For years, star stock pickers with a yen for bargain bin fare have been crediting Benjamin Graham's research for much of their success.

But it's not just the Warren Buffetts of the active management world who are big fans. So is John Gambla. His name isn't known in too many households across America. That could change, however, if his latest project comes anywhere near the success of its lofty premise.

Gambla's a portfolio manager and managing director at Hyde Park Investment Ltd. The investment shop has created a trio of indexes that seek to capture the best of Graham's theories. Those benchmarks form the basis of the recently launched Nuveen-sponsored ELEMENTS exchange-traded notes. (See related story.)

The ETNs cover large-cap value (NYSEArca: BVL); provide exposure to the total U.S. stock market while tilting to value (NYSEArca: BVT); and target small-cap value (NYSEArca: BSC) corners.

"It's not ridiculous to try to reduce an active manager's methodology to an index. Ben Graham had laid out a number of specific formulas he used with a very specific methodology," Gambla said.

Sure, you can go to a number of different Web sites and get stock recommendations based on Graham's theories, he admits. But the problem is that many of those take a very literal translation of their master's strategy, according to Gambla.

The benchmarks for the ELEMENTS ETNs aren't trying to replicate verbatim Graham's favorite valuation ratios, he says. "Graham developed a fantastic methodology which we're trying to update and bring into a more contemporary format," Gambla said.

Tweaking Modern Portfolio Theory

That means the Hyde Park indexes are trying to incorporate the concepts of diversification into Graham's concepts. "We're trying to apply advances in modern portfolio theory using the power of computers without disturbing the essence of Graham's strategy," Gambla said.

In a nutshell, here's how it works. Hyde Park's computers screen along seven broad categories. Those relate to: earnings quality, valuations, forward price-to-earnings ratios, dividend yields, profitability, debt and financial liquidity, and measurements relative to industry peers.

"Each of those general categories in some shape or form have some tie back to Graham's approach to investing," Gambla said. "Some have clearer relationships than others. But we didn't just willy-nilly try to go out and re-create how Benjamin Graham approached investing."

Each stock is ranked from zero to 100 (the best). The large-cap value index takes the top 50 names, and the small-cap value as well as the total stock market use 100 each. They're rebalanced every six months and reconstituted every year.

No foreign stocks are counted. For large-cap stocks, nothing less than $10 per share is included, while for small-caps, nothing under $5 per share is considered. Hyde Park's computers also screen for various liquidity measures.

"This has been extremely challenging and tremendously rewarding. It's something we're really proud about accomplishing," Gambla said.

Trying to capture the works of famous past stock-pickers is hardly a novel idea. Countless Web sites hawk computer-generated stock picks based on Graham's theories. Even Jason Zweig, now a Wall Street Journal columnist, has tried to update the work of "The Father of Value Investing" by penning his own book.

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