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Graham's Last Will & Testament

by Wayne A. Thorp, CFA

Graham's Last Will & Testament Splash image

While researching Ben Graham’s net current asset value approach to investing for Computerized Investing’s February 2010 Online Exclusive (available online to Computerized Investing subscribers at www.computerizedinvesting.com), I ran across an article written by James Rea shortly after Graham’s death in The Journal of Portfolio Management.

Prior to meeting Graham a few years earlier, Rea had been working on a stock selection methodology that looked for companies with high reward-to-risk ratios. Upon reading an article that Graham had written in Barron’s—“Renaissance of Value”—Rea discovered that his approach seemed similar to Graham’s. On a lark, Rea forwarded his research to Graham. A couple of months later, Graham called Rea and asked how it was that he was finding his kinds of stocks and suggested that they meet. That first meeting led to a three-year working relationship, which culminated in Graham and Rea starting an investment fund that used the “best” stock selection criteria based on their research.

This article outlines the 10 criteria Graham and Rea first developed (and which they tested using a 50-year period), and builds a screen with the three criteria that they used for their Rea-Graham Fund.

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Wayne A. Thorp, CFA is a vice president and senior financial analyst at AAII and editor of Computerized Investing. Follow him on Twitter at @AAII_CI.


Discussion

Larry from Pennsylvania posted over 3 years ago:

The relationship between Benjamin and Jim Rea is described in Janet Lowe's book "Benjamin Graham on Value Investing". Their partnership was established on June 30, 1976 and Mr Graham died September 21, 1976 at 82 years of age.

Quoted from the book on page #223: "As for the Rea-Graham Plan Fund, it has not dazzled. For the five years ended in 1993, it delivered a total return of only 4.7 percent and was ranked in the bottom 20 percent of all mutual funds." She discusses some reasons why it did poorly.

The book is a great read and enlightened me on Mr Graham's personal life, his brilliant mind, high ethical nature and prejudice in wanting to employ Jewish men in his firm. Mr Warren Buffett was not initially hired by Mr Graham because "...he preferred to give jobs to young Jewish men because at the time they had difficulty finding good positions on Wall Street." It was heartwarming that their relationship grew and Mr Graham eventually hired Mr Buffett- and the rest is history.

Mr Benjamin Graham remains the father of value-investing and freely passed on his ideas to others. Making money was not his goal in life. It was to discover what moved the great institution called Wall Street.


Cameron from Washington posted over 2 years ago:

As a newcomer to personal investing I welcome reading informative, educated articles such as this one. Investing has always seemed to be such a complicated, mysterious, and complicated process that I never thought I could, or should begin managing my investments. Sound, thorough articles such as this one give me confidence and offer guidance I feel I need to begin managing my accounts. I look forward to reading more articles on AAII to further my financial education and build confidence in my ability to successfully manage my financial future.


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