Benjamin Graham, “The Father Of Value Investing”, was known for his conservative and very sensible approach to investing. He came up with buying companies below their net current asset valeu (NCAV), which is defined as Current Assets – Total Liabilities – Preffered Stock. This NCAV was supposed to give you a rough estimate of an entities liquidation value. The reason he didn’t use all assets to determine the liquidation value of a company is that nobody knows how much you will get for intangible assets or a factory.
So what’s wrong with investing in these companies selling below NCAV. Well first of all Ben Graham had very strict criteria. He would buy a company at 66% of NCAV. On December 19, 2006 there were only four net/nets I could find:
1. Dominion Homes (DHOM)
2. CET Services (ENV)
3. TransNet Corp. (TRNT)
4. Taitron Components (TAITS)
While I’m not saying these would make bad investments, companies don’t get below liquidation value because of managements fine ability to increase book value as well as shareholder value. Sometimes one of these companies will go out of business. Many of these companies book value will keep declining reducing the spread between the share price and the NCAV.
So why would Ben Graham invest in Net/Nets? Well for one thing, he started implementing that strategy shortly after the great depression where the market was cheap overall. This allowed Graham to have over 100 net/nets in his portfolio. Today we would have four. While a company going bankrupt didn’t do much damage to Graham’s portfolio, it most surely would in a portfolio of only four companies. I’m usually against diversification when it comes to buying great companies for a really good price and with this type of market that offers not a lot to choose from, I think it would be safer to stay away from Graham’s net/net strategy. During a recession or huge drop in the market this strategy will work fine, but as of now it is not a safe bet… unless…
If you have the money to take a controlling stake in one of these companies you can liquidate certain assets and invest the cash or issue it as a dividend. Otherwise, stay away!
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Eric Schleien does not own shares in DHOM, ENV, TRN, TAIT
Eric Schleien
zachary
teenmoney
josh4580
Carlton
I don’t own any of these either but I think you need to pull a mini Bain Capital and buy all of the near net net and net nets out at 80% of book value.
My modern interperetation of Graham is to find good businesses that trade below book value but have solid earnings histories, and are cheap on both earnings, cash flow and book value.
Led me to PKX, TNT, BBQZ, GI, ALGOF, AWX, NAHC, EXM, and a list of about 20 others.
I look for P/B
[...] After all, if the market values them so poorly, there must be something amiss, right? (According to ValueSeeker.net, there were only 4 stocks that met Ben Graham’s Net/Net criteria at the end of [...]