In 1934, Benjamin Graham and David Dodd – two of the most famous investment analysts uncovered a basic investment truth which I want to share with you today. It was a defining concept because those investors who understood it, are some of the world’s greatest investors and fund managers today.
The Graham-Dodd system explained
Much of the 1920’s was a time of great prosperity and growth in the US. Many technological developments like cars, radios, electricity became available to the American people. This economic boom fuelled the fast-rise of the US stock market. Everybody owned stocks, not only investors. Entrepreneurs, nurses, taxi driver, you name it. It was everybody’s ball-game.
From 1920 to 1929, the Dow Jones Industrial Index rose fivefold.
It seemed as if stocks would rise forever. But October 1929 marked a defining moment of investing in the US. Following a nearly decade-long bull market, the Dow reached its peak. It then began a sickening decline.
By 1932, the Dow had lost nearly 90%.
The Dow slowly recovered to a “normal” level. But the stock market had become a place most investors feared to tread.
As a result of the great depression, the stock market was littered with good quality companies significantly below their market value or worth. And it was people like John Templeton who were able to buy great value companies for just a dollar and see their one dollar investment grow exponentially on those undervalued quality companies whose price had been driven down abnormally because of market sentiment not because of its true asset value.
Today this significant mispricing in a company’s value is what’s commonly referred to as margin of safety. And if you can find stocks that have this wide gap in what the market’s view of a stock’s price is relative to its real nett asset value, then you stand to make a fortune when the real value of that company is recognised and the price of its stock shoots up.
And it’s this concept that university professors Benjamin and Graham were able to define and teach to people like Warren Buffett.
Look at the graph below to see what I mean…
The orange line shows the market value of a particular investment. The dotted line is the Graham-Dodd system in action, which shows a “reasonable” price an investor should buy at.
The solid grey line shows what the investment is really worth. Or the point at which you should sell.
The Graham-Dodd system is simple. When the price falls below the “Graham-Dodd line”, it becomes a buy.
Once it reaches its true value, that’s when you sell.
In fact, here at Real Wealth, we regularly use the Graham-Dodd system to select stocks that are about to soar
In the January 2024 issue of Real Wealth, I used the Graham-Dodd system to uncover a cheap, but quality company, Calgro (JSE: CGR).
Calgro develops thousands of homes and memorial parks a year – on demand – and makes good money doing so. At the time, the company wasn’t not only profitable, but also boasted a total construction revenue pipeline of more than R17 billion. Yet its market was only just R514 million.
Better yet, Calgro’s share were trading far below the “Graham-Dodd line” at R4.27. An investment metric that reveals whether a company’s current share price trades below its REAL value.
Simply put – it was a no brainer buy!
And since then, its shares have soared ever 59.25% – proof of how the Graham-Dodd system pinpoints shares that are about to soar.
If you would like to get started with your own portfolio and need help identifying the perfect stocks, then Real Wealth may be the perfect service for you. You can learn more here.
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