Benjamin Graham, the father of value investing, once said: "If we assume that it is the habit of the market to overvalue common stocks which have been showing excellent growth or are glamorous for some other reason, it is logical to expect that it will undervalue - relatively, at least - companies that are out of favour because of unsatisfactory developments of a temporary nature. This may be set down as a fundamental law of the stock market, and it suggests an investment approach that should be both conservative and promising." In a nutshell, that is what the bargain portfolio is all about.
Each year we use the investment criteria outlined by Benjamin Graham in his book The Intelligent Investor to pick our portfolio of bargain shares. (For those new to the rules, a brief summary of the selection procedure appears in a separate article here - and you can buy the book in the IC bookstore.) The system, contrarian as it may at first seem, has stood the test of time, with our portfolios outperforming the FTSE All-Share index in all bar one of the past 10 years and returning an average annual return of 23 per cent in the past decade, including a record breaking 146 per cent performance in 2003. To put this in perspective, the All-Share has lost an average of 0.5 per cent of its value each year in this 10-year period.
10-YEAR BARGAIN PORTFOLIO RECORD
| Year | Bargain Portfolio 1 yr performance (%) | FTSE All-Share index 1 yr performance (%) |
|---|---|---|
| 1999 | 59.0 | 17.3 |
| 2000 | 28.1 | -4.5 |
| 2001 | 2.5 | -17.2 |
| 2002 | -29.0 | -31.0 |
| 2003 | 146.0 | 29.0 |
| 2004 | 17.1 | 11.0 |
| 2005 | 50.0 | 16.1 |
| 2006 | 16.9 | 11.3 |
| 2007 | -0.9 | -6.0 |
| 2008 | -60.1 | -30.9 |
| Average annual return | 23.0 | -0.5 |
| Source: Investors Chronicle | ||
So, once more we have run the rule over 2,800 listed businesses to come up a portfolio of companies where the asset backing should be strong enough to overcome any short-term trading difficulties and, in the end, reward our loyal following of long-term investors as we have done in the past decade.
