An assessment on Graham's approach for stock selection: The case of Turkey

Graham’s approach is widely discussed by individual investors, portfolio managers and academicians in these days. Graham’s approach has very simple formula to evaluate the company’s intrinsic value. The main concept behind the formula is the belief that companies have an intrinsic value which the market doesn’t necessary reflect in their stock prices. The concept of an intrinsic value is justified by a firm’s assets, earnings, dividends, and financial strength. Focusing on this value can prevent an investor from being misled by the misjudgments often made by the market during periods of uncertainty. In this perspective, this study intends to examine the profitability of the stock selection criteria of Benjamin Graham for Turkey’s capital market by using the data on stocks listed on Borsa İstanbul for the period from 2005 to 2014. The Turkish stock exchange has experienced wide fluctuations over the course of this period, making expectations the common factor that affects stock choice. Nonetheless, it is widely known that the Turkish stock exchange market has been mainly dominated by foreign investors which are capable of driving the market with huge amounts of available portfolios. However, the global economic and financial crisis, the Great Recession, has also affected the Turkish stock exchange and made it very important to choose the right stock at the right time, a statement which is a must for especially small investors which hardly exist. Hence, this paper tries to assess whether it is possible that these choices, depending on Graham's approach, are fruitful in an emerging economy like Turkey.