Understanding Net-Net Investing

The Concept

Net-net investing, developed by Benjamin Graham, is a value investing technique that focuses on companies trading below their net current asset value per share (NCAVPS). This approach emphasizes the importance of current assets and provides a margin of safety for investors.

Key Components

• Current Assets: Cash and assets convertible to cash within 12 months
• Liabilities: Deducted from adjusted current assets
• Stock Price: Should be no more than 67% of NCAV per share

Historical Performance

Studies have shown impressive returns for net-net investing:

• From 1970 to 1983, investors could have earned an average return of 29.4% annually by following Graham's net-net strategy, according to research by Henry Oppenheimer.[source]
• A more recent analysis by Montier found net-nets generating annual returns of 35% on average across various markets.[source]

The "Cigar-Butt" Approach

Warren Buffett likened net-net investing to finding a discarded cigar butt with one puff left. While it may not offer much, the extremely low purchase price relative to the business makes that "last puff" potentially very valuable. The "cigar butt" analogy is meant to be an example of the potential for significant returns from seemingly unattractive investments.

Diversification is Key

Graham emphasized the importance of diversification when using the net-net strategy. He recommended holding at least 30 stocks to spread risk and increase the likelihood of overall positive returns.