The crash of 2008 destroyed more than portfolio wealth. It also ruined a number of investment strategies, including “buy and hold forever.”

One measure of investment quality that stands up, however, is price stability. The most stable stocks held up best against the market’s drop.

Mind you, there were no gainers in this once-in-a-lifetime crash.

This is the broad comparison in a survey of 130 stocks:

> The top quartile (the most stable stocks) lost an average of 54%, measuring from 2007-08 highs to 2008-09 lows.

> The bottom quartile (least stable stocks) lost an average of 75%, 21 percentage points more than the top quartile.

The S&P/TSX composite lost 51% on a comparable basis.

The top quartile included a few big losers — such as Suncor Energy Inc. (down by 83%) and Morguard Corp. (down by 75%). But the majority of stocks in the most stable group dropped by less than the broad market.

The table at right consists of stocks with price stability indices compiled at yearend 2007.

You may recall our previous ventures into this field, using price stability to measure investment quality (in the August 2008, August 2007 and February 2006 issues of Investment Executive).

The measurement of price stability originates in the pioneering work of Arnold Bernhard, founder of New York-based Value Line Invest-ment Survey.

Bernhard attempted to quantify investment quality. In doing so, he discovered the single most significant indicator of the quality of a stock is its long-term price stability. This proved, statistically, to be even more significant than earnings growth.

At first glance, Bernhard’s work seems to duplicate the widely used beta measurement of price volatility.

The difference is that beta is usually a short-term measurement, one or two years being common. Bernhard’s calculation requires 11 years of price data, and adjusts for the influence of a secular price trend.

Beta compares a stock’s price movement against the market. You employ the Bernhard measurement in comparison with other stocks.

The 130 stocks in the price stability study include most Toronto Stock Exchange listings that pay regular dividends, as well as companies that pay no dividends.

The list includes S&P/TSX 60 index stocks, with the remainder from the S&P/TSX completion index and the S&P/TSX small-cap index.

The correlation between price stability and the extent of price drops in the crash is not even. But the comparison clearly shows that stocks with good price stability on average held their value better.

Of the 10 stocks with the best price stability measurements, the average price drop was 55%. (The average is the geometric mean.) The average was dragged down by Suncor’s drop and Great-West Lifeco Inc.’s 70% drop.

The next 10 stocks performed better on average, with an average 49% drop.

In contrast, the 10 stocks with the worst price stability dropped by an average of 75%. The next 10 also dropped by an average of 75%.

The crash of 2008 was so extreme, it destroyed almost every assumption and measurement of investment value.

But price stability survives as a means of identifying and ranking stock quality. IE