Net-Net Investing

Key takeaways
* Net-net is a value-investing strategy from Benjamin Graham that values a company by its net current assets per share (NCAVPS), excluding long-term assets.
* Graham recommended buying stocks trading at 67% or less of NCAVPS as potentially undervalued.
* The approach emphasizes short-term liquidation value and safety but can miss long-term business problems; diversification is critical.

What is Net-Net?

Net-net investing identifies stocks whose market price is below the company’s net current asset value per share. The idea is that current assets that can be converted to cash within 12 months—less current liabilities—represent a conservative, recoverable value. If a stock trades materially below that number, an investor may capture downside protection and potential upside if the market corrects the mispricing.

How it works

• Calculate NCAVPS to estimate the company’s conservative per-share liquidation value:
  NCAVPS = (Current Assets − (Total Liabilities + Preferred Stock)) ÷ Shares Outstanding
• Graham’s guideline: consider buying when market price ≤ 67% of NCAVPS.
• Historically, studies have found strong short-term returns for portfolios selected this way, though results vary and past performance is not a guarantee.
• Advances in financial data make full financial-statement analysis easier today than in Graham’s time, so many investors combine NCAV screening with other checks.

Important factors

• Current assets: cash, cash equivalents, receivables, and inventory—items expected to convert to cash within 12 months.
• Current liabilities: obligations due within 12 months (accounts payable, short-term debt).
• Long-term assets and long-term liabilities are excluded from the NCAVPS calculation; the focus is on near-term recoverable value.
• A related conservative measure, net-net working capital (NNWC), is sometimes used:
  NNWC = cash + short-term investments + 75% × accounts receivable + 50% × inventory − total liabilities
  (The weighted receivables/inventory adjustments reflect potential collection or liquidation losses.)

Limitations and criticisms

• Short-term safety, not guaranteed long-term success: management decisions, poor competitive position, or structural industry decline can destroy value over time.
• Stocks can be cheap for good reasons; NCAV screening may flag companies with fundamental problems (declining demand, unsustainable losses).
• Net-nets were more common and effective when financial information was scarcer; today, investors can and should supplement NCAV screening with broader financial and industry analysis.
• Net-net stocks can be volatile and attract speculative trading, which may lift prices temporarily before fundamentals reassert themselves.

Practical guidance

• Use NCAVPS as an initial, conservative filter—not a standalone buy signal.
• Follow up with quality-of-earnings checks, management assessment, cash-flow analysis, and industry outlook.
• Diversify: Graham recommended holding many positions (he suggested around 30) because not every net-net will perform well.
• Consider a time horizon: net-net strategies often favor shorter-term mispricing capture, but careful selection is required for longer-term holdings.

Bottom line

Net-net investing is a conservative, margin-of-safety approach that focuses on near-term, liquid value. It can uncover deeply discounted stocks and offer downside protection, but it omits many long-term economic factors. Use NCAVPS as a disciplined screening tool, then perform broader analysis and diversify to manage the strategy’s risks.