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The most profitable stock market investing strategy of all time
I’ve talked for years about how Benjamin Graham, the father of value investing, taught the public a profitable stock market investing strategy without relying on Wall Street or The City to do it for you.
One advantage of a DIY approach to stock market investing is that you will cut out the fees professional money managers will charge you.
They will often charge you fees even when they lose you money in bear markets or they are simply unable to beat the S&P 500, which most of them cannot.
You can simply buy a low-cost S&P 500 index fund in your broker account and make more money over the long term than the vast majority of professional money managers.
But you’re here because you’d like to understand how a more sophisticated approach to making money from the stock market can yield even better results over a long-term time frame.
The Relatively Unpopular Large Company
The Relatively Unpopular Large Company is the name Benjamin Graham gave to a value investing strategy that is simple to understand so that you can start using it once you get to grips with it.
Graham described the strategy as ‘conservative and promising’:
The key requirement here is that the enterprising investor concentrate on the large companies that are going through a period of unpopularity
Benjamin Graham, The Intelligent Investor
The key skill you’ll need to develop is determining that the period of unpopularity is temporary.
But more on that later.
Let’s break down how this strategy works.
Concentrate on large-cap stocks for profitable stock market investing
Concentration on the largest of stock market listed companies ensures that over time, you’ll develop an intuition, a sixth sense within the large-cap space.
Familiarity does not breed contempt in this situation.
Trying to invest in stocks of all shapes and sizes can be done, but we are here to develop a niche skillset in the ‘safest’ part of the market.
For one thing, large caps are the most talked about, followed, analysed, and written about stocks in the world.
This means that your research process on individual stocks going through a period of unpopularity begins with a simple Google search.
More importantly, large-cap stocks and the businesses behind them employ the brightest minds in the world.
That intellectual capital is what Ben Graham was relying on when he said of this strategy:
The large companies thus have a double advtange over the others. First, they have the resources and capital in 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
Look for stocks with a market capitalisation of at least $10 billion, many of them being household names familiar to you.
Yahoo Finance, Google Finance, and many other free services will give you this information.
If you’re a European investor then indexes like the FTSE 100 in the UK, the CAC 40 in France or the DAX in Germany offer convenient lists of large caps to research from.
Determine if the period of unpopularity is temporary
Guesswork will not do for this or any aspect of the strategy.
You will need to do some research if all of a sudden your news-feed flashes the headline ‘XYZ large-cap stock has collapsed in price today’.
Here is a starter list of questions you’ll need to answer to help you determine the timeline of unpopularity:
Why did it collapse in price?
How short-lived is the issue that caused the price collapse?
Does it have a strong balance sheet?
Has it hit 52-week or multi-year lows?
Is the general market in a bull or a bear market?
What is the long-term (10+ years) dividend record?
How likely will the company ‘turn itself around’ based on what management v what The Street says?
What is the PE ratio average over the past ten years (PE10) compared to the PE ratio over the last twelve months?
Has the long-term return on capital employed (ROCE) been historically high? (at least double digits).
Some of these questions are abstract and will have no definitive answer.
Some of these concepts like PE10 or ROCE will be new to you and are based on mathematics.
In both situations, the research process is about building a picture of the long-term success or otherwise of a business, where it sits in the current business environment, and how well based upon your research you think the business will turn itself around after a setback.
Learning about PE10, ROCE and other useful financial ratios is part of the process of becoming a better, intelligent, and enterprising investor.
It is the difference between dollar cost averaging with a low-cost S&P 500 tracker (set and forget) or seeking a higher reward for more work.
Sometimes you will not have a clear yes or no answer as to whether the unpopularity of a company will be temporary.
In this scenario, you should simply place the stock on a watchlist and monitor the news flow about the stock.
You would have already done the hard work of researching it, so it’s best not to waste that work.
Keep it on your radar, monitor news about it, and gain a better understanding of the business to determine when it’s time to buy.
Is investing in large-cap stocks a good fit for your mindset?
At the start of this article, I stated that the relatively unpopular large company strategy was the most profitable of all time.
Warren Buffett uses something close to this strategy, with a focus on large businesses that have shown consistent growth and a historically high return on capital employed (ROCE).
Buffett also buys businesses outright and has a vast pool of cash to play with, and combined with his reputation, he creates deals that we cannot.
That said, he is the wealthiest most successful stock market investor of all time and his investing mentor happened to be Benjamin Graham, the inventor of this strategy and the father of value investing.
But before you stride out there on your lonesome, a word of caution.
There are hundreds of articles, white papers, and books written about the best stock market investing strategies in the world.
What the vast majority of them lack is what I call a ‘mindset fit’.
This mindset fit is the distance between a stock market strategy and the way you think as an individual.
If you think you need charts, indicators, and a constant refresh of your broker’s app for stock market prices every 15 minutes then this strategy of relatively unpopular large companies is not for you.
You’ll likely need a short-term trading strategy based on technical analysis.
If you value your time to enjoy what the world offers without having to look at charts and stock prices all day then the relatively unpopular large company is for you.
Most of your time will be spent keeping abreast of financial market news rather than staring at charts and prices.
Value investing is by its very nature long-term orientated so when you actually purchase stock in a large cap undergoing a temporary period of unpopularity, the price may not rise straight away and may even go lower before going higher.
This is exceptionally difficult for most people to accept which is why they feel the need to check stock prices constantly.
Checking the news is a much better use of your time since large caps tend to pay dividends whilst they sort themselves out.
Subscribe to the newsletter so that you’ll not miss another article on large-cap stock market investing and follow along with my own portfolio news and performance because I use this very strategy to make money from large-cap stocks.
The post The most profitable stock market investing strategy of all time first appeared on Wealth Accumulated and was written by D J Thomas .