Jim Grant's Safer than a 10 year screen

Yesterday, I blogged about Jim Grant's thoughts on risk. His analysis showed that its possible to come up with a stock portfolio that's likely to yield more than 10 year treasuries *and* crucially safer as well.

Google's stock screener has really improved so I plugged Grant's criteria into it. His screen includes data points

* MarketCap >$5B (Big companies only)

* ROE >15% (high quality companies)

* Dividend yield > 2% (recurring income stream to you the investor)

* Debt to Assets Ratio <35% (sane Balance Sheet)

* P/E <15 (Cheap)

Using Google stock screener this screen yields 53 names

 

Conventional wisdom says cash and treasuries are safer than stocks, but Grant's screen makes a compelling case for finding safety in stocks over cash.

Some examples

Exxon has a $377B market cap, a P/E of 13, 2.4% dividend, 17% return on equity, and debt to assets ratio of 4% 

Johnson and Johnson has a $173B market cap, a P/E of 13, 3.4% dividend, 26% return on equity, and debt to assets ratio of 15%

Like international investing? Telkom Indonesia has a $17B market cap, P/E of 14, 3.6% dividend, 32% Return on equity and 22% debt to assets ratio.

And so on, these are just some example, but I think the key insight from Grant and other value investors is that you don't get safety from following the herd (cash, treasuries), you have to find your own margins of safety.

We see this in information security, people continue to invest waste their companies hard earned capital in network and infrastructure security, but what happens when a piece of network or infrastructure commodity goes down? Do you even try and fix it? More than likely you chuck it in the trash and slam a new box in the rack. What needs protection, where you need safety is apps, data and identity. Those are assets that run your business and if they went away so would your business, but that is not where most of information security spends its time or money.

We in infosec can learn a lot from value investors and Ben Graham - "you are neiher right nor wrong because people agree with you, you are right or wrong because facts and reasoning are right."

MBA students are taught that markets are perfectly efficient, this was a leading cause of the financial crisis even though it had been discredited in the real world for decades - leading universities like every Ivy League university except, of course, Columbia teach it as gospel.

Buffett's 1984 speech "The Superinvestors of Graham and Doddsville" where he takes this theory out the woodshed with about 8 different real world examples including one (Walter Schloss my favorite) who works in a small desk in a hallway and deliberately never talks to analysts. Probably because of its Ben Graham association, Columbia figured this out a long time ago but the rest of the Ivy league is more resistant to learning.

So in closing:

• "There seems to be a perverse human characteristic that likes to make easy things difficult... it's likely to continue this way. Ships will sail around the world, but the Flat Earth Society will flourish... and those who read their Graham and Dodd will continue to prosper" - Warren Buffet

 

• "Buffett's argument has never, to my knowledge, been addressed by the efficient-market theorists; they evidently prefer to to continue to prove in theory what was refuted in practice" - Harvard's own Seth Klarman

 

• "Is it really that difficult to predict that five brickyards in Texas will still produce most of the brick in Texas in 20 years' time? No one else is going to go in there, it's a perfectly static business. We love brick – we've got a lot of businesses like that, that your MBA graduate from Wharton would turn their nose up at." - Charlie Munger

There is a small band of investors who seek safety and returns through value investing, they comprise the minority of the financial world. There is a small band of security people who seek to protect core business assets - data, identity and apps.

Comments

[Cd-MaN]

I wanted to perform some historical analysis of this recommendation ( similar to this one: http://www.nytimes.com/interactive/2011/01/02/business/20110102-metrics-graphic.html?ref=business ), but unfortunately I couldn't find good historical data.

I would be curious: did you perform such a historical analysis of the claim, and if so, what was the result?