Portfolio Policy for the Enterprising Investor

In Benjamin Graham's tomb to value investing, Chapter 7 presents three strategies that can offer low risk and strong returns.

Strategy One: The Unpopular Large Company

The idea is simple; companies that are experiencing short term troubles tend to fall out of favor. Using the safety of large cap stocks, an investor can pick-up these temporarily troubled companies at a discount. Today this strategy can be observed in Dog of the Dow and Dog of the S&P portfolios. The S&P strategy can leave an investor concentrated in specific sectors. At the moment, these sectors include regional banks, and real estate/construction related businesses. The Dow Dogs can offer safer companies, larger yields, and a level of diversification. Here is the current portfolio:

Citi (C)- 5.07%
Pfizer (PFE)- 4.77%
Altria (MO)- 4.11%
Verizon (VZ)- 3.77%
AT&T (T)- 3.43%

Strategy Two: Buying Bargain Issues

To Graham, a true bargain was a stock selling at a +50% discount to it's value. This strategy was easier to employ in the post-Depression markets which Graham invested but opportunities still exist. His criteria for bargain issues was finding prices below a companies net working capitol. This means an investor can buy a company and pay nothing for fixed assets. An excellent resource for this strategy can be found at this blog.

Net Working Capital = Current Assets - Total Liabilities

Strategy Three: Special Situations

This strategy covers a broad range of possible investments. One is merger arbitrage; Company A offers to buy Company B for $20 a share but B trades a discount of $18. That's a 10% return and depending on the closing date that could happen in a matter of months. This is a simplified example that can be furthered studied in The Warren Buffet Way or at Fat Pitch Financial.