Planting the SEEDS : backtesting the Graham–Munger investment style for 2006–2020

Abstract

Despite having many critics disputing value investing’s relevance today, several of the world’s best value investors continue to deliver market-beating results almost every year. This thesis attempts to participate in this discussion by studying two of the most prevalent value investing philosophies. Specifically, the thesis studies whether the quality-specific investment criteria for the defensive investor—as proposed by Benjamin Graham in The Intelligent Investor—can deliver risk-adjusted excess returns during the investment period from 2006 to 2020. Additionally, the thesis studies whether an improved performance can be observed by creating an investment style that blends the abovementioned, quality-specific criteria of Benjamin Graham with Charlie Munger’s investment philosophies regarding purchasing price and holding duration. By identifying all 36 companies that respect Graham’s quality criteria as per December 31st 2005, 11 portfolio constructions that blend Graham’s and Munger’s investment philosophies are explored. All portfolio constructions produce consistent risk-adjusted excess returns when compared against a commonly accepted global benchmark. In particular, the proposed strategy— which blends Graham’s and Munger’s investing philosophies—produces substantial excess returns at a lower risk than the market provides. Nevertheless, while the results are promising, more research must be performed on additional investment periods before a firm response can be given to the current discussion.