Using A Net-Net Strategy: The NCAV Graham Method

Using A Net-Net Strategy by The Value Edge

Over the years of investing, my partner and I have experimented with various valuation models. From the simplest of just investing based on dividend yields to one of the most complex models by Colombia Business School. The purpose of my article today is not about sharing all the various models we have used but just one – the NCAV strategy.

NCAV – Net Current Asset Value is argued by Graham to be approximately the company’s liquidation value. The strategy is just screening for all companies trading below their NCAV and investing in the best 20 companies. With so many more complex valuation models out there, many may be skeptical about such a simple strategy. However, I would like to point out that success with investing is not based on the complexity of your valuation model but rather how strong your logic is.

Of course, words are all meaningless without results to back it up.

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Over the period of 3 years, it can be seen that the NCAV portfolio not only outperformed the S&P 500 but by did so by a huge margin of approximately 5x.

Net-Net Strategy

 

Over the next 3 years, it can be seen that the NCAV portfolio under performed the S&P 500 (INDEXSP:.INX). However, the important thing to note would be the underperformance is very marginal.

Net-Net Strategy

 

On the last period, it can be seen that the NCAV portfolio once again outperformed the S&P 500. Interestingly to note, while the NCAV portfolio was affected much more than the S&P500 during the Global Financial Crisis, it recovered at a much faster pace as compared to the S&P 500. Whether this is an one-off incident or a trait for a NCAV portfolio, I do not have sufficient results to prove it.

Over these 3 periods, it can be seen that whilst the NCAV portfolio does under perform the benchmark 33.3% of the time, the cumulative results still outstrips it.

Credits are given to Jae Jun of Old School Value for conducting the backtesting of a NCAV strategy.

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I developed my passion for investment management especially equity research at a relatively young age. My investment journey began when I was 20, at a point in time where markets were still recovering from the Global Financial Crisis. My portfolio started from money I saved over the past years and through working during the holidays. I was fortunate to have a good friend with common investing mentality to began my journey towards value investing. To date, we still research and invest in companies together, discussing valuations and potential risks of a company. To date, I manage a fund with a value investing style. Positions are decided upon via a bottom-up approach or smart speculation (a term I came up with when buying a stock for quick profit due to a mismatch in prices in the market due to takeovers/selling of a subsidiary or associate). Apart from managing my own portfolio, I enjoy sharing my research with family and friends, seeking their opinions and views towards the stock. Reading Economics in London, I constantly keep up with the financial news in Singapore & Hong Kong. Despite my busy schedule, it has not stopped me from enjoying other aspects of life. I enjoy a variety of activities in whatever free time I may have – endurance running, marathons, traveling, fine dining, whiskey appreciation, fashion. Lastly, I enjoy meeting new people, discussing ideas and gaining new perspectives towards issues in the world.