Net current asset value

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The net current asset value (NCAV), commonly referred to as the Cigar Butt Investment Strategy, is an investment technique outlined by Benjamin Graham in Security Analysis.[1]

Methodology[edit]

Graham suggests buying a well-diversified portfolio of stocks considered cheap because their Net Current Asset Value exceeds their Market Capitalization.

Formula[edit]

Total Current Assets - Total Liabilities = Net Current Asset Value (NCAV)

Number of Shares Outstanding × Current Price per share = Market Capitalization (MC)

If: NCAV > MC then the stock is considered cheap.

Historical returns[edit]

United States stock market returns[edit]

According to "Ben Graham's NCAV (Net Current Asset Value) Technique in the 21st Century" this strategy produced 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.[2] "Ben Graham's Net Current Asset Values: A Performance Update" also found that the strategy outperformed the benchmark. This study determined that this strategy produced a return of 33.7% compared to 12.1% for the benchmark between 1971-1983.[3]

International stock market returns[edit]

According to "The Performance of Japanese Common Stocks in Relation to Their Current Asset Values" this strategy produced a return of 19.7% compared to 16.6% for the relevant benchmark between 1975-1988.[4] Additionally, according to "Testing Benjamin Graham's Net Current Asset Value Strategy in London" the strategy produced a mean annualized return of 31.1% compared to 20.5% for the relevant benchmark between 1980-2005. [5]

References[edit]

  1. ^ Graham, Benjamin (2008). Security Analysis (6 ed.). McGraw-Hill Education. ISBN 978-0071592536.
  2. ^ Dudzinski, Jonathan; Kunkel, Robert (Spring 2014). "Ben Graham's NCAV (Net Current Asset Value) Technique in the 21st Century". The Journal of Investing. 23 (1): 17–23. doi:10.3905/joi.2014.23.1.017.
  3. ^ Oppenheimer, H.R. (1986). "Ben Graham's Net Current Asset Values: A Performance Update". Financial Analysts Journal. 42 (6): 40–47. doi:10.2469/faj.v42.n6.40.
  4. ^ Bildersee, John; Cheh, John; Ajay, Zutshi (September 1993). "The Performance of Japanese Common Stocks in Relation to Their Net Current Asset Values". Japan and the World Economy. 5 (3): 197–215. doi:10.1016/0922-1425(93)90011-R.
  5. ^ Xiao, Y.; Arnold, G.C. (Winter 2008). "Testing Benjamin Graham's Net Current Asset Value Strategy in London". Journal of Investing. 17 (4): 11–19. doi:10.3905/JOI.2008.17.4.011.