The Perfect Stocks Portfolio: May 2025 Update

The May update for the Perfect Stock Portfolio at Benzinga Edge begins with an acknowledgment of Benjamin Graham’s profound influence on modern securities markets.

From Graham’s Columbia University classroom emerged some of the greatest investment minds of the past century and I’d argue there aren’t many people who’ve had a bigger impact on how we invest today.

His notable students included Warren Buffett; Walter Schloss, who delivered approximately 20% returns before fees for 47 consecutive years (and whom Buffett once wrote a lovely letter of introduction for when closing one of his partnerships); Irving Kahn, founder of the still-thriving Kahn Brothers; and Bill Ruane of Sequoia Funds.

These figures not only applied Graham’s principles but propagated them throughout the investment world, creating a multi-generational impact.

Graham’s influence extends beyond traditional value circles to unexpected areas, with even venture capitalist William Obendorf acknowledging Graham’s impact on his high-tech and growth investment approach.

In addition to teaching, Graham authored “Security Analysis” and “The Intelligent Investor” with the latter breaking down his principles for the average investor and becoming the definitive text on value investing, despite being, as those of us in the industry know all too well, “one of the most frequently purchased and least frequently read books in all of finance.”

Graham developed two distinct formulas for investment success. The first, his net current asset formula, remains effective but represents a more aggressive approach that we’ll dive into another time.

The second, his defensive investor formula focusing on undervalued stocks with low debt, sufficient liquidity, profitability, and dividend payments forms the foundation of the Perfect Stock Portfolio’s strategy.

Graham’s influence created a cascade of investment excellence: from Buffett to Munger to Guerin to Pabrai, and from Schloss to his nephew Paul Isaacs of Arbiter Capital.

There’s just a whole long trail of relationships you can trace back to that Columbia classroom.

His impact extended beyond academia into the business world. Tweedy Brown, originally a brokerage dealing in illiquid securities, became one of Graham’s primary brokers.

 In fact, one of Warren Buffett’s first jobs out of college was shuttling stock certificates and checks between Tweedy Brown and Graham’s office.

The firm’s principals, watching Graham make substantial money holding securities they merely traded, eventually transitioned into asset management and now operate a significant global value investing firm in Connecticut.

Similarly, Charles Brandes, a Merrill Lynch broker in La Jolla, formed a relationship with the retired Graham when the professor walked in to open an account. They hit it off, and Brandes subsequently established his own successful global value firm implementing Graham’s teachings.

Graham’s own private partnership reportedly compounded at approximately 20% annually for over twenty years.

The man practiced what he preached, and he was very good at it.

Graham’s investment philosophy was distinctly bottom-up, focusing on individual security selection rather than market timing or economic forecasting. He didn’t care what the market did. He didn’t pay much attention to what the economy was doing. He looked for undervalued securities with substantial margins of safety and built a portfolio of those.

In his final interview before his death in the mid-1970s, Graham expressed a shift toward simplification, stating that he no longer believed in the intensive analysis methods of earlier decades. Instead, he advocated for his two formulas: the net current asset approach and the simple criteria of undervalued, low-debt, profitable, dividend-paying stocks, a methodology that consistently outperforms the market.

It is the second approach that lies at the heart of the Perfect Portfolio.

Notably, though Graham never intended to be a macro investor, his approach inadvertently produced exceptional macro-timing results. At the Perfect Stock Portfolio, while we analyze macroeconomic reports (and yes, we do read thick stacks of them), our stock selection remains independent of these factors. Nevertheless, our focus on undervalued, profitable companies with strong balance sheets naturally leads to advantageous macro positioning.

The Perfect Stock Portfolio’s Historical Performance

The effectiveness of this approach is demonstrated by the Perfect Stock Portfolio’s historical performance during market dislocations:

• 2001 Internet Collapse: While the broader market declined 10%, the Portfolio gained 25% by positioning in out-of-favor sectors like steel, furniture, textiles, clothing, metals, and basic industries. We weren’t buying internet stocks or anything popular, just solid, deeply undervalued companies.
• 2006-2009 Financial Crisis: By mid-2006, the screen identified only half the usual number of qualifying stocks globally, naturally reducing exposure before the 2008 collapse.
• In 2009, the strategy directed investors toward small banks, Japanese stocks, energy, and miners, doubling the market’s return with gains exceeding 50%.
• 2016 Election Turmoil:
• The Portfolio outperformed by concentrating in Japanese and Chinese equities, small banks, and precious metals miners, avoiding the mess going on in U.S. markets.
• COVID-19 Pandemic: In early 2019, the screen again showed significantly fewer qualifying stocks, reducing exposure before the pandemic shock.
• As markets bottomed in March 2020, the strategy identified opportunities in small banks, gold stocks, industrial companies, energy at historically low prices (remember that wonderful moment when oil hit zero?), electronics firms, and insurance companies, particularly those with substantial dividends.
• The emphasis on safe and cheap contributed to returns that absolutely crushed the broader market recovery.
• 2022 Downturn: By late 2021, appreciated stocks trading above book value were being sold, and few new qualifying investments could be found. This naturally positioned investors with approximately 50% cash before the 2022 market decline, providing both protection and dry powder for new opportunities.

The current iteration of the Perfect Stock Portfolio was initiated in late 2024 amid expectations of a Trump victory and anticipation of pro-business, pro-banking, and pro-market policies similar to 2017. Everyone expected the administration to take the daily performance of the stock market very seriously and respond to it.

That, of course, is not what we got.

However, the Perfect Stock Formula had already directed us away from U.S. equities, with very few domestic stocks qualifying for inclusion. Instead, the portfolio established substantial positions in Europe, China, and Japan. This positioning has proven remarkably effective (to say that’s an understatement would itself be an understatement) as European markets have reached new highs while U.S. markets have struggled.

 Consequently, the portfolio has achieved double-digit returns during a period when U.S. indices have barely maintained flat performance.

The current portfolio maintains its international focus with investments across Canada, Europe, Japan, Germany, China, Denmark, and selective U.S. positions. Sector diversification includes shipping, automotive, printing, gold mining, aerospace and defense, banking, natural gas, electrical generation, insurance, and Latin American exposure through Argentina.

This global positioning is particularly appropriate given the current U.S. market conditions: severe overvaluation, a hesitant Federal Reserve, potential stagflation in the latter half of 2025, and ongoing uncertainty regarding tariffs and trade policy. These factors create an unfavorable backdrop for domestic equities, reinforcing our emphasis on European, Asian, and Latin American markets.

The case for European equities is compelling:

• Valuation Advantage: European equities trade at approximately 14x earnings versus 25x+ for U.S. stocks—a multi-decade valuation gap that shows no signs of closing.
• Improving Economic Outlook: Investor confidence is strengthening across Europe, bolstered by expectations of additional interest rate cuts and stimulus from both the European Central Bank and the German government.
• Consumer Tailwinds: Falling oil prices are benefiting European consumers, enhancing spending capacity and growth prospects.
• Positive Yield Curve: The steepening yield curve across Europe represents a significant positive indicator for banking sector profitability and broader economic activity.
• Fiscal Support: Supportive fiscal policies and increased infrastructure spending create a favorable backdrop for growth.
• Defense Spending Surge: European defense policy is undergoing a fundamental shift from reliance on U.S. support to self-sufficiency. For the first time since World War II, Europe feels they’re in it by themselves. The defense policy that’s been based on “hang on until the U.S. gets here” is now becoming “we’ve got to do it ourselves.” This is driving substantial increases in defense-related expenditure with ripple effects throughout associated industries and infrastructure.

These factors have generated increasingly positive sentiment among investors and asset allocators, who are redirecting capital from U.S. markets to European opportunities. European institutions that had previously invested in U.S. markets are repatriating capital to domestic industries with enhanced growth prospects.

Japan represents another significant area of opportunity:

• Attractive Valuations: Despite positive fundamentals, Japanese equities remain attractively priced.
• Economic Strength: Robust wage growth, solid economic expansion, and recovering tourism contribute to a positive economic environment.
• Monetary Policy: The Bank of Japan maintains accommodative policies even as it gradually raises rates in response to price increases—the first meaningful inflation in Japan after decades of stagnation.
• AI Adoption Advantage: Japan appears to be outpacing the U.S. in artificial intelligence implementation, driving labor productivity and manufacturing activity.
• Financial Stability: High household savings rates provide resilience against external shocks and geopolitical instability. Remember, the average Japanese household has a lot more money in the bank than the average American household, which insulates their economy in ways ours lacks.
• Corporate Governance Revolution: Perhaps most significantly, Japan is undergoing unprecedented corporate reforms focused on shareholder value. The government is driving corporate governance improvements, addressing the longstanding issue of companies trading far below book value due to traditional cross-shareholdings and resistance to outside influence.

These cross-shareholding structures are being unwound as entrenched management comes under increased pressure. Insurance companies are divesting equity positions in favor of dividends and buybacks. Japanese corporations are demonstrating unprecedented focus on shareholder returns through increased dividends and share repurchases.

International activists and private equity firms are making significant inroads into Japanese markets for the first time in decades. I’ve been in this business for thirty years, and I’ve never seen anything like it. KKR is having a lot of success there, Blackstone’s doing some deals, and we’re even seeing Elliott Management scoring victories in Japan as they push companies to unlock shareholder value.

This corporate reform movement is facilitating access to deeply undervalued businesses paying dividends while trading below book value, precisely the types of investments that will benefit from ongoing corporate governance improvements.

The Perfect Stock Portfolio currently maintains the following metrics:

• Valuation: Trading at approximately 79% of book value
• Dividend Yield:  above 3.5%
• Profitability: All portfolio companies are profitable

Amazingly, despite impressive performance with some holdings up 80-90% since inception—only one position currently trades above tangible book value: Magellan Aerospace.

Despite a 45% appreciation, we are maintaining this position due to its aerospace and defense exposure. They’ve gone parabolic and they will be a massive beneficiary of the increased defense spending across Europe.

Other notable positions include:

• China Yuchai International (CYD): Despite a 90% appreciation, still trades at only 65% of tangible book value
• Commerce Bank: Up 75% but still trading at just under 90% of tangible book value

These examples illustrate that despite strong performance, our holdings remain significantly undervalued at current prices, justifying their continued inclusion in the portfolio.

Recent additions include a coal stock and a dividend-paying Japanese printing company. We maintain a watchlist of potential additions but are exercising patience in the current environment of broad market enthusiasm.

That’s generally not the atmosphere where we want to come rushing in to add money.

 When we get pullbacks, we do have a list of other stocks we want to add to the Perfect Portfolio.

Conclusion: Positioned for Continued Outperformance

Graham’s principles and investment rules have positioned the Perfect Stock Portfolio advantageously for the current market environment. The strategy enables investors to not only ride out global turmoil but to profit as everything else sort of falls around everybody’s ears here in the United States.

We’re avoiding volatility while maintaining substantial profit potential.

I do expect to see a lot of takeover activity within our portfolio companies before all is said and done.

The portfolio is well-situated for the remainder of 2025, having already delivered double-digit returns while U.S. markets have struggled to maintain flat performance.

Our approach, buying quality companies at discounted valuations and holding them, continues to prove effective, as it has consistently done for a century.

It’s just common sense: buy and hold quality companies purchased at discounted valuations and cash dividend checks along the way

This systematic application of Graham’s value philosophy not only provides superior returns but also acts as an inadvertent macro timing mechanism—positioning investors defensively before market corrections and aggressively during recoveries, all without attempting to predict economic cycles or market movements.

Graham’s legacy endures not only in investment theory but in practical application, generating real outperformance across diverse market conditions through a disciplined focus on fundamental value, quality, and safety margins.

The Perfect Stock Portfolio stands as testament to the enduring effectiveness of these principles and they’re working now just as they have worked for the last one hundred years.