The Wealth Accumulated investment strategy relies heavily on the simplest most basic stock market strategy that there has ever been.
One that is actually profitable, reduces risk and does away with a casino mindset.
The strategy was first brought to the public’s attention in 1949 by the father of value investing Benjamin Graham in his famous book The Intelligent Investor and updated in the revised edition in 1973.
Graham coined the term ‘enterprising investor’ to describe the amount of work required to pursue this value investing approach even though it has an uncomplicated method.
Quite simply the investment strategy relies upon a set of 3 criteria before a stock is considered for purchase but don not let the simplicity of the strategy delude you as Graham himself advises:
The enterprising investor, by definition, will devote a fair amount of his attention and efforts toward obtaining a better than run-of-the-mill investment result.Benjamin Graham, The Intelligent Investor
Using this strategy has yielded excellent results within my Self Invested Personal Pension (SIPP) so in keeping with Graham’s emphasis on simplicity here is the simplest value investing strategy.
The strategy: the relatively unpopular large company
According to Graham an enterprising investor pursuing the relatively unpopular large company investment strategy must:
- select only from large cap stocks
- the companies must be going through a period of unpopularity
- the unpopularity should be of a temporary nature
And that is all.
You would be forgiven for thinking that a fund manager would not be dispensing their fiduciary duty with such a simplistic approach to the stock market and their clients capital.
That would be the case were it not for the success of the approach.
The regularity with which household names listed on a stock exchange get themselves into trouble only to get themselves out of trouble to the benefit of their shareholders and watchful value investors is high.
A real world example of relatively unpopular large company
Take the fuel emission scandal at Volkswagon.
Dubbed ‘dieselgate’, VW were found guilty of fitting out cars with hardware and software that detected when it was being tested for CO2 emissions.
The vehicles would subsequently run on a lower performance but driven in normal conditions on the road, the cars would return to a higher performance emitting 40 times more pollutants than US law allowed at the time.
We’ve totally screwed upMicheal Horn, US Chief Executive, Volkswagon
The net result to the share price chart was a near vertical price collapse.
The damage to Volkswagen’s reputation and balance sheet was huge but as Graham notes about the resiliance of large cap stocks:
they have the resources in capital and brain power to carry them through adversity and back to a satisfactory earnings base. Second, the market is likely to respond with reasonable speed to any improvement shown.Benjamin Graham, The intelligent Investor
And so it was with Volkswagon.
More relatively unpopular large companies
Often though, large cap stocks can devalue on a group basis especially if disaster hits an entire sector.
For example the financial crisis lead to the devaluation of the entire banking sector from which they have not yet fully recovered.
More recently the extremely low price of oil as a result of reduced demand from the worldwide coronavirus pandemic hit the oil stocks badly with plenty of cheap stocks laying around in that sector at the start of the pandemic.
The global crash in stock market prices from the pandemic allowed value investors to pick up well run, conservatively financed big name stocks at a discount to their intrinsic value.
The challenge is in actually buying stock at times of great distress when everyone else is selling – this is the most difficult part the relatively unpopular large company strategy.
Staying the course
If we assume that it is the habit of the market to overvalue common stocks which have been showing excellent growth or are glamorous for some other reason, it is logical to expect that it will undervalue—relatively, at least—companies that are out of favor because of unsatisfactory developments of a temporary nature.Benjamin Graham, The Intelligent Investor
There’s no doubt that entering new positions when the market is selling stock at a discount due to a catastrophic event is not easy.
The mainstream media is fond of sensationalising the problems that large listed businesses face during times of crisis because it allows them to sell more subscriptions.
But a cool-headed approach to value opportunities in times of distress can be a profitable way to get hold of some of the most resilient businesses in the world at a very good price.