What is net-net?

Net-net value investing is a term derived from one of Benjamin Graham’s investment strategies. It is a technique valuing a company’s stock based on its net current assets per share (NCAVPS). 

In his book, The Intelligent Investor, under the chapter “Stock Selection for the Enterprising Investor”, the father of value investing talked about net-current-asset or bargain issues. It was from this Graham-Newman investment method that the net-net value investing strategy got its name. (Graham-Newman was a company launched by Benjamin Graham, the father of value investing, in January 1936 and dissolved in 1956 when he retired).

Before going into what a net-net stock is –  which involves buying a stock at less than its liquidation value – mention must be made that net-current-asset or bargain issues in the chapter were for the enterprising investor.

Benjamin Graham made a basic distinction betweeen two kinds of investors – the “defensive” investor and the “enterprising” investor. The defensive (or passive) investor places emphasis on avoiding serious mistakes or losses. The enterprising (or active, or aggressive) investor is willing to devote time and care to the selection of securities that are both sound and more attractive than the average.

There are two criteria in the net-net stock strategy.

Criterion 1: To acquire as many issues as possible, costing less than their book value in terms of net-current-assets, meaning ignoring or not giving value to the plant account and other assets.

Criterion 2: Making the purchases of the net-net stock typically at two-thirds or less of the stripped down asset value.

Benjamin Graham said: “In most cases, we carried a wide diversification here – at least 100 different issues.”

In Security Analysis by Graham and Dodd’s, the authors said “we deduct all obligations and preferred stock from the working capital to determine the balance of the common”.

Thus, net current asset value (NCAV) is the value of the current assets minus total liabilities, including preferred shares. Because of this, proponents call it buying a stock below the liquidation value.

The formula is:

Net-net stock price = 2/3[{Current assets – (Total liabilities + Preferred Stock)/Outstanding number of shares}]

That is, net-net stock price = 2/3(NCAV/outstanding shares) = 2/3 x NCAVPS.

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