The Intelligent Investor_ The Definitive Book on Value Investing - Benjamin Graham [158]
Other results gleaned from our portfolio studies may be summarized as follows:
Only three of the groups studied showed up better than the S & P composite (and hence better than the DJIA), viz: (1) Industrials with the highest quality ranking (A+). These advanced 9½% in the period against a decline of 2.4% for the S & P industrials, and 5.6% for the DJIA. (However, the ten public-utility issues rated A+ declined 18% against a decline of 14% for the 55-stock S & P public-utility index.) It is worth remarking that the S & P rankings showed up very well in this single test. In every case a portfolio based on a higher ranking did better than a lower-ranking portfolio. (2) Companies with more than 50 million shares outstanding showed no change on the whole, as against a small decline for the indexes. (3) Strangely enough, stocks selling at a high price per share (over 100) showed a slight (1%) composite advance.
Among our various tests we made one based on book value, a figure not given in the Stock Guide. Here we found—contrary to our investment philosophy—that companies that combined major size with a large good-will component in their market price did very well as a whole in the 2½-year holding period. (By “good-will component” we mean the part of the price that exceeds the book value.)* Our list of “good-will giants” was made up of 30 issues, each of which had a good-will component of over a billion dollars, representing more than half of its market price. The total market value of these good-will items at the end of 1968 was more than $120 billions! Despite these optimistic market valuations the group as a whole showed a price advance per share of 15% between December 1968 and August 1971, and acquitted itself best among the 20-odd lists studied.
A fact like this must not be ignored in a work on investment policies. It is clear that, at the least, a considerable momentum is attached to those companies that combine the virtues of great size, an excellent past record of earnings, the public’s expectation of continued earnings growth in the future, and strong market action over many past years. Even if the price may appear excessive by our quantitative standards the underlying market momentum may well carry such issues along more or less indefinitely. (Naturally this assumption does not apply to every individual issue in the category. For example, the indisputable good-will leader, IBM, moved down from 315 to 304 in the 30-month period.) It is difficult to judge to what extent the superior market action shown is due to “true” or objective investment merits and to what extent to long-established popularity. No doubt both factors are important here. Clearly, both the long-term and the recent market action of the good-will giants would recommend them for a diversified portfolio of common stocks. Our own preference, however, remains for other types that show a combination of favorable investment factors, including asset values of at least two-thirds the market price.
The tests using other criteria indicate in general that random lists based on a single favorable factor did better than random lists chosen for the opposite factor—e.g., low-multiplier issues had a smaller decline in this period than high-multiplier issues, and long-term dividend payers lost less than those that were not paying dividends at the end of 1968. To that extent the results support our recommendation that the issues selected meet a combination of quantitative