Contrarian Strategy Outperforms the Market in August


While many of the stock screen methodologies AAII tracks were down in August, there were a couple that brought in gains, including the Graham Enterprising Investor Revised screen.

Benjamin Graham’s contrarian view dictates that stocks will appear most attractive when they are relatively unpopular with the market. The original screen, Graham Enterprising Investor, follows a value methodology that Graham outlined primarily in two books: “Security Analysis,” co-authored with David Dodd, and “The Intelligent Investor.” Graham outlined a persona of several different types of investors, including the “enterprising investor.” The enterprising investor was defined as an individual who has market experience as well as additional time to devote to portfolio management.

The AAII interpretation of the original Graham approach (Enterprising Investor) has outpaced the market on an absolute and risk-adjusted basis. However, the screen suffered from a small universe of passing stocks. Because of this, John Bajkowski, president of AAII, created a revised enterprising investor approach in 2012 that loosened the criteria used in order to find a more investable strategy. The revised approach made a simple adjustment to allow companies with price-earnings ratios in the lowest 25% of all stocks to pass the screen, loosening it from the original criteria that included stocks with price-earnings ratios only in the lowest 10% of all stocks.

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