‘Net-Net’ Stocks: A Timeless Value Strategy – But Pickings Are Slim by Norman Rothery, The Globe And Mail

In the evenings, I enjoyed perusing Victor J. Wendl’s bookThe Net Current Asset Value Approach to Stock Investing: A Guide to Purchasing Stocks Trading below Liquidation Value. Mr. Wendl works as a fee-only adviser in St. Louis, Mo., and the book focuses on a strategy first suggested by famous money manager Benjamin Graham in the 1930s.

Near the depths of the Great Depression, Mr. Graham wrote a series of articles that highlighted businesses that could be snapped up for less than their liquidation value. The outlook was so bleak for these firms that the market believed they were better off dead than alive. Anyone who was brave enough to buy a basket of them, and hold on, did very well indeed.

To find such stocks, Mr. Graham calculated each firm’s net-net value, which is equal to its current assets less all of its liabilities. Firms trading at a significant discount to this value attracted his attention.

Mr. Graham’s well-known protege, Warren Buffett, bought similarly depressed stocks when he started his hedge fund decades ago. But it was only after taking control of Berkshire Hathaway, an ailing textile concern, that he proved to be a great CEO.

But Mr. Buffett now buys quality firms at fair prices. Problem is, only a few stocks trade below their net-net values in normal times and they’re generally too small for large investors to bother with.

That leaves the field open to small investors who might benefit from Mr. Wendl’s book, which is devoted to a series of back-tests of the net-net method.

Full article here The Globe And Mail