Collectively, mutual fund managers have a very poor track record. But while the pros struggle mightily to beat their benchmarks, that doesn’t mean that beating the market is impossible, Validea CEO John P. Reese writes in his latest Seeking Alpha column.
“In a 1984 speech he gave at Columbia University entitled ‘The Superinvestors of Graham-and-Doddsville’, [Warren] Buffett examined the remarkable track records of a small group of investors who studied under Benjamin Graham, the man known as “The Father of Value Investing,” Reese writes. “He explained that from 1954 to 1956, there were four ‘peasant level’ employees working under Graham at the Graham-Newman Corporation (David Dodd and Jerome Newman were among the firm’s other directors). Three of those ‘peasants’ (Walter Schloss, Tom Knapp, and Buffett himself) established easily traceable track records after leaving the firm, Buffett said — and all of those track records were tremendous.” Buffett concluded that this was no coincidence, and that there must be something to Graham’s techniques.
Many other great investors were inspired by Graham’s value-focused approach, Reese notes. In recent years, however, value stocks – which over the long haul have significantly outperformed more expensive stocks – have struggled. “But these periods of underperformance are where great value investors like Graham and Buffett do the hard work that lays the groundwork for future gains,” Reese explains. “When others bail on good stocks that are having short-term dips, those focused on the long term can swoop in and pick up the bargains left behind. It’s hard to do, because in the short term your portfolio can include some very unloved, declining stocks. But, as Graham, Buffett, and other ‘superinvestors’ have shown, over the long haul value and fundamentals win out. Stay disciplined, and you tilt the odds greatly in your favor.”
Reese looks at a handful of stocks that get high marks from his Graham- or Buffett-inspired Guru Strategies. Among them: industrial firm Mettler-Toledo.