Evan Bleker’s book, Benjamin Graham’s Net-Net Stock Strategy

Picking stocks based on a growth or value strategy is one of the oldest ways to build a portfolio. As global equity markets may start to show signs of a value rotation, what better time to revisit the teachings of the great Benjamin Graham?

Known as the “Father of Value Investing,” Graham is an influential investor whom many experts turn to to develop a value-driven approach to investing. Evan Bleker, a professional investor, spent 10 years studying Graham’s technique and managed to beat the market using a net-net strategy.

To provide a cohesive guide to the strategy, he wrote a book called Benjamin Graham’s Net-Net Stock Strategy: A Practical Guide to Successfully Investing in Deep Value in Today’s Markets, which was published by Harriman House.

Bleker, who founded the Net Net Hunter Platform, wrote the book to leave a template for readers to find “the most profitable investment strategies ever created.”

“Graham gave investors a tremendous gift when he developed his net-net equity strategy, but he did not delve into how investors should implement the strategy,” he said. Opto. “Instead, there were pieces of the strategy strewn across dozens of written works that had to be stitched together into a cohesive whole.

“Graham gave investors a tremendous gift when he developed his net-net equity strategy, but he did not delve into how investors should implement the strategy. Instead, there were bits of strategy scattered across dozens of written works that had to be stitched together into a cohesive whole “- Evan Bleker

During Bleker’s research, he was heavily influenced by Warren Buffett’s “cigar butt” approach of looking for absurdly cheap stocks with qualitative facts. “Imagine buying a strong and growing insurance company at a PE of just 0.5x! These are the kind of nets I hunt today, ”he adds.

The following is an excerpt from chapter three of Benjamin Graham’s Stock Net-Net Strategy, published with permission.

A closer look at Graham’s net-net working capital formula

The famous Tweedy value management firm, Browne once called net-net investing the oldest systematic approach to investing they knew. Net-net investing is indeed old, dating back at least to the beginning of Graham’s career. Graham first publicly discussed the practical utility of buying stocks below their liquidation value in the early 1930s. But it is not clear whether Graham was pointing out a new approach to investing or highlighting a tradition. much older.

Net-nets first raised public awareness in a major way during one of America’s darkest times. The world had just suffered a terrifying fall in the stock markets and was in the midst of the greatest economic depression in the past 600 years.14 Due to the massive stock market crash of 1929 to 1932, about a third of all publicly traded companies in below a reasonable assessment of their net asset value. At the time, Graham referred to many of them as net fast companies and only included cash, short-term investments, and receivables in his calculation. Later in his career, when assessing liquidation value, he came to include all of a company’s current assets and recommend that enterprising investors focus on those working capital stocks for the purchase.

Graham used a few different formulas as he developed the approach throughout his career, and his writing is littered with different terms for strategy. Some of the most common formulas and terms used over the past century include:

  • Net cash: Stocks that trade below their net redemption value, cash and cash equivalents minus any pre-joint stock bonds. Pre-common obligations basically include anything that needs to be paid by the owners of the business, such as loans, vendor credits, taxes, preferred dividends, or even the withdrawal of preferred stock.
  • Net Fast Stocks: More conservative than the current approach, they only take into account a company’s more liquid current assets. Here, cash and cash equivalents, short-term investments and receivables are included while everything else (including inventory) is excluded from the calculation.
  • Net working capital (NNWC stocks): Less conservative than net quick inventories, these take into account all current assets but discount current assets (for example, short-term investments, receivables, inventories and prepaid items) for a more valuation. careful. Graham also included fixed assets, but at an extreme discount from their book value.
  • Working capital / net working capital stocks / NCAV stocks: Graham has used these terms interchangeably but all refer to the same general approach, which takes into account all current assets.
  • Net inventories net / net net: Slang term derived from offsetting current assets against current liabilities, and offsetting this amount against long-term liabilities and obligations before the common.

In this chapter, I present to you one of the most common alternative formulas: investing in net-net working capital. In the process, I hope to help you understand the main formula better so that you can apply it well in your own practice.

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Ann J. Cox