Value Investing in Brazil: A Novel Application of Benjamin Graham’s Criteria to Generating Abnormal Returns

Objective: This study aimed to adapt Benjamin Graham’s criteria to the Brazilian stock market, using a ranking strategy to build winning portfolios that offer abnormal returns. Method: We have collected data from all companies traded on the stock exchange in Brazil between the 4th quarter of 1998 and the 2nd quarter of 2020. Graham’s criteria were adapted using each indicator’s quarterly median and sector-wise. We employed the Greenblatt (2006) ranking strategy in the portfolio construction. Results: We employed the five-factor asset pricing model to analyze the abnormal returns of the portfolios. Our findings indicate that portfolios formed with the adapted criteria consistently outperformed the market average. Notably, the portfolios with 10, 20, and 30 assets demonstrated superior returns compared to the Ibovespa, IBrX 100, and LFTs, with the 10-asset portfolio generating the highest Alpha. Contributions: This research advances the literature on value investing in emerging markets by adapting Benjamin Graham’s criteria to the Brazilian context using quarterly sector medians and a ranking strategy. The study demonstrates the potential for generating abnormal returns, outperforming benchmarks such as the Ibovespa and IBrX 100. It underscores the importance of periodic adjustments and sector-specific adaptations, providing valuable insights for investors applying fundamental analysis in emerging markets. These contributions bridge traditional value investing principles with the unique dynamics of emerging markets, aiding in more informed portfolio management decisions.