current earnings (i.e. trailing four quarters) can be distorted by recent events (e.g. spiking commodity prices, introduction of a “hot” new product, one-time asset sales, etc.).

Graham suggested investors use a moving average of earnings (i.e. 5-, 7-, or even 10-years) under the current price to smooth out the cyclical earnings volatility experienced by many businesses. James Montier (formerly of SocGen, now at GMO) has written about this metric, referring to it as the “Graham and Dodd P/E.” It is also the same technique Robert Shiller of Yale uses to value the S&P 500, after adjusting for inflation.

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]]> By: Preston http://www.grahaminvestor.com/2010/01/03/grahams-50-year-study-foolproof/comment-page-1/#comment-78 Preston Mon, 14 Jun 2010 19:21:56 +0000 http://www.grahaminvestor.com/?p=571#comment-78 Two questions: 1) In Graham's article his target profit was 50% above cost: so even if the stock jumps 15% in 2 months, that would be an annualized rate of return of 90%, so what he's saying is I would still hold on to it until it reached 50% of it's cost (ex. $6 dollar stock sell at $9) correct? 2) I guess I'm still a little worried about the 2 year strategy ending on a bear market--in that case would you continue on and sell your stocks at the target holding perior and then buy your next 2 yr stocks and eat the loss or would you hold onto them and wait for them to go back up since it ended in a bear market? Any answers would be great. thanks. Two questions:
1) In Graham’s article his target profit was 50% above cost: so even if the stock jumps 15% in 2 months, that would be an annualized rate of return of 90%, so what he’s saying is I would still hold on to it until it reached 50% of it’s cost (ex. $6 dollar stock sell at $9) correct?
2) I guess I’m still a little worried about the 2 year strategy ending on a bear market–in that case would you continue on and sell your stocks at the target holding perior and then buy your next 2 yr stocks and eat the loss or would you hold onto them and wait for them to go back up since it ended in a bear market?

Any answers would be great. thanks.

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]]> By: Jeremy http://www.grahaminvestor.com/2010/01/03/grahams-50-year-study-foolproof/comment-page-1/#comment-76 Jeremy Mon, 31 May 2010 17:16:02 +0000 http://www.grahaminvestor.com/?p=571#comment-76 Would number 1 mean 'at least' twice the aaa yield? Would number 1 mean ‘at least’ twice the aaa yield?

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]]> By: Manish http://www.grahaminvestor.com/2010/01/03/grahams-50-year-study-foolproof/comment-page-1/#comment-73 Manish Mon, 24 May 2010 19:11:44 +0000 http://www.grahaminvestor.com/?p=571#comment-73 Although I think it is kind of unnecessary (as it is late to reply), but still I would like to add my points in response to Chris's suggestions/questions about "allowed himself room for at least a 50% return,”. I think that 50% appreciation is not for the price and price does not represent the true value. That 50% appreciation of the price is regarding the tangible book value of the stock, as Graham believed that after some point the stock will follow/match its book value (efficient markets concept). With price at 67% of the book value, the appreciation potential is 50% from there to reach the book value assuming there is no degradation in the book value of the stock. Manish Although I think it is kind of unnecessary (as it is late to reply), but still I would like to add my points in response to Chris’s suggestions/questions about “allowed himself room for at least a 50% return,”.

I think that 50% appreciation is not for the price and price does not represent the true value. That 50% appreciation of the price is regarding the tangible book value of the stock, as Graham believed that after some point the stock will follow/match its book value (efficient markets concept). With price at 67% of the book value, the appreciation potential is 50% from there to reach the book value assuming there is no degradation in the book value of the stock.

Manish

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