How Ben Graham Would Have Invested During The Worst Of The Recession

Back in November 30 2008 when the market was close to its bottom, I noted that there were several large stocks selling for less than the amount of Cash on their balance sheets, and this was the signature investing tactic of Warren Buffet, buying stocks for 1/3 to 1/2 of their ‘intrinsic value’. Here’s their subsequent return for 12/1/08 through 6/20/2011 (a couple were taken over):


The market’s up only 64% over that period. Quite the call.

I picked this observation up from a WSJ article at the time, which had the following observation:

An analyst at T. Rowe Price’s Small-Cap Value fund recently said “he thought he could find at least 10 tech stocks selling at less than the cash on their balance sheets, an old Ben Graham measure of value

Now, since then, the T. Rowe Price’s Small-Cap Value fund (PRSVX) hasn’t outperformed its benchmark, and is up only 70%, which makes me feel better because I didn’t invest in this portfolio either. Why? Well, it’s not my bag. It would have been a one-off thing, and I was trying a different systematic approach. In retrospect, perhaps these are exactly the times to chuck standard methods and applied something as tried and true as cash/market cap, as this is a classic value play, not some newfangled bottom-fishing filter. However, the next time this happens the apocalypse will seem nigh and I’m sure I won’t do it then either.

There does appear to be a risk premium during business cycles, especially evidenced by the large credit spreads well above any conceivable long term default projection (eg, B credits for 1000 basis points). Yet these things have only happened a handful of times. So, one could say, buy everything when things look bad, noting how things rebounded from 1974, 1990, 2002, and 2008. Yet, it’s a small sample, so the sample estimate of the returns to this strategy may be well above the population mean (this is the so-called peso problem, which has a large literature, but it’s mainly ignored as applied to equities).

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