Our Proof that Ben Graham's Formulae Still Beat the Market. See for Yourself!

Jul 30, 2016

In this issue:
» Is the IMD's 2016 forecast still on track?
» Another correction in oil prices cannot be ruled out
» ...and more!
00:00
Radhika Pandit, Managing Editor of ValuePro

In 1949, Benjamin Graham published his most acclaimed book, The Intelligent Investor. Indeed, legendary investor Warren Buffett called it the best book on investing ever written.

Why has this book become so famous? With a simple and lucid style The Intelligent Investor guides the layman in the basics of investment philosophy. The book aims to enable readers to earn robust and sustainable returns on investments. And that too without resorting to complex mathematical calculations. It's a must-read book for every die-hard value investor.

Indeed, one of the hallmarks of Graham's book is his focus on the concept of margin of safety. He wrote that when a company is available on the market at a price that is at a discount to its intrinsic value, then there exists a 'margin of safety'. That is when investors should consider putting money in the stock of such a company.

Graham was not a fan of predicting the future. Indeed, since the future is highly uncertain, he believed that it was almost impossible to predict trends and how the environment and its consequent impact on companies will pan out. That is why he preferred to rely more on the past record and zero in on companies that were trading at a deep discount to their intrinsic value.

These principles were set on paper 67 years back. The world has changed so much since then. How relevant are Graham's principles today?

We live in a world where technological disruption is the order of the day and data and information are available at the click of a button. The political and economic landscape of the global economy has also changed substantially. We are now a part of a much more integrated global economy.

In such an environment, are Graham's principles of deep value investing outdated? Not one bit. In fact, they are all the more relevant. You see, Graham's view that the future is unpredictable is valid even today.

Given how technology and doing business are evolving, anyone trying to predict the future is bound to make some errors. Hence, irrespective of the global macro environment, it is all the more important, particularly today, to determine the intrinsic value of a stock and only put money in companies trading at a big discount to this value.

Equitymaster Co-Head of Research Rahul Shah certainly believes in Graham's principles. That is why he and his team launched the Microcap Millionaires service in February 2014 based on the simple rules that Graham laid out and some qualitative criteria of their own.

And here's the icing on the cake...The service has hit the 100% returns mark for the first time since it was launched. This is way, way ahead of the Sensex's 37% during the same period. In fact, Microcap Millionaires even outperformed the 86% returns of the BSE Small-Cap index during the same period.

Here's Rahul:

  • You can't go too wrong with a strategy defined by Benjamin Graham, particularly one that has outperformed the benchmark index since it was back-tested by Graham himself in the US markets more than 50 years ago.

Indeed.

Do you believe that Benjamin Graham's principles are relevant even in today's fast-changing environment? Share your views in the Club or share your comments here.

02:31 Chart of the day

Much has been said about the prediction capabilities of the Indian Meteorological department (IMD) in India. As the chart shows, the Met's predictions of monsoons have delivered few hits and misses in the past few years. This time around though, the Met department is sticking to its forecast for rains all over the country to be above normal.

Earlier this year, the IMD had forecasted that monsoon rainfall during the period July to September 2016, will be 106% of the long period average (LPA), averaged across the country. A normal monsoon is critical since most of our farmers are still dependent on monsoon rains for their subsistence.

While the rains all over the country till now have been normal, according to the ministry of agriculture, kharif sowing so far this year has been higher than the previous year by 3%. This is good news for the country as it battles to come out of two successive sub-par rains coupled with sharp spikes in the prices of essential food items. Drought like situation that had engulfed most states of the country have also got some relief since decent rains in the country's catchment areas have led the water levels of the country's major reservoirs to rise.

There is a strong possibility that the actual rains across the country this year would possibly match or even beat the Met's forecast. We will know for sure over the next two months. Having said that, this is certainly not something to speculate on while buying stocks.

Is the IMD's 2016 Forecast on Track?


03:31

Even as most other commodities are far from soliciting investor interest, two of them gripped the bullish sentiments of traders and analysts alike in past few months. They are gold and oil. The case for the former may remain strong given the uncertainty in global economy. Unless the pace of money printing ebbs and interest rates move upwards, gold prices may remain stable. But oil is very likely to remain slippery.

Starting May 2016, oil prices moved swiftly upwards as industry giants and analysts speculated a supply glut in the commodity. The excess crude production is certainly abating. But gasoline inventories around the world are brimming. A revival in US drilling threatens to swell supplies further. Plus geo-social hindrances to oil production are also getting resolved. Canadian oil-sands that were halted by wildfires in May have restored production. Nigeria has partially recovered after militant attacks curbed production to a three-decade low. Therefore the supply of oil and gasoline is only going to get better in the near term. And the chances of yet another correction in crude prices cannot be ruled out. So industries depending on crude inputs may retain healthy margins longer than expected.

04:14

Global markets closed on a mixed note in the week gone by. Stock indices in Germany (up 1.9%) and France (up 1.3%) were the leading gainers in the pack. While Singapore (down 2.6%) and Chinese (down 1.1%) stock indices were among the top losers.

During the week, the US Fed left the interest rates unchanged. At the same the central bank indicated higher possibility of upward revision in the rate later this year.

On the other hand, the Bank of Japan (BOJ) disappointed investors by offering a much smaller-than-expected round of additional stimulus. The Japanese Prime Minister had earlier promised additional stimulus package of nearly 28 trillion yen to boost the economy. Meanwhile, BOJ made no changes to interest rates. Interest rates in Japan continued to remain in the negative territory.

One must note that the Bank of Japan is currently printing 80 trillion yen (US$750 billion) a year to stimulate inflation after decades of deflation and stagnant growth. Despite all these measures, the inflationary expectations appear to be weakening. Vivek Kaul recently explained in his Diary how Japan became a giant laboratory experiment for novel monetary policies.

Back home the BSE Sensex continued to hover around the 28,000 mark and ended the week higher by 0.9%. As reported in Business Standard, foreign portfolio investors remained buyers in Indian equities with net purchases of Rs 17 bn on Thursday. For the upcoming week, the most crucial event to look out for will be goods and service tax (GST) bill. The government has listed the GST bill for consideration in the Rajya Sabha's agenda for next week.

Performance During the Week Ended 29th July, 2016

04:55 Weekend investment mantra

"The best investment against inflation is to improve your own earning power, your own talent. Very few people maximise their talent. If you increase your talent, they can't tax it or they can't take it away from you." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Radhika Pandit (Research Analyst).

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1 Responses to "Our Proof that Ben Graham's Formulae Still Beat the Market. See for Yourself!"

RAJKUMAR S D

Jul 31, 2016

Madam,

As per your article on Benjamin Investing Principles, I can gather that whenever stock is trading at deep discount to its book value i.e adequate margin of safety is available, one should invest it despite of its uncertain and bleak future. I remember that most of large PSU stocks like SBI PNB and BOB were available at deep discount to its book value around 3 months back, but there was lot of noise of their NPAs and recapitalisation, hence I have not invested in same. Even story for most of beaten metal stocks like Vedanta, Cairns and Hindalco the story is same. Had I followed Benjamin Principles, I would have earned decent return of 20 to 25% byh investing in all such stocks, but media and tv noise had disturbed me, so I could not follow
advice of Mr Grahm Benjamin. Please advise me that in future shall I follow his advice for investing in beaten down stocks. Your advice will be highly appreciated.
Thanks with regards

RAJKUMAR

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