Methodologies, Value Investing

Graham’s net-net investment strategy

Just read an article on Gurufocus: that talks about Benjamin Graham's "net-net" investment strategy in 1979, and Joel Greenblatt's analysis of it back in 1981.

Salient points:
Graham's rough liquidation value (net-net) estimate:
"Current Assets" (cash, accounts receivable, inventory, etc.)
Less: "Current Liabilities" (short term debt, accounts payable, etc.)
Less: "Long Term Liabilities" (long term debt, capitalized leases, etc.)
Less: "Preferred Stock" (claim on corporate assets before common stock)
Divided by: Total Shares Outstanding
EQUALS "Liquidating Value Per Share"

Greenblatt did a study using 6 years of historical data (1972-1978) with the following 2 conditions:

  1. Stocks that have shown a loss over the last 12 months, were not considered
  2. Stocks were sold after 100% or 2 years (whichever came first)

The screen that worked best was

  1. Price / Liquidating Value <= 0.85
  2. Price / Earnings <= 5

which returned an annually compounded rate of 42.2% (before transaction costs).

Conclusion: You don't find such bargains (companies selling for less than net working capital) anymore =)



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