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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 criteria to make them 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.

Click to enlarge images

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 (BRK.A), 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 their value, they act 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

TickerNameMktCap ($M)Industry
  1. VOXX
Audiovox Corporation163.16Communications Equipment
GRVYGravity Co54.1Software & Programming
TRIDTrident Microsystems103.67Semiconductors
OPXTOpnext, Inc.165.49Semiconductors
DRADDigirad Corporation35.58Medical Equipment & Supplies
ANLYAnalysts International14.71Software & Programming
ENWVEndwave Corporation23.63Communications Equipment
QLTIQLT Inc.255.67Biotechnology & Drugs
FMTIForbes Medi-Tech Inc1.49Biotechnology & Drugs
IESCIntegrated Electrical Service73.08Construction Services

Disclosure: I own GRVY at the time of writing.

Source: Back-Testing Graham NCAV, NNWC Screen Strategies: Update