Ben Graham’s Net Current Asset Values: A Performance Update via CSInvesting
by Henry R. Oppenheimer
Ben Graham’s “net asset value”( NAV) criterion calls for buying securities whose prices are below the value of the net current assets of the company Portfolios formed from such NAV securities had higher mean returns than the market benchmarks over the 1970-83 period. Furthermore, the 13-year risk-adjusted returns of the NAV portfolios were significantly greater than those of the benchmarks. Although individual NAV portfolio performances over 30-month holding periods w ere widely variable, these portfolios, too, outperformed the market.
NAV portfolios consisting of the securities of companies that had positive earnings but did not pay dividends had higher mean and risk-adjusted returns than the NAV portfolios of companies with positive earnings that did pay dividends. In addition, portfolios of securities that were the most undervalued (as measured by purchase price as a percentage of net asset value) tended to outperform the benchmarks by the widest margins. During the period examined, the net asset value criterion allowed investors to achieve above-market returns.
“It always seemed, and still seems, ridiculously simple to say that if one can acquire a diversified group of common stocks at a price less than the applicable net current assets alone-after deducting all prior claims, and counting as zero the fixed and other assets-the results should be quite satisfactory.”
– Benjamin Graham, The Intelligent Investor, 1973
Ben Graham’s net current asset value (NAV) criterion for stock selection is very well known. Graham developed and tested this criterion between 1930 and 1932, and it was used extensively in the operations of the Graham-Newman Corporation through 1956. Ben Graham reported that issues selected on the basis of the rule earned, on average, about 20 per cent per year over a 30-year period. After the mid-1950s, however, “bargain” issues became relatively scarce. Some issues became available again during the early 1970s, following the market declines of the late 1960s, and became abundant after the 1973-74 bear market.
This article examines the performance of securities that were bargain issues during the 1970-83 period. Even though the NAV criterion is the valuation technique Ben Graham is most famous for, it has been subject to relatively little research.’ Oppenheimer has provided tests of its performance over the 1949-72 period, but his tests (which do not demonstrate consistent profits) are largely confined to data prior to 1958.
Greenblatt et al. purport to examine the criterion, but in fact examine a somewhat different one, intergrating into their screening mechanism a criterion relating firm P/E and bond yields. Furthermore, their risk analysis. is limited and their sample size for most portfolios only satisfactory for the period December 1973 through August 1977, a period of less than four years.2 It is in light of this lack of analysis, and of a recent emphasis on Ben Graham’s precepts, that we undertook this analysis.3
We simulated the investment experience of a hypothetical investor who invested in portfolios of common stock using Ben Graham’s NAV criterion. To create these portfolios for each year of the 1970-82 period, we screened the entire December Security Owner’s Guide. For each security, we took the sum of all liabilities and preferred stock and subtracted it from current assets; this result was then divided by the number of common shares outstanding to give NAV.
Our investor bought a security if its November closing price was no more than two-thirds of its NAV.4 For these firms, we recorded the NAV, November closing price, number of shares outstanding, exchange the firm was traded on, and whether the firm had positive earnings or dividends over the prior 12 months.
For the most part, we used standard methods of performance evaluation. All securities selected from the December 1970 through December 1972 and December 1978 through December 1982 Security Owner’s Stock Guide were evaluated. For the remaining years, we evaluated all NYSE securities as well as random samples of about 20 to 30 AMEX and OTC securities. Table I summarizes the distribution of sampled securities.
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