The Intelligent Investor_ The Definitive Book on Value Investing - Benjamin Graham [152]
Check out the neighborhood. Websites like http://quicktake. morningstar.com, http://finance.yahoo.com and www.quicken.com can readily tell you what percentage of a company’s shares are owned by institutions. Anything over 60% suggests that a stock is scarcely undiscovered and probably “overowned.” (When big institutions sell, they tend to move in lockstep, with disastrous results for the stock. Imagine all the Radio City Rockettes toppling off the front edge of the stage at once and you get the idea.) Those websites will also tell you who the largest owners of the stock are. If they are money-management firms that invest in a style similar to your own, that’s a good sign.
Chapter 15
Stock Selection for the Enterprising Investor
In the previous chapter we have dealt with common-stock selection in terms of broad groups of eligible securities, from which the defensive investor is free to make up any list that he or his adviser prefers, provided adequate diversification is achieved. Our emphasis in selection has been chiefly on exclusions—advising on the one hand against all issues of recognizably poor quality, and on the other against the highest-quality issues if their price is so high as to involve a considerable speculative risk. In this chapter, addressed to the enterprising investor, we must consider the possibilities and the means of making individual selections which are likely to prove more profitable than an across-the-board average.
What are the prospects of doing this successfully? We would be less than frank, as the euphemism goes, if we did not at the outset express some grave reservations on this score. At first blush the case for successful selection appears self-evident. To get average results—e.g., equivalent to the performance of the DJIA—should require no special ability of any kind. All that is needed is a portfolio identical with, or similar to, those thirty prominent issues. Surely, then, by the exercise of even a moderate degree of skill—derived from study, experience, and native ability—it should be possible to obtain substantially better results than the DJIA.
Yet there is considerable and impressive evidence to the effect that this is very hard to do, even though the qualifications of those trying it are of the highest. The evidence lies in the record of the numerous investment companies, or “funds,” which have been in operation for many years. Most of these funds are large enough to command the services of the best financial or security analysts in the field, together with all the other constituents of an adequate research department. Their expenses of operation, when spread over their ample capital, average about one-half of 1% a year thereon, or less. These costs are not negligible in themselves; but when they are compared with the approximately 15% annual overall return on common stocks generally in the decade 1951–1960, and even the 6% return in 1961–1970, they do not bulk large. A small amount of superior selective ability should easily have overcome that expense handicap and brought in a superior net result for the fund shareholders.
Taken as a whole, however, the all-common-stock funds failed over a long span of years to earn quite as good a return as was shown on Standard & Poor’s 500-stock averages or the market as a whole. This conclusion has been substantiated by several comprehensive studies. To quote the latest one before us, covering the period 1960–1968:*
It appears from these results that random portfolios of New York Stock Exchange stocks with equal investment in each stock performed on the average better over the period than did mutual funds in the same risk class. The differences were fairly substantial for the low-and medium-risk portfolios (3.7% and 2.5% respectively per annum), but quite small for the high-risk portfolios(0.2% per annum).1
As we pointed out in Chapter 9, these comparative figures in no way invalidate the usefulness of the investment funds as a financial institution. For they do make available to all members of the