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Invest like legendary investor Ben Graham

April 21, 2024
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Learn how to invest like Ben Graham.

Ben Graham is known as "the father of value investing" and one of Warren Buffett's role models. 

So why would you want to try to invest like Ben Graham?

To dumb it down, his strategies are relatively safe and has been shown to outperform over the long run.

https://www.quant-investing.com/blog/why-and-how-to-implement-a-net-net-investment-strategy-world-wide

* Read his book 'The Intelligent Investor' to gain a better perspective. 

In this article, we will touch on Graham's net-net strategy.

Net-net strategy:

Graham came up with this strategy after losing a lot of money during the Great Depression. It is a conservative strategy and basically asks "what is the business worth today if I have to liquidate all the assets and pay down all debts very quickly?".

The calculation of this is called net-net working capital (NNWC). Graham applied discounts to the various asset classes to account for conservativism.
In general, discounts were applied in the following manner:

Cash (100%) - no discount as cash can be liquidated immediately 
Account Receivables (75%) - discount by 25%
Inventory (50%) - discount by 50%

NNWC = Cash + Receivables*75% + Inventory*50% - Total liabilities

If NNWC > Market Cap then buy.

A more simpler version of NNWC is called net current asset value (NCAV). It is easier to implement because it does not make any assumption about how to discount the specific asset classes. For example, discounting inventory by 50% might be too much for a house builder company, but not strict enough for a out-of-fashion clothing retailer. Also, using either NNWC or NCAV doesn't really matter for long term performance as both strategies outperform.

https://www.oldschoolvalue.com/investing-strategy/ncav-nnwc-backtest-refined/

The NCAV method sums all current assets together and discount the value by a third.

NCAV = ( Cash + Receivables + Inventory ) - Total liabilities 

If NCAV * 2/3 > Market cap then buy.

How to implement:

Buy stocks where NCAV * 2/3 > Market cap and sell as soon as stock reaches 50% gain or stock approximate it's NCAV value. Max holding period usually around 4 years. Remember these companies are generally ugly/cheap companies, so very few are buy and hold opportunities.

*Rough guidelines, if you are serious about the strategy then do a bit more reading

https://www.netnethunter.com/your-essential-guide-to-net-net-stocks/

Things to note:

Usually small illiquid companies, so selling is not always as easy. Graham bought a lot of these stocks, however, you might not be able to find a lot of stocks with these characteristics.








 


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