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 (NYSE: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.
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
|Audiovox Corporation||163.16||Communications Equipment|
|GRVY||Gravity Co||54.1||Software & Programming|
|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.