Download An Assessment on Graham`s Approach for Stock Selection: The

An Assessment on Graham’s
Approach for Stock Selection:
The Case of Turkey
Society for Economic Measurement Conference
July 22 -24, 2015
Nuray Terzi
Marmara University, Istanbul, Turkey
The aim of this presentation
• Examine the profitability of stock
selection criteria of Benjamin Graham in
Turkey’s capital market
The plan of this presentation
• Focus literature review
• Explain data and methodology
• Give results and conclusion
Graham’s approach
• Focus on the concept of an intrinsic value that is
justified by a firm’s assets, earnings, dividends,
and financial strength
• Companies have an intrinsic value which the
market doesn’t necessary reflect in their stock
prices.
• Focusing on this value can prevent an investor
from being misled by the misjudgments often
made by the market during periods of
uncertainty
Graham’s Approach-Value investing
• The prices of financial securities are subject to
erratic and significant movements.
• The value of the security may not be reflected
in its current market price.
• The time to buy financial securities is when
they are selling significantly below their
intrinsic value or what they are really worth
based on assets of the company.
Literature…
•
•
•
•
•
•
Oppenheimer and Schlarbaum, (1981)
Klerck and Maritz (1997)
Xiao and Arnold (2008)
Balik and Mehran (2008)
Chang (2011)
Singh and Kaur (2014)
Data
• Universe of the study comprises of the stocks
listed at Istanbul Stock Exchange
• The data were both provided by Queen Stocks
Professional Program.
• The study is conducted over the period of nine
years that is 2005-2014.
Methodology
• In the first stage of study, it was selected the
stocks as modified Graham criteria.
• Secondly, the portfolio performance was
calculated by using analytical tools.
• Finally, the portfolio performance was
compared by an index performance.
Graham Criteria
• Adequate size: The size of the companies was more than 300 million
Turkish Liras of annual sales for a company.
• Strong financial condition: Current ratio was more than two.
• Earnings stability: Net profit was more than zero for the common stock in
each of the past five years.
• Strong dividend record: Dividend record was more than zero.
• Earnings growth: Net profit was more than five years earlier net profit.
• Moderate price earnings ratio : Current price (price –earnings ratio) was
less than 15 times average earnings of the last year.
• Moderate price to book value ratio: A current price was less than 1 ½
times the book value last reported.
Measures
Sharpe Ratio
Description
Interpretation
Sharpe Ratio = (R p - R f ) / s p
R p = Return of p portfolio,
R f = Risk Free Rate,
s p = Standard deviation of return of p portfolio.
The higher the Sharpe ratio, the better a
fund returns relative to the amount of risk
taken.
Treynor Ratio
Treynor Ratio = (Rp-Rf) βp
R p = The expected return of portfolio P,
R f = Risk Free Rate,
b p = Beta coefficient of portfolio P.
α = Rp - [Rf + bp (Rm - Rf)]
R p = The expected return of portfolio P,
R f = Risk Free Rate,
b p = Beta coefficient of portfolio P.
Rm = Market return
The higher the Treynor ratio
shows higher returns and lesser market risk
of the fund
Jensen Alfa
Jensen measure is based on
systematic risk. It is also suitable for
evaluating a portfolio’s performance in
combination with
other portfolios.
Standard Deviation
Standard Deviation allows us to evaluate the Should be near to its mean return
volatility of the fund. The standard deviation of a
fund measures this risk by measuring the degree to
which the fund fluctuates in relation to its mean
return.
Beta
Beta is a fairly commonly used measure of risk. It
basically indicates the level of volatility associated
with the fund as compared to the benchmark.
Rp = R pt - Ri (t-1) / Ri (t-1)
Rp = The expected return of portfolio P
Rpt = Closing value at t day
Ri (t-1) = Closing value at (t-1) day.
Portfolio/Index Return
Beta > 1 = high risky
Beta = 1 = Avg
Beta <1 = Low Risky
Results of Modified Graham Criteria
I
II
III
IV
2005
AKSA,
ANACM, AKSA,
ANACM, ECZYT,SISE, TRKCM
BRISA,
CIMSA, BRISA,
CIMSA,
ECZYT, SISE
ECZYT, SISE
ECZYT
2006
2007
ALARK,SODA
ALARK
BRISA,ECZYT
-
AKSA
BRISA,ECZYT
2008
BRISA,ECILC
ECZYT
ASELS, ECILC,ECZYT
ASUZU,
ECILC,ECZYT
ASUZU,ECILC,GOODY
2009
2010
ASUZU,
AKSA, FROTO
BAGFS,EREGL
ALARK,
ECILC, ALARK,
ECILC, ECILC,
ECILC,
ECZYT
ECZYT, VESBE
ECZYT,TRKCM,VESB ECZYT,SISE,TRKCM
E
2011
SISE,TRKCM
ARCLK, SODA
SODA
ALARK,ECYZT,SISE
SODA, ÜLKER
2012
ALARK,
ECILC,ECZYT,
ENKAI,SISE,SODA
ALARK,
ECILC,ECZYT,
SISE, TRKCM
SISE
ALARK,
ENKAI,SISE,SODA
2013
2014
SISE
SISE,SODA
GOLTS,
GOODY, GOLTS,
SISE,SODA,YAZIC
SODA,TRKCM
SODA
GOLTS, KOZAL, SISE,
SODA,TRKCM
Results of Performance and Risk of
Graham Portfolio and BIST 100
2005-2014 Cumulative
Graham Portfolio
BIST 100
Sharpe Ratio
0.07
-0.10
Treynor Ratio
0.97
-0.87
Jensen Alpha
1.23
Beta
0.64
1
Standard
Deviation
8.50
8.36
The Value of TL 100.000 Investment in
Graham Portfolio and BIST 100 Index
Annual Returns
Graham Portfolio %
BIST 100 %
2005
56.55
47.90
2006
35.25
-10.32
2007
-11.72
30.99
2008
-61.40
-56.05
2009
36.23
84.59
2010
4.04
17.43
2011
33.62
-29.68
2012
28.56
43.70
2013
6.88
-19.28
2014
39.01
16.90
Conclusion…
• This paper has mainly aimed to examine the
profitability of stock selection criteria of
Benjamin Graham Turkey’s capital market by
using the data on stocks listed on Borsa
İstanbul for the period from 2005 to 2014.
Conclusion…
• Results of this research indicate that an investor who
made use of the combinations of Graham’s criteria
investigated to create a portfolio, would have achieved
results better than that of the BIST-100 during the
period 2005 and 2014, excluded crisis period.
• When considered in conjunction with market
conditions, the criteria of stock selection of Graham
can optimize the investment decision making.
Additionally, due to the Graham criteria are stringent, if
they are modified, it will give better results for
developing markets.
Thank you for your attention !