My New Portfolio – with the Graham’s Value-approach.

As I mentioned few months ago, I’m planning to swift my stock-selecting method to Graham’s way. Thanks to Hong Leong Broking which maintains its minimum brokerage fee at RM12, allowing me to buy stock at smaller lots, with low transaction fee. Last month, I’ve opened a trading account with HLeBroking, and I’ve started this portfolio in the early of March.

The purpose that I set up this portfolio is to carry out an “experiment”, to test whether I could generate a good return with this approach. In his 48-years of investment life, Walter Schloss has showed that Graham’s method can give an compound return rate of 20%p.a., almost as same as Buffett’s record.

In this separated portfolio, I will select a number of undervalued stocks, simply based on their assets. I’m not going to study deeply into their business model, nor am I going to make a detail analysis about their future prospect. I’ll just concentrate on figures, not people. Everything is based on the historical data, not future forecast. More attention will be paid on analyzing their assets instead of earnings.

Before I started this portfolio, I had listed down some rules for the screening purpose:

First, I’m not going to invest into a property or plantation company. This is simply because I don’t have confidence in estimating the value of land-properties. However, I’ll still invest in such a company if it consists of high-liquidity-assets, and its share price below the value of these assets.

All the companies selected into this portfolio must have a price lower than its net-working-capital. Here, I’m using Graham’s definition, where “net-working-capital” equals to current assets minus total liabilities. As we know, Graham suggested to buy into stocks which is priced below two third of its net-working-capital, leaving a 33% safety margin. However, I think this rule is too strict, where I hardly find a counter on KLSE that comply with it. So, I use a lower standard-- price below net-working-capital as my first screening filter.

Since my requirement on net-working-capital is less than what Graham suggested, I have to set a few more screening criteria to lower my risk of investment. Some of them are:

• no debt (or very little debt).
• the PE ratio must be lower than 10.
• has a consistent record of dividend payment.
• not suffering loss during the past few years.
• the current price level should be at least 25% lower than its peak in the last 24 months.

I hope that I could find at least 10 counters from KLSE which can meet all the above stated criteria. I'll invest about RM1,000 in each of them, to form a diversified portfolio of value-stocks. Of course, I understand that ten counters is not actually diversified enough, but currently I only have about RM10 thousand budget for this.

Due to the low invest amount in each counter, the transaction fee (in and out) will be a bit higher, about 2% ~ 3% of invested amount. But if this portfolio can generate an average return of 20% p.a., I don’t think that transaction fee is a big matter.

To find a stock that meets all the above criteria is not an easy job. Currently, I have only four candidates in my hand. I’d already invested into two of them, in the beginning of this March (I’ll discuss them in my next post). I'll continue the searching until I've found ten of them.

TaTa...

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