By |Published On: April 17th, 2011|Categories: Research Insights, Value Investing Research|

Charles Mizrahi, over at http://www.hiddenvaluesalert.com/, suggested we backtest a simple Ben Graham strategy mentioned in a 1976 article he dug up in Medical Economics. Charles has been implementing Ben Graham related strategies for many years and the live performance of his recommendations are monitored by the Hulbert Financial Digest (HFD), which helps investors sift between the “good”, “bad”, and “ugly” of the newsletter world.(1)

Here is a link to the modern day version of the Medical Economics magazine where Ben Graham mentions how to implement his simple strategy.

So what’s Graham’s secret to achieve 15%+ returns over long horizons?

Well, below is an excerpt from the original 1976 article with all important points highlighted:

Click to get the pdf file. 

We decided to keep it simple and backtest the low P/E (<10), shareholder equity > .5 strategy from 1965–2010. We also backtested the results in accordance with the “trading rules” alluded to by Graham: stocks entering the portfolio are held for 2 years, or if they appreciate >50%. For robustness, we tested a variety of P/E and shareholder equity combinations–all results are very similar.

Here are some highlights from the analysis:

Click to get the pdf file. 

We plan to write up an academic article this summer that goes into the details of our final results and analysis. We wanted to share the “hot off the press” results with readers of the Empirical Finance Blog™.

Enjoy!

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About the Author: Wesley Gray, PhD

Wesley Gray, PhD
After serving as a Captain in the United States Marine Corps, Dr. Gray earned an MBA and a PhD in finance from the University of Chicago where he studied under Nobel Prize Winner Eugene Fama. Next, Wes took an academic job in his wife’s hometown of Philadelphia and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management firm dedicated to an impact mission of empowering investors through education. He is a contributor to multiple industry publications and regularly speaks to professional investor groups across the country. Wes has published multiple academic papers and four books, including Embedded (Naval Institute Press, 2009), Quantitative Value (Wiley, 2012), DIY Financial Advisor (Wiley, 2015), and Quantitative Momentum (Wiley, 2016). Dr. Gray currently resides in Palmas Del Mar Puerto Rico with his wife and three children. He recently finished the Leadville 100 ultramarathon race and promises to make better life decisions in the future.

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Important Disclosures

For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Third party information may become outdated or otherwise superseded without notice.  Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency has approved, determined the accuracy, or confirmed the adequacy of this article.

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. Our full disclosures are available here. Definitions of common statistics used in our analysis are available here (towards the bottom).

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