Ben Graham: A low-risk, value approach

John Reese is an expert in analyzing the investment criteria of “legendary” advisors looks at Benjamin Graham. 

In his exceptional Validea, he notes, “Benjamin Graham – considered the greatest investment guru by Warren Buffett -- built his reputation by using an extremely conservative, low-risk approach to investing.”

“To Graham, preserving one's original capital was every bit as important as netting big gains.

"Having lived through the 1929 market crash, it's no surprise that the strategy Graham laid out in his classic book The Intelligent Investor was a conservative, loss-averse approach.

“To Graham, an investment wasn't something that could be turned into quick, easy profits; anything that offers such ‘easy’ rewards also comes with substantial risk, and Graham abhorred risk.

“In terms of specifics, Graham's approach limited risk in a number of ways, and my Graham-based model lays out several of those methods.

“For example, one key criterion is that a firm's current ratio -- that is, the ratio of its current assets to its current liabilities -- is at least two, showing that the firm is in good financial shape.

“The approach also targets financially sound firms by requiring that long-term debt not exceed long-term assets.

“Two other criteria the Graham method uses to find low-risk plays: the price/earnings ratio and the price/book ratio.

“By using conservative, fundamental-focused measures, Graham earned himself the moniker ‘The Father of Value Investing’.

“And as the father of that school of thought, he inspired a number of famous ‘sons’ -- Mario Gabelli, John Neff, John Templeton, and, most famously, Buffett, are all Graham disciples who went on to their own stock market greatness.

“Perhaps the most intriguing part of Graham's strategy is that, while it was published almost 60 years ago, it still works today.

“Since I started tracking it more than five years ago, a 10-stock portfolio picked using my Graham model has gained more than 160%. That gain is more than ten times the S&P 500's during that time.

“Here are the the current 10 holdings in our Graham portfolio:

1. JAKKS Pacific (NASDAQ: JAKK)
2. Men's Wearhouse (NYSE: MW)
3. Ashland Inc. (NYSE: ASH)
4. Movado Group (NYSE: MOV)
5. Mueller Industries (NYSE: MLI)
6. Scholastic Corporation (NASDAQ: SCHL)
7. Ceradyne, Inc. (NASDAQ: CRDN)
8. Columbia Sportswear (NASDAQ: COLM)
9. Reliance Steel & Aluminum (NYSE: RS)
10. Carlisle Companies (NYSE: CSL)

“As you can see, the portfolio has a pretty diverse mix, with holdings that range from basic materials firms to aerospace & defense companies to retailers.

“The 2008 year has, so far, been one of the Graham strategy's best -- and that's saying something. The portfolio is up more than 23% this year, while the S&P is down 17.8%.

"The model's continued strength, both over the long term and through this difficult 2008, is a testament to the enduring greatness of Graham.”