This Strategy Crushed the Sensex by 6x in 2022. Here's What it's Recommending for 2023

Although the Sensex is up 7% so far this year, it can hardly be called a good outing for the benchmark index. A good outing is when the index earns closer to its long-term average i.e. 14-15%.

Given Sensex's below par outing, I'm sure most investor portfolios are also up by a similar margin, especially those portfolios that have mostly bluechips or large companies.

Therefore, while the Sensex has touched a new all-time high, investors don't seem to be laughing all the way to the bank.

However, what if I tell you that there is a strategy that has managed to crush the benchmark index by a whopping 6x.

Yes, you read that right. There is an investment strategy that earned an impressive 45% returns so far this year, 6x more than the index.

Interesting, isn't it? Well, that's only half the interesting part. The other half is the time it would have taken you to put together this portfolio.

Assuming you had a good quality screener at your disposal, it wouldn't have taken you more than 30 minutes to put together this portfolio.

Yes, just 30 minutes of effort would have provided you a portfolio that even professional money managers would have found extremely difficult to beat.

I know what you are thinking. Is IT justified to praise a strategy that's only one year old? After all, the strategy may have gotten lucky in managing to outperform by such a huge margin.

I totally get you. However, once you learn about the strategy and its background in more detail, there's a strong chance you may change your mind.

This strategy traces its roots all the way back to 1970s when Ben Graham and James Rea came together to devise a simple method to earn market beating returns.

Ben Graham, as you all know, is the father of value investing, and one of the most respected authorities in finance.

James Rea was an independent investor who later came in touch with Ben Graham, and they hit it off so well that they launched a fund after finalising their strategy.

Unfortunately, Graham passed away a few months after the fund was launched and its difficult to find information on what happened to the fund afterwards.

However, what was not so difficult to find were the rules or the filters of their strategy.

You see, Graham and Rea had earlier devised ten rules or filters that every stock had to pass through before becoming a part of their portfolio.

However, as they studied the market in more detail, they realised that ten filters were too many. After digging deeper, it dawned upon them that all you need are three filters for creating a market beating portfolio.

These filters are:

• Earnings yield at least twice the AAA bond yield
• Dividend yield at least two-thirds of the AAA bond yield
• Debt-to-equity ratio less than one

What these filters imply is that if the triple AAA bond yield is 8% then your stock should have an earnings yield of at least 16%. This is a PE multiple of around 7x as the inverse of earnings yield is the PE multiple.

Also, besides a PE multiple of 7x, you need a dividend yield of atleast 3-4% and a debt to equity ratio of less than 1.

That's it. No other information or no other parameter needed.

If you put together a portfolio of 25-30 stocks using these three filters and keep churning your portfolio with an average holding period of 1-2 years, then you stand a strong chance of beating the market over the long term.

In fact, when they tested these parameters themselves, they were able to outperform the benchmark index by a factor of 2x over a period as long as 50 years.

Yes, their simple strategy had the power to outperform the broader market by earning twice as much returns as the index.

When I tested this strategy on the top 500 Indian companies by marketcap, it led to a whopping 45% returns this year till date.

Here are the three filters that I used.

• A trailing twelve-month PE ratio of 5x-15x
• A dividend yield of atleast 2% on the latest dividend declared
• A debt-to-equity ratio of less than 1x

I know these filters are not completely in sync with what Graham and Rea had outlined. However, they still satisfy the condition of the underlying stocks being of good quality and available at attractive valuations.

And that's very important in my view. There could be variations in techniques and systems to account for the differences in geographies and time period. However, the principles should never change.

This is the biggest misconception around legends like Ben Graham in my view. People think that Graham's techniques are outdated and hence, discard them outright.

However, it should be noted that the techniques could be outdated but his principles are alive and kicking.

In fact, they would be alive and kicking even 100 years from now as they are based on basic human nature of fear and greed.

Thus, as long as the broader principles are adhered to, the strategy should end up giving a good return over a reasonably long-term period of 3-5 years.

In our case, the returns were delivered in less than a year and of very impressive magnitude. A portfolio of 20 stocks put together based on the 3 filters I just disclosed, is up 45% so far this calendar year.

While I won't disclose the full portfolio here, the three biggest gainers in this portfolio were Mazagon Dock Shipbuilders, Bharat Dynamics, and Hindustan Aeronautics, each up 226%, 146%, and 130% respectively.

The three biggest losers on the other hand were NALCO, Finolex Industries, and Polyplex Corporation, down 21%, 16%, and 5% respectively. All the returns are between 31 December 2021 and 5 December 2022.

The portfolio has both winners and losers but the winners more than compensated for the losers. And this is what has allowed the portfolio to post stellar returns.

I'm sure you'd be keen to know the stocks this portfolio is suggesting for 2023. In other words, what is the 20-stock portfolio that is currently clearing all the three filters of the Graham and Rea strategy.

Again, I'm not disclosing the entire portfolio as I want you to do the screening yourself. However, here the five of the twenty names that the strategy is recommending for 2023.

Petronet LNG, Sun TV Network, Glenmark Life Sciences, Vardhman Textiles, and DCM Shriram Ltd.

I'm sure you can easily find the remaining fifteen with a good screener.

So, is this portfolio guaranteed to work in 2023? Well, no one can guarantee that. But if the stock market goes up significantly in 2023, this portfolio should also go up. It has good quality stocks trading at attractive valuations.

And if the stock market were to go down, then this portfolio may not fall as much as say the bad quality stocks or the extremely overvalued ones.

Therefore, in a way, this portfolio gives you the best of both worlds. And this is the best you can hope for in investing in my view.

Happy Investing.

Warm regards,


Rahul Shah
Editor and Research Analyst, Profit Hunter