Using A Net-Net Strategy

Over the years of investing, my partner and I have experimented with various valuation models. From the simplest of just investing based on dividend yields to one of the most complex models by Colombia Business School. The purpose of my article today is not about sharing all the various models we have used but just one – the NCAV strategy.

NCAV – Net Current Asset Value is argued by Graham to be approximately the company’s liquidation value. The strategy is just screening for all companies trading below their NCAV and investing in the best 20 companies. With so many more complex valuation models out there, many may be skeptical about such a simple strategy. However, I would like to point out that success with investing is not based on the complexity of your valuation model but rather how strong your logic is.

Of course, words are all meaningless without results to back it up.

Screen Shot 2014-08-05 at 4.42.40 pm

Over the period of 3 years, it can be seen that the NCAV portfolio not only outperformed the S&P500 but by did so by a huge margin of approximately 5x.

Screen Shot 2014-08-05 at 4.43.07 pm

Over the next 3 years, it can be seen that the NCAV portfolio under performed the S&P500. However, the important thing to note would be the underperformance is very marginal.

Screen Shot 2014-08-05 at 4.43.21 pm

On the last period, it can be seen that the NCAV portfolio once again outperformed the S&P500. Interestingly to note, while the NCAV portfolio was affected much more than the S&P500 during the Global Financial Crisis, it recovered at a much faster pace as compared to the S&P500. Whether this is an one-off incident or a trait for a NCAV portfolio, I do not have sufficient results to prove it.

Over these 3 periods, it can be seen that whilst the NCAV portfolio does under perform the benchmark 33.3% of the time, the cumulative results still outstrips it.

Credits are given to Jae Jun of Old School Value for conducting the backtesting of a NCAV strategy.


  1. Hi I am from India. I have two views,

    1) I tried applying NCAV value for a share and for a Working capital intensive company, the value, most times is higher than market price.
    2) I am an avid follower of Gold and Jewellery industry in here. I happened to read, that though their Working capital would comprise of raw Gold and Diamonds. If i assume a particular company is getting liquidated, what would be the value this inventory would fetch? (I found a company which got liquidated, the value for Raw materials it got was 40% discounted than the original value.) In such a case, how the NCAV would help me to determine a company is bargain or not?

    1. Hi,

      1) I have never looked at the India market before given the lack of access but indeed there are certain markets where there are still an abundance of NCAV companies trading below market value – like in Japan.
      2) Well in the research, Graham only invested in companies that were trading at a 66% discount to market price. Personally, I do not make that a criteria but research has shown that as the discount increases, the outperformance against the benchmark increases as well. Secondly, you could use the NNWC which can be seen from the graphs (I did not mention in the post). It is a more conservative approach where instead of Curremt Assets, you use Cash + 75% Total Receivables + 50% Inventory. Performance for such a fund can be seen in the graphs and is marginally better than the NCAV fund.

      1. Agreed. But the share which i am talking about, Gitanjali gems, is currently having serious corporate governance issues, starting with Promoters pledging to insider trading!. Their Working capital management is haphazard, as i identify they would soon face cash crunch!. Such a company is what is trading at a discount. Net Net value is INR 3000 Cr, whereas Market Cap of INR 600 Cr. But am hesitant to invest in such a company because, am not confident in the management. I believe Graham would have mentioned the special clauses, is there any?

      2. Using the NCAV method is just a screening process. Essentially, it is to just reduce say a list of 700 listed companies to a shorter list of say 50 for us to look deeper into. For a company to be trading at such valuations, there must be a reason why, and it is our job to understand the reason behind this. If you were to refer to my analysis I wrote on CDW Holdings and Memtech International, while both are companies trading below its NCAV, I came to different conclusions for both – to continue monitoring CDW holdings and to buy Memtech International. For the case of Gitanjali gems, I am unsure of what exactly is the news revolving around it but for a company to be suspected of insider trading, management being dishonest, you aren’t even able to trust if the Net Net value is truly what is stated in the Annual Reports. It is something like in China/HK/Singapore where we have many of these listed China companies that have committed accounting frauds, resulting in investors being unable to be certain whether the figures seen in the balance sheet are actual. Hope this answers your queries, or else you could contact me via my email and I could reply you more promptly via that channel.

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