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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: TimbaBear who wrote (11862)	1/16/2001 10:04:38 PM
From: Paul Senior	Read Replies (1) \| Respond to of 78625

TimbaBear: net-nets I am just guessing, but I would presume many people here would consider a definition by Jim Clarke to be most appropriate. (Or maybe RJM, who seems to specialize in such investments). But since I'm here and I've got some time, I refer you to the standard "Intelligent Investor", Chapter 15 (1973 edit), "Stock Selection for the Enterprising Investor", referring to net current asset stocks (NCA): "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 count as zero the fixed and other assets- the results should be quite satisfactory." We are talking about stocks selling at price equivalent to working capital/sh. A NCA stock = a netnet. To me, a "Ben Graham net-net" is a stock selling at 2/3 of NCA. Dr. Graham suggested that buying a diverse number of stocks each of which sold for 2/3 of NCA and holding each (Patience is required!) until the stock price rose to NCA value (or until two years elapsed) and then selling-- that that was a method that proved profitable. There are also some notes that I have wherein Dr. Graham said just buy the NCA stocks and that works out well. On this thread, IMO - and I am guessing only - the strong preference is for 2/3 NCA for a purchase. Paul

To: TimbaBear who wrote (11862)	1/16/2001 11:58:22 PM
From: Q.	Read Replies (2) \| Respond to of 78625

Re. net-net, you could take current assets minus all liabilities, which is how I interpret Graham's definition of net current assets. You then multiply this by your favorite ratio. Graham used a ratio of 2/3. If the stock is selling for less than the product, it's a candidate to consider buying in this scheme. How to choose the ratio for the cutoff? Ben Graham's Intelligent Investor book suggests using 2/3. If the stock sells below 2/3 of net current assets, it's a candidate for him. There's no particular justification that I could find in the book for choosing 2/3, as opposed to some other fraction. It's just there, in the book. I don't think you have to use 2/3 as the gospel. You might want to choose a different ratio as your cutoff, for this reason: Typically the stocks that sell at the deepest discount to net current assets are very small market cap stocks, with low stock prices. A $1 stock with a market cap of $7 million for company selling a single product, well that would not be uncommon. If this isn't what you feel comfortable buying, you could loosen your screen by choosing a larger ratio than 2/3, and you could thereby find more stocks to choose, including better capitalized companies with bigger market caps. Lately, though, there are lots more stocks selling below net current assets, or even below net cash, than in recent memory.