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TWEEDY, BROWNE COMPANY L.P.
What Has Worked in Investing
(continued from preceding
page)
ASSETS BOUGHT CHEAP
Benjamin Graham's Net Current Asset Value Stock Selection Criterion
The net current asset value approach is the oldest approach to investment in groups of securities with common selection characteristics of which we are aware. Benjamin Graham developed and tested this criterion between 1930 and 1932. The net current assets investment selection criterion calls for the purchase of stocks which are priced at 66% or less of a company's underlying current assets (cash, receivables and inventory) net of all liabilities and claims senior to a company's common stock (current liabilities, long-term debt, preferred stock, unfunded pension liabilities). For example, if a company's current assets are $100 per share and the sum of current liabilities, long-term debt, preferred stock, and unfunded pension liabilities is $40 per share, then net current assets would be $60 per share and Graham would pay no more than 66% of $60, or $40, for this stock. Graham used the net current asset investment selection technique extensively in the operations of his investment management business, Graham-Newman Corporation, through 1956. Graham reported that the average return, over a 30-year period, on diversified portfolios of net current asset stocks was about 20% per year.
In the 1973 edition of The Intelligent Investor, Benjamin Graham commented on the technique:
"It always seemed, and still seems, ridiculously simple to say that if one can acquire a 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."
In an article in the November-December 1986 issue of Financial Analysts Journal, "Ben Graham's Net Current Asset Values: A Performance Update", Henry Oppenheimer, an Associate Professor of Finance at the State University of New York at Binghamton, examined the investment results of stocks selling at or below 66% of net current asset value during the l3-year period from December 31, 1970 through December 31, 1983.
The study assumed that all stocks meeting the investment criterion were purchased on December 31 of each year, and replaced on December 31 of the subsequent year by stocks meeting the same criterion on that date. To create the annual net current asset portfolios, Oppenheimer screened the entire Standard & Poor's Security Owners Guide. The entire 13-year study sample size was 645 net current asset selections from the New York Stock Exchange, the American Stock Exchange and the over-the-counter securities market. The minimum December 31 sample was 18 companies and the maximum December 31 sample was 89 companies.
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