Quote:One of Graham's investment fund strategies, as explained in his best-selling book The Intelligent Investor, was to buy stocks that are valued at a discount to their net current asset value. Graham called such stocks "bargain issues." In other words, Graham would look for stocks whose current assets less total liabilities was worth more than what the stock was trading at. This meant that any plant, property and equipment, goodwill and long-term investments were free.
Graham believed this approach lowers risk because if a company defaults, shareholders still stand to recoup their losses and possibly profit as the company is liquidated.
Since many companies that trade below their net current asset value have weak prospects, Graham would often have a portfolio of 100 such stocks to limit the impact of one company defaulting. Graham said that 90% of the bargain issues returned a satisfactory profit over 35 years.
Graham's investment fund, Graham-Newman Corp., returned 14.7% annually from 1936 to his retirement in 1956, versus the 12.2% return of the stock market, according to The Intelligent Investor (revised 2003 version). After 20 years, a $100 initial investment would have been worth $1,533.35 in Graham's fund, compared to $999.67 in the overall stock market.Unquote