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by Henry R. Oppenheimer
Ben
Graham's Net
Current Asset
Update
Values: A Performance
BenGraham's "netassetvalue"(NAV)criterioncallsfor buyingsecuritieswhosepricesare
belowthe valueof the net currentassetsof thecompany.PortfoliosformedfromsuchNAV
over the 1970-83 period.
securitieshad highermeanreturnsthan the marketbenchmarks
Furthermore,the 13-yearrisk-adjustedreturnsof the NAV portfolioswere significantly
over
AlthoughindividualNAV portfolioperformances
greaterthanthoseof thebenchmarks.
the
30-monthholding periodswere widely variable,these portfolios,too, outperformed
market.
NAV portfoliosconsistingof thesecuritiesofcompaniesthathadpositiveearningsbutdid
returnsthan the NAV portfoliosof
not pay dividendshad highermeanand risk-adjusted
companieswithpositiveearningsthatdidpaydividends.In addition,portfoliosof securities
thatwerethe mostundervalued(as measuredby purchasepriceas a percentageof net asset
by the widest margins.During the period
value) tendedto outperformthe benchmarks
returns.
examined,the net asset valuecriterionallowedinvestorsto achieveabove-market
"It always seemed, and still seems, ridiculously simple to say that if one can acquirea
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,
TheIntelligentInvestor,1973
ENJAMINGRAHAM'S
net currentasset
value (NAV) criterion for stock selection
is very well known. Graham developed
and tested this criterionbetween 1930and 1932,
HenryOppenheimer
is AssociateProfessorofFinanceat the
State Universityof New Yorkat Binghamton.He thanks
GaryG. Schlarbaum
for his helpfulcommentsand aid in
executingthe researchand Cindi Kesterof the SUNYBinghamtonComputerCenterfor computational
assistance.Partialfinancialsupportfor thisresearch
wasprovided by theM.I. NeeleySchoolof Business,TexasChristian
University.
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The Study
24
25
23
11
6
9
2
3
4
2
120
25
34
30
27
24
46
28
16
12
3
276
24
25
23
24
24
34
21
14
13
13
249
73
84
76
62
54
89
51
33
29
18
645
41
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criterion.8
MeanReturns
Rp.
(%)
R.tRmt
(%)
Measures
Risk-Adjusted
a
p
to)
a~~~~~~~~~~~~
(%)
t(a)P
,B
t(pi)b
2.45
2.45
0.96
1.75
1.46
0.67
2.60c
1.72b
1.10
1.03
9.23"
18.70d
0.356
0.694
0.69
0.96
-0.40
-0.67
1.41
11.15d
0.447
0.56
0.47
0.69
1.75
0.25
-2.53c
1.42
1.15
10.30d
0.15
-1.22
16.92d
0.408
0.650
2.36
2.26
2.36
0.96
1.17
1.75
1.38
1.10
0.51
2.04c
1.80b
1.03
1.07
0.99
1.10
7.48d
10.33d
15.92d
0.266
0.409
0.622
2.87
2.66
2.87
0.96
0.87
1.75
1.92
1.78
1.23
3.28d
0.98
3.48d
2.60c
1.04
0.90
0.05
3.58
2.41
3.42
0.38
0.82
0.76
1.64
-0.30
2.81
1.65
2.03
-0.26
3.79d
2.11c
2.18c
1.58
1.34
1.01
0.65
0.89
1.20
1.96b
7.91d
11.53d
13.58d
0.289
0.463
0.545
Panel C: Three-YearPeriodsa
vs. NYSE-AMEX Index
1970-1972
1973-1975
1976-1978
1979-1982
vs. Small-Firm Index
1970-1972
0.05
1973-1975
1976-1978
1979-1982
3.58
2.41
3.42
-0.25
2.15
2.49
2.37
0.78
0.18
1.26
0.55
1.68b
5.14d
9.09d
5.18d
3.38d
0.437
0.489
0.441
0.199
1.14
10.86"
0.581
1.14
0.81
0.86
23.41"
0.862
0.811
0.501
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19.09d
6.80d
$254,973 (with monthly compounding) by December31, 1983. The comparablefigures for the
NYSE-AMEX and small-firm indexes are
$37,296 and $101,992, respectively.
Comparingthe returns of the NAV securities
on any exchange with the exchange benchmark,
the NYSE-AMEXindex or the small-firmindex
yields similar results. With the exception of the
NYSE securities, the NAV portfolios outperformed the benchmarksby relativelylarge margins. It should be noted, however, that the
results of Panel C indicate that these results
were not stable over time.
Over the 13-year period, the NAV portfolios
on average outperformed the comprehensive
NYSE-AMEXindex by approximately 1.46 per
cent per month (19 per cent per year) after
adjusting for risk. When compared to the smallfirm index, these portfolios earned, on average,
an excess return of approximately0.67 per cent
per month (8 per cent per year).10
Several interesting results emerge from the
Mean Returns
Purchase
Datea
Rpt
(%)
Rmt
(%)
Terminal Wealth of
$10,000
NAV
Issues
Market
Index
5.37
3.70
1.88
0.88
42,581
28,180
16,993
12,726
1976
2.75
0.58
21,533
11,624
1977
2.64
1.36
19,736
14,473
1978
2.86
1.78
22,131
16,446
1979
2.16
0.94
18,176
12,767
1980
3.88
1.61
30,220
15,635
1981e
3.53
1.73
21,923
14,798
1982'
1.77
5.85
18,937
12,297
Panel B: vs. Ibbotson and Sinquefield Small-FirmIndex
1970
0.47
$ 8,778
-0.27
$19,557
1971
-0.08
-0.98
8,584
6,958
1972
1.36
0.14
11,556
9,310
1973
3.60
2.17
24,441
17,151
1974
5.37
3.74
42,581
27,859
Risk-AdjustedMeasures
a
(%)
-0.21
0.62
1.81
2.78
2.48
2.72
2.17
1.06
1.17
1.19
2.53
2.29
4.11
t(a)b
-0.19
0.37
0.77
1.69
1.88b
3.31d
3.07d
1.20
1.43
1.36
3.11d
1.65
1.35
t(p)b
R2
1.64
1.23
1.14
1.19
4.94d
0.466
2.69c
3.07d
1.70
1.23
6.01d
5.64d
0.205
0.252
0.429
0.563
0.532
1.05
1.37
0.90
0.73
0.61
0.48
0.97
5.82d
0.547
7.73d
5.17d
4.14d
0.681
0.489
0.380
0.311
0.098
0.089
4.58d
3.55d
1.54
0.93
1.91b
1.22
1.09
1.22
1.19
1.47
1975
3.70
3.34
28,180
25,305
0.57
1.46
0.93
16.89d
0.911
1976
1977
1978
1979
1980
1981e
1982"
2.75
2.64
2.86
2.16
3.88
3.53
5.85
2.70
2.42
3.32
1.55
1.65
2.55
2.92
21,533
19,736
22,131
18,176
30,220
21,923
18,937
19,674
18,423
24,959
14,966
21,154
17,877
13,967
0.58
0.17
-0.11
0.73
1.54
1.02
1.68
1.34
0.14
-0.11
1.12
2.49c
0.91
0.76
0.75
0.84
0.72
0.77
0.82
0.98
1.56
12.26d
6.73d
0.843
0.819
0.744
0.664
0.636
0.465
0.548
0.88
1.03
1.32
1.11
2.22
1.38
0.83
0.76
1.34
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16.34d
5.99d
6.21d
13.08d
11.28d
5.39d
7.43d
7.00d
4.37d
3.48d
0.821
0.562
0.579
0.859
0.927
Table IV
Yearly NAV Returns vs. Small-Firm Index and Reinganum's MV1 Portfolio
NAV
Return
SmallFirm
Index
Return
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
13-Year Terminal Wealth
13-Year Annual Geometric Mean Return
1970-74 Terminal Wealth
5-Year Annual Geometric Mean Return
1975-78 Terminal Wealth
4-Year Annual Geometric Mean Return
1979-82 Terminal Wealth
4-Year Annual Geometric Mean Return
21.3%
29.0
-43.0
-19.0
127.1
58.4
35.4
23.1
32.1
36.7
25.5
39.4
89.4
$254,973
28.2%
$ 16,148
10.1%
$ 34,877
36.7%
$ 45,295
45.9%
16.5%
4.4
-30.9
- 20.0
52.8
57.4
25.4
23.5
43.5
39.3
13.9
28.0
39.7
$101,992
19.6%
$ 10,273
0.5%
$ 34,980
36.8%
$ 28,371
29.8%
1.92
1.27
0.52
1.39
1.27
1.11
0.79
0.70
1.03
MV1
Return
27.8%
9.8
-38.1
-12.7
80.9
57.0
20.6
33.5
43.9
27.6
N.A.
N.A.
N.A.
N.A.*
N.A.*
$13,718
6.5%
$36,374
38.1%
N.A.
N.A.
1.58
44
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Table V
Mean Returns
Rmt
(%)
(%)
(%)
t(p)b
0.96
1.75
1.46
0.67
2.60c
1.72b
1.10
1.03
9.23
18.70
0.356
0.694
1.43
0.75
2.88
2.02c
1.05
0.93
9.98
17.78d
0.393
0.673
1.58
0.62
1.97b
0.99
1.22
1.22
7.17d
13.94d
0.250
0.558
2.47c
1.48
0.90
0.79
9.67
16.66d
0.378
0.643
2.54c
1.28
1.14
8.38
13.61d
0.313
0.546
Rpt
Panel A: Entire Sample
vs. NYSE-AMEX Index
vs. Small-Firm Index
2.45
2.45
t(a)b
1.66b
R2
ties, these portfolios are comparable. Reinganum reports a median capitalization for his
18-yearperiod of $4.7 million. The median capitalization of the 10 NAV portfolios is $4.1 million. While we do not know the mean capitalization of the MV1 portfolio, it is clearly less than
that of the NAV portfolios ($10.7 million), because we know that the median value of Reinganum's MV2 portfolio (his second-smallest
portfolio) is $10.8 million. On the other hand,
Reinganum reports a mean beta (versus the
NYSE-AMEXvalue-weighted index) of 1.58;the
mean of the 10 NAV portfolios' estimated betas
is 1.22. It would appear that the NAV portfolios
achieved a slightly higher return (22.6 vs. 20.3
per cent) than the MV1 portfolios while being
considerablyless risky.
Close examination of Tables II, III and IV
suggests that this period can be divided into
three distinct periods-1970-74, when NAV issues outperformed the relevant benchmarks;
1975-78, when no advantage existed; and 197982, when again the NAV issues outperformed
the benchmarks.Table IV clarifiesthis division.
The table indicates that, during 1970-74, the
NAV portfolio had considerably higher returns
than both the small-firm and MV1 portfolios,
while having somewhat higher risk than the
small-firmportfolio (a beta of 1.27 as measured
against that portfolio) and somewhat lower risk
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Table VI
MeanReturns
Quintile
Rpt
Rmt
(%)
(%)
Risk-Adjusted
Measures
a
(%)
t(a)a
(%)
1.92
2.32b
2.66
0.96
1.64
2.20b
3
4
5
Sample
2.51
2.14
1.88
0.96
0.96
0.96
1.59
1.17
0.86
2.09b
1.63
1.54
2.45
0.96
1.46
2.60b
1.23
1.17
0.89
1.07
1.18
1.10
1.47
1.31
1.27
0.71
0.26
1.72a
1.17
1.08
0.97
0.97
1.02
1.03
t(a
R2
6.96c
9.23c
0.239
0.262
0.167
0.246
0.392
0.356
12.11c
12.14c
10.94c
11.00
16.88
18.70c
0.488
0.489
0.436
0.440
0.649
0.694
7.39c
5.56c
7.08c
9.96c
than the MV1 portfolio (a beta of 1.39 relativeto present these results. Firms having positive
the NYSE-AMEXindex, while MV1 had a beta earnings and paying a dividend provided a
of 1.58 relative to it).
lowermean return than portfolios of firms with
In contrast, during the 1975-78 period, the positive earnings not paying a dividend. They
returns of the three portfolios were identical. also had a lower systematic risk. Finally, their
However, the NAV portfolio had a beta relative risk-adjustedexcess returns were not as high as
to the small firm index of only 0.79, while its those of the portfolio of firms with positive
beta relative to the NYSE-AMEXindex was 1.11 earnings but not paying dividends. Choosing
(and MV1's was 1.58).
only firms that have earnings and pay a diviFinally, during the 1979-82 period, the return dend does not help the investor.17
of the NAV portfoliowas far greaterthan that of
the small-firm index, while the portfolio was
approximatelyas risky as the index. Thus, dur- Degree of Undervaluation and
ing all three periods, the NAV portfoliosprovid- Performance
ed excess returns after explicit consideration of The NAV criterionindicates that the investor is
both risk and size.
to purchase all securities with a price that is
two-thirds or less of NAV. A question of some
Do Earnings or Dividends Matter?
interest is whether the degree of undervaluation
Graham frequently provided his NAV advice is related to subsequent performance.To examwith the caveat that it was best to select securi- ine this, we calculated for each security purties that had positive earnings and that were chase price as a percentage of NAV. Each year,
paying a dividend. To that end, we divided the we divided the population into quintiles accordsample into two groups-a group that had ing to this variable and analyzed mean returns
positive earnings over the past year (approxi- as well as risk-adjusted performance. The remately two-thirds of the firms) and a group sults are presented in Table VI.
operating at a loss. Panels B and C of Table V
The conclusion is clear-cut. Returns and expresent the performances of these groups. No cess returns can be rank-ordered, with securiclear-cutpattern emerges from an examination ties having the smallest purchase price as a
of these panels. If anything, firms operatingat a percentage of net asset value having the largest
loss seem to have slightly higher returns and returns. It appears that degree of undervaluarisk than firms with positive earnings.
tion is important:The difference in both mean
We next asked if the dividend criterion im- return and risk-adjusted return between quinproved performance.Panels D and E of TableV tiles 1 and 5 is over 10 per cent per year.'8 a
FINANCIAL ANALYSTS JOURNAL / NOVEMBER-DECEMBER1986 G 46
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Footnotes
1. See for example P. Bluestein, "BenGraham'sLast
Will and Testament," Forbes,August 1, 1977.
2. See H. Oppenheimer, CommonStockSelection.An
Analysisof BenjaminGraham's'IntelligentInvestor"
Approach(Ann Arbor, MI: UMI Research Press,
1981) and J. Greenblatt, R. Pzena and B. Neuberg, "How the Small Investor Can Beat the
Market," Journalof PortfolioManagement,Summer, 1981, pp. 48-52.
3. See for example W. Buffet, "Up the Inefficient
Market!Grahamand Dodd is Alive and Well in
Wall Street," Barrons,February25, 1985, pp. 11,
37-40.
4. For OTC securities, the bid price was used
throughout. We know of no other commonly
available source that provides a more comprehensive listing of publicly available firms. The
StockGuideincludes all NYSEand AMEXfirms as
well as a large number of firms traded over-thecounter, on regional exchanges and on the Canadian exchanges. It is unclear whether the Stock
Guide systematically excludes any set of firms
likely to meet the criterion that an American
investor would likely look at and trade through a
broker. Thus it is reasonable to believe that the
tests presented are of the criterionratherthan the
data source. Finally, TheStockOwner'sGuidewas
usually received by December10, in the libraryin
which the screening was performed, so this procedure would be feasible for an investor. Finally,
it should be noted that this screeningprocess was
also performed in 1983, but only four securities
met the criterion.These were not analyzed.
5. NYSE security returns were obtained from the
CRSPtapes, while some AMEXand OTCsecurity
returns were obtained from the PDE tape. The
remaining security prices for AMEX and OTC
firms had to be hand-gathered from standard
sources. To keep this project of managable size,
only 20 to 30 securities (every third or fourth
AMEXor OTC NAV on each of these lists) were
used.
6. Graham, in various editions of The Intelligent
Investor,suggested holding these issues up to
2-1/2 years was appropriate.
7. This procedure likely biases the performance
measures of the next section downward.Only two
firms that filed for bankruptcy actually went
bankrupt during the period examined. Others
that filed for Chapter XI (such as InterstateDepartmentStores) later either emerged from bankrupty (Interstate Stores became Toys 'R Us) or
were acquired,in both cases invariablybecoming
far more valuable than the last price we used.
Those firms no longer listed in standard sources
8.
9.
10.
11.
Rm
RP
2.974 0.534
2.752 0.077
2.974 2.109
a
2.43
2.82
0.52
3
t(a)
2.41** 1.40
2.63** 1.34
0.83
1.22
R2
t(3
7.30`' 0.537
6.52"'* 0.481
15.01**' 0.830
FINANCIALANALYSTSJOURNAL/ NOVEMBER-DECEMBER
1986 O 47
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