Hello James Clark!
I'll offer my thinking on using a multiple of NetNet as I derive it, which is probably pretty close to how Graham outlined for deriving NetNet.
The questions I face are: "How do I find a good company to invest in that offers me a reasonable rate of return on my money with reasonable safety of principal?" "How would I recognize it if I saw it?" "How do I process the vast amounts of information available to me for free on the internet in such a way as to be able to cull from all that data the sets of facts germane to an intelligent decision(and do so relatively quickly)?" "How and when do I evaluate the results of those decisions?"
I don't know how many books I've read over the years to try to answer these and many other questions, but it is a pretty impressive list, and it will probably keep growing until the day that I die because I love the field and the challenge.
One of the things that I've learned is that I must come up with my own style of decision-making. Neither Graham, nor Buffet, nor Fisher, nor Pring, nor Livermore, nor Rogers, nor anyone else is on hand for the crisis times and none will take responsibility for my losses. I have lots of help from their accumulated wisdom, but ultimately I stand alone. Which is fine, I accept the challenge freely.
Having said that, what is a fair price to pay for a company?
X times sales? Y times book? Z times income? W times discounted dividend? T times cash? V times cash flow? When do any of these STOP being a good price at which to own a company? If I buy stock in a company and, through a stroke of good fortune it is up 40% in a few days should I sell it?
The answers, for me, are never black and white. It is usually a combination of the above. A TimbaBear combination.
I have arrived at the notion that "book value" as currently derived is a meaningless calculation. It is a strongly held notion of mine, so strong that I won't use "book value". But the concept that was its genesis is an important one for "fair price" evaluation purposes. So I have replaced "book value" with NetNet value. This is for my use, it does not need to be accepted as appropriate by or for anyone else. I'll indicate that I used it (on this board) as a friendly gesture to help the other fine investors/speculators here to understand my thinking, and to generate discussions like I hope this one turns out to be, but not because I need anyone's approval.
I use a multiple of NetNet value similarly to the way that I would use a multiple of book value. Only, I have much more confidence that the number represents something meaningful. Something I think was originally intended by those who first had the need to get a base line valuation and filled that need by deriving "book value" calculations.
I agree that NetNet valuation alone, or buying companies solely because they are near or below this calculation is not the sole investment approach that Graham used. Nor is it the sole approach I use. There is no substitute for knowledge of the concepts behind financial analysis and security analysis.
I believe that a multiple of NetNet and a multiple of Free Cash Flow (again, as Timba derives it) are more germane to a sound investment decision than "book value" and "P/E"
I too am looking forward to a discussion on this topic! However, I'm going away for the week-end and won't be able to participate again until sometime Sunday afternoon or evening.
Timba |
