NCAV & NNWC Backtest Criterias Updated
Following on from the great discussions and feedback from the initial NCAV NNWC strategy, I’ve made some changes to the screen testing criterias to make it more realistic.
The best way to go about the screens would be to screen for companies that had enough daily volume. A reader, Chroma, also mentioned that Graham stated that it was best to buy NCAV stocks trading at less than 66%. Absolutely right. So I included this margin of safety into the backtest.
Purpose of Backtesting
With the backtest, I went as far back as 10 years, but I realized that analyzing a backtested strategy for more than 10 years is misleading. The purpose of a backtest is to simply show you how a certain strategy works over multiple periods of time rather than a straight 10 year period. If at the end of 10 years, the strategy is up more than the market, the immediate assumption is that it must work.
There are of course many studies which already show the performance of the strategy for each calendar year, which is the correct way of going about it, but many services only display a single graph such as the one below from Magic Formula Investing.
These types of graphs are misleading. Why? Because your eyes immediately follow the blue line to the top.
However, to Greenblatt’s credit, he also includes the performance for each calendar year on another page.
I know that having a long term view is important, but to be honest, how many small investors in the world employ nothing but the same investing strategy for more than 10 years? Zero. Most people would give up after 3-4 years if a strategy didn’t work out which is very possible.
The time you start is also critical and changes the whole game. Had you invested $10,000 when Buffett took over Berkshire, supposedly you would have hundreds of millions, but this thinking is completely wrong. Besides, I wasn’t even born at that time. Instead, had I invested $10k when I was 20 years old in 2002 into BRK, I would be up about 50% after 8 years…
This is why comparing multiple short 3-5 years timeframes would be much more accurate in a practical sense. You also get an idea of what strategy to follow in different market conditions. After all, the advantage of small investors like us is the ability to move quickly.
Greenbackd also wrote an article perfectly timed with my first one where he analyzes Damodaran’s discussion of how fees eat away the real returns of backtests.
But back to the results.
Updated NCAV NNWC Screen Criteria
- Volume is greater than 30k
- NCAV margin of safety included
- Slippage increased to 1%
- Rebalance frequency changed to 6 months
- Test period remains at 3 years
NCAV & NNWC Stocks with Volume
2001 to 2004
2004 to 2007
2007 to 2010
Now that the NCAV stocks are only chosen when trading for less than 2/3 of it’s value, it acts much like a NNWC. This debunks my initial thought that NCAV doesn’t perform well. As long as you buy them with a margin of safety, NCAV stocks look to perform equally well.
Either way, if a recession ever comes around again, I better sell everything in my portfolio and load up on Graham stocks.
Top 10 NCAV Stocks
| Ticker | Name | MktCap ($M) | Industry |
|---|---|---|---|
| VOXX | Audiovox Corporation | 163.16 | Communications Equipment |
| GRVY | Gravity Co | 54.1 | Software & Programming |
| TRID | Trident Microsystems | 103.67 | Semiconductors |
| OPXT | Opnext, Inc. | 165.49 | Semiconductors |
| DRAD | Digirad Corporation | 35.58 | Medical Equipment & Supplies |
| ANLY | Analysts International | 14.71 | Software & Programming |
| ENWV | Endwave Corporation | 23.63 | Communications Equipment |
| QLTI | QLT Inc. | 255.67 | Biotechnology & Drugs |
| FMTI | Forbes Medi-Tech Inc | 1.49 | Biotechnology & Drugs |
| IESC | Integrated Electrical Service | 73.08 | Construction Services |
Disclosure
I own GRVY at the time of writing.
February 18th, 2010 at 2:19 am
This is awesome, really really good. Great changes, great breakdowns, very impressive.
Do you mind sharing where you got your data from? I can’t figure out how to find which stocks would qualify as a net-net in, say, 2002. There are quite a few things I’d like to backtest and play with if I can just figure out an easy source of old data.
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I know that having a long term view is important, but to be honest, how many small investors in the world employ nothing but the same investing strategy for more than 10 years? Zero.
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What % of small investors in the world should even be thinking about picking their own stocks or doing anything at all? IMO, it’s < 5%. People don't want to put the work in, get too emotional, don't want to use their heads. Most people aren't wired to invest well. So I don't think it matters that most change their strategy all the time, they do that because they don't know what they're doing and they can't help themselves.
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Most people would give up after 3-4 years if a strategy didn’t work out which is very possible.
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Sure, again though, that would be to their detriment because they don't understand the nature of markets/variance/automatic systems. Incidentally, I find the longer I'm at this the more I think the Magic Formula is kinda genius because when I look at the list of stocks it selects looking at most of them individually my gut reaction is "ew, don't want to own that." Strangely, I think that means it's probably doing the right thing.
February 18th, 2010 at 7:07 am
This looks much better Joe.. Thanks for the post!
February 18th, 2010 at 10:44 am
I am curious what the result is gonna be for buying EPV stocks with MOS of 50%.
February 18th, 2010 at 10:49 am
Your findings are consistent with my own findings that 2/3 NCAV is superior to what you call NNWC.
How did you come up with a 30k volume cutoff? Why not 10k or 50k? I’m asking because I’m also working on similar NCAV backtests.
I’m trying to find out if there are any patterns associated with stock that are trading below 2/3 NCAV that never recover. I’m having a hard time identifying which stocks stopped trading and/or went to zero. It’s also tough to identify ones that also paid out special dividends as part of a liquidation. Do your backtest returns numbers include dividends?
George´s last blog ..Festival of Stocks President’s Day 2010 Edition
February 18th, 2010 at 5:07 pm
Fantastic!
Greenbackd´s last blog ..Walking the talk: Applying back-tested investment strategies in practice
February 18th, 2010 at 5:58 pm
@ ted8k1,
I’ll try to send you an email of all the data.
@ peekay,
Thanks
@ zehua,
Good idea. I’ll try to figure out how I can do a screen on it.
@ George,
From the NCAV article I linked to, it has the following statement.
“with the AAII Shadow Stock Portolio: The average daily number of shares traded should be four times the amount needed for the position.
Otherwise, it may be too difficult to get in and out of the position quickly. For example, if I had $5,000 to invest in China Dasheng Biotechnology (CDBT), I would be able to buy 6,330 shares at its January 22, 2010, closing price of $0.79. Therefore, I would like to see CDBT trade at least 25,000 shares a day (spefically 25,320, or 6,330 × 4).”
Also from my experience trading low price and volume, I found that having at least 30k was a good amount of volume to move in and out quickly.
@ Greenbackd,
Thanks
February 18th, 2010 at 7:30 pm
Thanks Jae, look forward to receiving it. I’ll send you back something I’ve been working on lately that I think you might like.
February 19th, 2010 at 12:21 am
All three lines are pretty close as of 7/09. The NNWC strategy seems to work best when the entire market is rising (so beat down stocks selling as if they are going to go broke rise the most). The extreme superior performance of small caps and value stocks (like RZV which went from like 10 to 35 between March and Sept) in 2009 accounts for a big part of the superior performance of NNWC stocks.
I don’t know how much to read into this.
February 19th, 2010 at 10:12 am
Hi Jae Jun,
I have previously done a number of backtests on NCAV strategy that takes into consideration the overall market P/B level, with the following criteria:
Buy criteria:
Price/NCAVPS -10%
Average Net Income for past 5 years / book value > 10%
P/B of S&P sector for this security < 3
Maximum individal security investment: Median P/B value for the security in the past 10 years, or P/B of S&P Sector > 3
I have tried this combination with good success that provides ample down side protection, maybe this idea can help you in some way.
Let me know if you are interested in discussing further: ken.kp.so@live.com
February 19th, 2010 at 10:14 am
Sorry, format issue:
Buy Criteria:
Price/NCAVPS -10%
Average Net Income for past 5 years / book value > 10%
P/B of S&P sector for this security 3
Rebalancing period: 6 months
March 27th, 2010 at 7:32 am
Hello,
i’m french and excuse me for my approximative english !
so between january 2001 and january 2004 result of ncav strategy was arround + 500% ?
between 2004 and 2007 = arround zero %
and to finish since 2007 = arround 75%
are you agree with me?
if you agree with me ,where can i found stocks with criterions used to do ncav list ?.
Where can i found results and exacts criterions for very long time period ?
Thanks and excuse me for my poor english !
Sébastien From french