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March 7th, 2010, 03:03 PM
This paper presents evidence that the net current asset value rule developed by Ben Graham in 1930 is still profitable in the 1970s and early 1980s. The abnormal gain is not due to future mergers because both the merged and nonmerged subsamples have positive and statistically significant returns in the post-event period.
The net current asset value (NCAV) rule is a simple trading technique: buy all the stocks that sell for less than the net current asset value per share. The NCAV is defined as current assets minus all liabilities including long-term debt and preferred stock. Buying stocks below NCAV, the investor pays nothing at all for the fixed assets. Ben Graham developed the NCAV rule in 1930, claiming that stocks selected by this technique substantially outperform the market.
Graham [11, p. 85] more recently tests the NCAV rule by buying one share of each of the 85 companies that meet the selection criterion on December 31, 1957, and holding them for two ye 3rs. The gain for the NCAV portfolio is 75 percent, against 50 percent for the Standard and Poor's 425 industrials. What is more remarkable is that none of the issues shows significant losses, seven are about even, and 78 show substantial gain. Graham also claims that the investment strategy based on the NCAV rule is uniformly good for about 30 years prior to 1957.
Oppenheimer [ 15] and Oppenheimer and Schlarbaum 1161 test Graham's stock selection criteria for "defensive" investors and conclude that these criteria result in above-average return even after adjusting for market risk. In 1984, Oppenheimer and Schlarbaum [17] test the NCAV rule directly. They find that this stock selection criterion is still profitable in the 1970s. The NCAV stock portfolios outperform relevant market benchmarks on both raw return and risk-adjusted return basis. This study has ime limitations. Fir:t, portfolios are formed on an arbitrarily c:' osen simulated date of purchase—the last business day of December. The method may include stocks that no longer satisfy the NCAV rule in December because the stock price used is - the November closing price. In addition, this method ignores atoc!-- that meet the NCAV selection criterion in earlier months but rise above the NCAV in December. Second, the beta (systematic risk) estimate of NCAV stocks might be incorrect because many stocks remain below NCAV for a period of more than a year, causing the portfolio selected in the following period to be highly correlated with the portfolio of the previous period. The estimated beta in such a situation would be based on the same period in which excess returns have already been reported.
This paper analyzes the performance of stocks that meet the NCAV, using a different method than that of Oppenheimer and Schlarbaum [17]. The selection method and data are described in the second section. The third section presents the results. The data suggest that the NCAV stock selection criterion is still profitable in the 1977-1984 period. The final section gives the conclusions and summary.
The net current asset value (NCAV) rule is a simple trading technique: buy all the stocks that sell for less than the net current asset value per share. The NCAV is defined as current assets minus all liabilities including long-term debt and preferred stock. Buying stocks below NCAV, the investor pays nothing at all for the fixed assets. Ben Graham developed the NCAV rule in 1930, claiming that stocks selected by this technique substantially outperform the market.
Graham [11, p. 85] more recently tests the NCAV rule by buying one share of each of the 85 companies that meet the selection criterion on December 31, 1957, and holding them for two ye 3rs. The gain for the NCAV portfolio is 75 percent, against 50 percent for the Standard and Poor's 425 industrials. What is more remarkable is that none of the issues shows significant losses, seven are about even, and 78 show substantial gain. Graham also claims that the investment strategy based on the NCAV rule is uniformly good for about 30 years prior to 1957.
Oppenheimer [ 15] and Oppenheimer and Schlarbaum 1161 test Graham's stock selection criteria for "defensive" investors and conclude that these criteria result in above-average return even after adjusting for market risk. In 1984, Oppenheimer and Schlarbaum [17] test the NCAV rule directly. They find that this stock selection criterion is still profitable in the 1970s. The NCAV stock portfolios outperform relevant market benchmarks on both raw return and risk-adjusted return basis. This study has ime limitations. Fir:t, portfolios are formed on an arbitrarily c:' osen simulated date of purchase—the last business day of December. The method may include stocks that no longer satisfy the NCAV rule in December because the stock price used is - the November closing price. In addition, this method ignores atoc!-- that meet the NCAV selection criterion in earlier months but rise above the NCAV in December. Second, the beta (systematic risk) estimate of NCAV stocks might be incorrect because many stocks remain below NCAV for a period of more than a year, causing the portfolio selected in the following period to be highly correlated with the portfolio of the previous period. The estimated beta in such a situation would be based on the same period in which excess returns have already been reported.
This paper analyzes the performance of stocks that meet the NCAV, using a different method than that of Oppenheimer and Schlarbaum [17]. The selection method and data are described in the second section. The third section presents the results. The data suggest that the NCAV stock selection criterion is still profitable in the 1977-1984 period. The final section gives the conclusions and summary.