What is Net-Net Investing?

Net-net investing, developed by Benjamin Graham (often called the "father of value investing"), 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 substantial margin of safety for investors by purchasing stocks at significant discounts to their liquidation value.

The name comes from the calculation itself: take current assets, net out the liabilities, and compare what is left with the share price. See the NCAV formula with a worked example.

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:

29.4%

From 1970 to 1983, investors could have earned an average return of 29.4% annually by following Graham's net-net strategy.

Source: Henry Oppenheimer Research
35%

A more recent analysis by Montier found net-nets generating annual returns of 35% on average across various markets.

Source: Montier, Value Investing

For more studies, including the UK and Japan, and the caveats behind these numbers, read Graham's net-net strategy: historical returns and studies.

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 critical importance of diversification when using the net-net strategy. He recommended holding at least 30 stocks to effectively spread risk and increase the likelihood of overall positive returns. Since individual net-net stocks can be volatile and some may not recover, a diversified portfolio helps ensure that the winners more than compensate for any losers.

Risk Awareness

While net-net investing can offer substantial returns, it's not without risks. These companies are often trading at low prices for legitimate reasons—they may be facing financial difficulties, operating in declining industries, or have questionable management. Always conduct thorough research and consider consulting with a financial advisor before making investment decisions.