Inflation-Adjusted Return Of Deep Value Stocks In Comparison To Gold

By: Victor Wendl | Mon, Jul 7, 2014
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The performance of gold stood in sharp contrast to the return on stocks over the previous decade. Most people are not aware that stocks had a negative average annual return from 2000 to 2009. This time period produced even worse results than the Great Depression of the 1930s¹. That terrible performance even assumes an investor reinvested the dividend income on their stock holdings. Given that backdrop of lousy equity performance, gold was viewed by the retail public as the asset class of choice over the previous decade. The chart below shows how gold almost quadrupled in value while the S&P 500 stock index remained slightly below where it started. As gold continued climbing over the previous decade, more investors joined the social contagion bandwagon and diversified into the yellow metal.

Value of $1 invested in Gold and S&P 500 from 2000-2009
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The gold investment fadcame to an end in 2011, starting a general decline with fits and starts that continue to this day. New worries have recently begun to surface regarding outright price deflation with the onslaught of a 1930s-style depression possibly waiting in the wings. This argument has gained traction because of high consumer debt levels and a low labor-participation rate. It is counterintuitive, but investments in gold do a better job of preserving purchasing power during periods of deflation than of inflation². This investment fact might cause a renewed interest in gold among investors who buy into the deflation thesis. Historically, deflation has never turned out well for stocks, so the gold alternative might once again pick up followers.

Both the inflation and deflation camps make credible arguments about the direction of general prices. Let's compartmentalize the issue of whether the future is one of increasing inflation or outright deflation and focus on something we can control--the investments retail investors can include in their portfolio. Regardless of where general prices are headed, investors don't have to abandon stocks as an asset class, provided they follow a disciplined approach to stock selection. Even if stocks repeat the terrible performance of the previous decade, one can still preserve purchasing power relative to gold by only buying stocks that trade below liquidation value or net current asset value (NCAV).

Let's compare the performance on an inflation-adjusted basis of investing in a broad stock index fund to a portfolio of stocks purchased below net current asset value (NCAV). We will use as our proxy for inflation the rate of change of gold. Gold is unhindered by changes in methodology that have accompanied the consumer price index (CPI), the government's measure of inflation often quoted in the financial press. John William's website, Shadow Government Statistics (, shows the changing methodology used to determine the CPI index. His website shows the CPI changes over time and how the inflation rate moves ever further from reality with each revision in the calculation³.

As already shown on the chart above, the performance of a stock index fund lost money in nominal terms over the previous decade while gold had a good run. If we use gold as our proxy for inflation, the performance of the S&P 500 on an inflation-adjusted basis looks even worse. Investing $1.00 in stocks at the beginning of the last decade dwindled down to $0.23after adjusting for the price of gold.

Inflation-Adjusted Performance of $1 invested in S&P 500 2000-2009
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Most stocks are correlated with one another, so if the S&P 500 had a bad decade on an inflation-adjusted basis, you might suspect that stocks trading below NCAV would also perform poorly. Let's assume an investor put no more than 10% in any one stock that trades at 75% or below its net current asset value (NCAV). The NCAV calculation involves subtracting all liabilities, including preferred stock, from the current assets listed on the company's balance sheet. This figure is then converted to a per share basis and compared to the current stock price. Only stocks trading at 75% or below NCAV are included in the portfolio. If few stocks could be found meeting the NCAV criterion, the balance was invested in Treasury Bills. Using the rate of change in gold as our measure for inflation, the performance of NCAV stocks over the previous dismal decade stands in stark contrast to the S&P 500.

Inflation-Adjusted Performance of $1 invested in NCAV Stocks from 2000-2009
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The S&P 500 stock index was a loser relative to the price of gold over the decade, but our NCAV stock portfolio still came out ahead. Granted, the NCAV filtering criterion isn't perfect. A review of the chart shows losses in some years relative to gold, but over the entire decade the value investing criterion still manages to almost triple in value for the patient investor.

This superior inflation-adjusted performance of NCAV stocks relative to the S&P 500 index fund is not unique to a decade where stocks did as terribly as they did in the 2000 to 2009 time period. Once again using gold as our proxy for the rate of inflation, NCAV stocks outperform the S&P 500 on an inflation-adjusted basis over the long term as well. Based on a comparison of the two charts below, a disciplined investor that embraces the NCAV value investing criterion over his or her lifetime would outperform a broad index fund by a wide margin.

Invlation-Adjusted Value of $1 invested in S&P 500 1950-2009
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Inflation-Adjusted Value of $1 invested in NCAV Stocks 1950-2009
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Over the 60-year time period, $1.00 invested in the S&P 500 had an ending balance of more than $14.00 after inflation, but the NCAV portfolio climbed to more than a thousand dollars. Both strategies are still below the peak value that occurred in the year 2000, which some market watchers classify as the real beginning of our ongoing bear market in stocks adjusted for inflation. Even if we are still in a bear market, the NCAV strategy has done a better job of recovering from the losses on an inflation-adjusted basis relative to the S&P 500, as indicated on the right tail of the chart.

Our NCAV/gold index outperforms the S&P 500/gold ratio by a wide margin. During a decade when gold as an asset class shines brightly, the NCAV portfolio can still come close to the metal's stellar performance. The only constraint to implementation of this value investing approach is summarized in the last lines of text in my book:

"The simple elegance and superior performance of purchasing stocks below Net Current Asset Value has been laid out before you. It only requires the psychological will to execute this knowledge and the discipline to stick with it to achieve your financial goals."


¹ Victor J. Wendl, The Net Current Asset Value Approach To Stock Investing, (2013), 164-165.

² Roy W. Jastram, The Golden Constant, (New York: John Wiley & Sons, 1977), 125-129.

³ John Williams. "Public Comment On Inflation Measurement and the Chained-CPI (C-CPI)." April, 2013. Accessed June 25th, 2014.



Victor Wendl

Author: Victor Wendl

Victor J. Wendl

Victor Wendl

Important Disclosure: Victor Wendl is the author of The Net Current Asset Value Approach to Stock Investing. The book reviews the performance over a 60 year time period of purchasing stocks trading below net current asset value. The stock filtering criterion was popularized by Benjamin Graham, the father of value investing, and a mentor to Warren Buffett who considered his professor and former employer one of the most influential people in his life. The Net Current Asset Value Approach to Stock Investing is available for purchase on, as well as for Nook and Kindle reading devices.

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