Benjamin Graham Method Back in Fashion as ‘Value’ Stocks Turn a Corner

December 10 22:10 2018

In the aftermath of the global financial crisis, the ‘value’ stocks that were at the centre of the “Graham method” were relegated to second best with many investors. They prefered to invest in growth stocks, rather than attempt to measure the intrinsic value of an investment against its estimated future performance. For many, there was too much risk and ‘guess work’ involved in searching for value stocks.

This situation could be about to change, with analysts at Morgan Stanley suggesting that value stocks could make a significant comeback in 2019.

Why ‘value’ stocks could gain popularity

The essence of a value stock is that it’s trading significantly below it’s intrinsic value. Traders buy these stocks in the belief that the company will make favourable returns over the long term. The problem is that it can be difficult to accurately predict the performance of a company over several years into the future. One of the most popular methods that traders utilise and adapt is the “Graham Method” named after its creator Benjamin Graham.

Traders can see what this method means for them today https://www.modestmoney.com/underpriced-stocks-graham-formula/36965.

This is a method which may come into use more often as the growth stocks which have been so popular in the wake of the financial crisis experience high levels of turbulence. The value share solution that has been languishing could be about to come back to life with some force.

Warren Buffet and the value share solution

It’s not just the analysts at Morgan Stanley that have faith in investment in value stocks. Warren Buffet has long been an advocate of the process, and talked of his beliefs as part of his famous “The Superinvestors of Graham and Doddsville” speech. Investors can see this speech revisited for today https://www.modestmoney.com/revisiting-superinvestors-graham-doddsville/37796. Buffet has recently restated his position in conversation with CNBC when discussing the basing of share repurchases on a stock price below intrinsic value. This is something that Buffet’s Berkshire Hathaway has not previously done, despite Buffet historically being an advocate of establishing intrinsic value, and being aware of the value option.

Diffculties that could impede the popularity of value stocks

If the predictions of Morgan Stanley come to pass, investors could be turning to advice in books such as Graham’s “The Intelligent Investor” for help https://www.modestmoney.com/review-intelligent-investor-benjamin-graham/12943. Books like this can assist with establishing methods to determine the intrinsic value of shares. It’s this intrinsic value which will help them to determine what the value price of a share should be and prevent them from buying shares that are selling at higher than this price.

This is not as simple as it sounds. The future performance of a company and its shares can be roughly calculated, but there is always going to be some intelligent guesswork involved, given that estimates are likely to cover several years. Even experienced investors have fallen foul of apparently value shares where the company has not risen to the expectations of its outperformance.

It remains to be seen whether investors will put Graham’s advice to use and begin investigating the route of purchasing value shares more often, leading to the emergence of this investing path in a major way.

Media Contact
Company Name: Modest Money
Contact Person: Jeremy Biberdorf
Email: Send Email
Phone: 604-773-9876
Country: United States
Website: https://www.modestmoney.com