Benjamin Graham's Net-Net: A Deep Dive into Deep Value Investing

Benjamin Graham is often called the "father of value investing" because he developed many groundbreaking ideas that investors still use today. One of these ideas is the net-net strategy, a strict way to invest in value that looks for companies selling for less than the value of their net current assets.

How to Figure Out the Net-Net Strategy

The net-net approach is based on the idea that investors should look for a margin of safety. Graham thought buyers were getting the company's long-term assets for free if they bought stocks for less than their net current asset value (current assets minus total liabilities). Graham said this gave a significant margin of safety because even if the company went bankrupt, it would still make money.

Putting the Net-Net Strategy into Action

For this approach to work, investors need to find companies whose market capitalization is less than the value of their net current assets. This is done by taking a company's overall liabilities, like preferred shares and long-term debt, and taking them away from its existing assets, like cash, accounts receivable, and inventory. If the total is more than the company's market value, the company could be called a net-net.

But buyers need to be aware of possible problems. Consider the quality of the current assets (for example, can the receivables be collected and can the goods be sold? ) and try to figure out why the company is undervalued.

What the Net-Net Strategy Can't Do and What It Might Do

The net-net approach can be profitable, but it also has risks. First, net-net stocks are often small companies with money problems or industries that aren't very popular. This means that they may be riskier than average.

Second, there are few net-net chances in developed markets, especially when prices are high during bull markets.

Lastly, net-net companies can be undervalued for a long, which can test buyers' patience.

Conclusion

Benjamin Graham's net-net approach is a crucial idea in deep value investing. Its main goal is to find companies selling for less than the value of their net current assets. This strategy can be an excellent way to make money. Still, buyers must be aware of the risks and research carefully. As with any investment strategy, the key to success is understanding basic ideas and possible problems.