cheers

Mike

I have to disagree with Jim Allen as well. There are two ways to do something like this, you can use it as a screen or you can just buy a basket of a bunch of them (30 stocks minimum), rebalance every year/2 years/whatever. Some of the stocks in your basket will go to zero. This is ok and doesn’t bother me, it’s the nature of the game. Some will double.

I find the basket approach extremely appealing, personally. I had a very very good year last year, but what small-cap value guy didn’t crush it? Keeping a decent chunk of my portfolio in a couple “value baskets” is a nice way to play it safe and guard against rash decisions- it’s all automatic.

@ Chroma,
Good point. I ran some tests based on the closing price being less than 66% of NCAV. I’ll update the article and include the new additional graphs.

@ peekay,
Very true. After my latest stint, I’m no longer trading net nets that have 0 volume. Just so hard to sell even if it hits intrinsic value and worse if you made a mistake and want to get out.

@ Greenbackd,
NNWC is from Graham himself. Klarman also mentions it often in Margin of Safety. It’s the purest form of NCAV you can get.

1. One needs to understand the Business prospects .. something offered cheap than its True value .. can have different implications.

2. Needs to have a decent trading vol atleast .. so that one can get in & out without problems, if & when the situation arises.

Would be interesting to see the screens with the vol part added.

Thanks.

I wonder if the difference in results of NCAV and NNWC is that the latter is a form of NCAV with a margin of safety built in. Graham suggested only buying NCAV stocks that had a margin of safety of at least 33% (discounted from their NCAV value). Perhaps the results would be different if the comparison was one of NCAV with a margin of Safety vs. NNWC.

I love your blog, thanks for keeping the convesation going!
.-= Chroma´s last blog ..Good Decisions, Bad Outcomes in Investing =-.

I found one NCAV stock that showed up on every value screen imaginable, but when I pulled the statements, it had never made a penny, in something like 8 or 9 years! It was cheap, and likely to remain so until it shows it can make a profit, or goes broke, which ever comes first.

The other comment I have is that there is very likely nothing, no technique, no strategy, that will protect you in a real no-holds-barred bear market like 2007-2009, 1972-74, or like the 1929-32, etc. If you get caught standing when the music stops, you just have to hunker down and hope you aren’t using borrowed money.

I’m going to test out NCAV NNWC with volume greater than 20k. Should be interesting.

I’d be interested in what the results would be for companies with reasonable avg daily volumes, say > $30k or > $75k, I don’t know where I’d draw the line but upon looking at a few it’d be pretty obvious. Did you do this by hand? If that’s something you’re interested in, e-mail me…

Instead of NCAV did you maybe mean book value?

Regarding the sample, OTC and financial stocks were ignored.

But what I wanted to point out was that according to the recent results, NCAV doesn’t work very well. NNWC also offered some more stability for the most part which was surprising.

Thanks for the INOC tip.

i would also ask how you took into account commissions and slippage? rebalancing every 4 weeks with stuff like this would be a very bad idea i think because these things are often extremely illiquid and you’re having to sit on the bid all week to get as much as you want or pay a nasty spread. 15 round trips a month aren’t cheap either (especially if you’re using IB and it’s a penny stock. also the tax implications aren’t that hot when you’re paying short-term taxes on everything.

but there is other evidence for this method of investing, i was talking about this with an investing buddy of mine the other day, i’ll copy/paste from the e-mail

- the oppenheimer paper 1970-1983, 18% outperformance
- james montier numbers (1985-2007, worldwide, 18% outperformance)
- walter schloss’s 50 years of outperformance and the fact that schloss studied with buffett in the 50s and directly under graham (he did more than net-nets obv)
- grahams claim that over 30 years he averaged 20% a year with the NCAV approach (no official stats but we know graham-newman did well and the people he taught all put up huge numbers for the next 50 years)
- performance of buffett partnership, which is buffett from like 1958-1972 or something, he did a lot of bottom-feeding with NCAV stocks (berkshire hathaway was a NCAV stock when he bought it!)
- http://papers.ssrn.com/sol3/papers.cfm?abstract_id=966188 which covers 1980-2005 net-nets in the london stock market finding around 20% outperformance

it’s unfortunate that none of these studies go back before 1960, but we have ample evidence that it worked before then and it just makes sense. i do something along these lines and rebalance yearly. oh, and finally, i own INOC which came up here… check it out it’s just a part of my basket, not a major holding but cheap any way you measure it.