Guru Spotlight: Benjamin Graham

10/20/2016 9:00 am EST


John Reese

Founder and CEO, And Validea Capital Management

To be sure, each of the gurus that I follow has come upon periods where performance suffered. Yet, each persevered and achieved highly successful careers. Benjamin Graham is a case in point, states John Reese, editor of Validea.

Graham's family lived quite well in his early years, as noted in my book, The Guru Investor. However, after his father's death, Graham's mother tried several business ventures, all of which failed. She even invested in the stock market before the famous 1907 financial panic, which wiped out her investment.

Benjamin Graham is known as the "Father of Value Investing." His investment style was grounded in the belief that preserving capital was every bit as important — if not more important — than producing big gains.

Graham didn't see an investment as something that could be turned into quick, easy profits, because anything that offers quick and easy profits also comes with substantial risk.

Investment was instead something that took a lot of research and study. His extensive research was aimed on companies' balance sheets and their fundamentals.

How much debt did they carry? How did their stock price compare to the amount of per-share earnings they were generating? Did the firm have strong sales figures?

This value-centric, company-focused approach may be used by a lot of investors today, but it was Graham who first popularized it. A key concept behind his approach was the "margin of safety" -- the difference between a stock's price and the value of its underlying business.

Graham focused on stocks with high margins of safety (meaning their stocks were selling on the cheap compared to what he believed to be the intrinsic value of their businesses), because their already low prices offered significant downside protection.

My results with Graham's strategy reflects the success his methodology has achieved. Since 2003, my Benjamin Graham Value Investor model portfolio has returned 327.8%, outperforming the market by 211.4%.

Humans are emotional and many, if not most, investors end up acting on short-term ups and downs far more than they should, selling good stocks that have had a bad day, or buying hot stocks that have had a good day, without regard to what truly matters: what those shares are really worth.

Disciplined investors do not react to the market's daily gyrations. When others bail on good stocks that are having short-term dips, those focused on the long term and a proven methodology can swoop in and pick up the bargains left behind.

It's hard to do, because in the short term your portfolio can include some very unloved, declining stocks. But, as Graham's success has shown, over the long haul value and fundamentals win out.

The following 6 stocks score a 100% rating on our Ben Graham model: G-III Apparel Group (GIII), Fossil Group (FOSL), Genesco (GCO), Dril-Quip, (DRQ), Dillard's (DDS) and Helmerich & Payne (HP).

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