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Graham’s strategy still holds good in these troubled times

There has often been a lot of debate on whether Benjamin Graham’s strategy, developed over 50 years ago, still holds good. A couple of years ago, some Indian companies that made the cut were identified.

In his book “The Intelligent Investor“, Graham found that one strategy that worked well was to buy companies that are sold at below its net current asset value, which he termed bargains. He wrote:

“The idea here was to acquire as many issues as possible at a cost for each of less than their book value in terms of net-current-assets alone – i.e., giving no value to the plant account and other assets. Our purchases were made typically at two-thirds or less of such stripped-down asset value. In most years we carried a wide diversification here – at least 100 different issues.”

In an experiment which was carried out from a couple of months ago, users at GuruFocus created portfolios based on Graham’s Net Current Asset Value Screener to find bargain buys, which would conform to these norms;

  • The stock prices are less than the net current asset value of the companies
  • During the past 12 months, the companies generated postive operating cashflow
  • The company has no meaningful debt compared to its cash position.

In order to test this screener, GuruFocus created a portfolio on November 24, 2008 with the top Ben Graham bargains, and guess what?

The portfolio returned an amazing return of 40% in just 7 weeks (annualised returns of 1098% over a year). Seven weeks is of course not an apt period to test this hypothesis, but the results and the stocks selected were pretty interesting studies in themselves. Head over to have a closer look.

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