Ben Graham’s NCAV (Net Current Asset Value) Technique in the 21st Century

Abstract

Common convention insists that investors must increase their risk tolerance in order to increase their expected return. Yet, there appears to be an exception. Benjamin Graham’s NCAV technique achieved an annualized geometric return of 24.7% from 2003 to 2010 that was unexplainable by either the capital asset pricing model or the Fama-French-Carhart model. In fact, by comparing the incidence and magnitude of negative returns among Graham’s method and the indexes, the NCAV appears to act as a quasi put option, protecting investors from losses. The average firm capitalization of $173 million and average sample size of 96 stocks, however, suggest that the method has limited applicability for large investment firms. Fortunately, their absence leaves the anomaly uncorrected and exploitable by the rest of us.

TOPICS: Portfolio theory, fundamental equity analysis, factor-based models