How Much Will The Market Return? Just Count Graham Net-Nets

How Much Will The Market Return? Just Count Graham Net-Nets

This may be an inappropriate question to ask at a time when the S&P500 is ruling near all-time highs.

Yet, it is always better to keep first principles in mind, and the Graham Net Net Number (NNNs) is a good way to answer the question from a binary viewpoint: is the market cheap…or not?


A white paper titled ‘Net-Net Number: Implications & Conclusions’ by Theodor Tonca, Chairman & CEO, Graham Theodor & Co Ltd, dated August 1, 2013, defines this number as follows:

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The term “NetNet” coined by the late, great Benjamin Graham, refers to a typical, operating business in which the market in a stroke of genius has decided to price below the value of its current assets (cash and equivalents, accounts receivable, etc.) less all liabilities (accounts payable, notes including long dated debt) alone.

In other words, it refers to a stock trading at a deep discount to even the value of its net, quickly realizable assets after paying off long-term creditors.  Years later, Warren Buffett would describe this akin to paying an amount for a wallet that already contained more money than the asking price.

So, the higher the number of NNNs, the cheaper the market.

Judging a market by how NNNs stack up

The study by Theodor Tonca shows an inverse relationship between the NNNs prevailing in the market and the returns realized during the same period.

Graham NNN-results

Rising markets tend to throw up a smaller number of NNNs, and it is not surprising, therefore, that returns are higher during these periods.

Falling markets usually see investors selling off at unrealistic prices, thereby boosting the availability of NNNs.

Screening for Graham NNNs

Graham value investing enthusiasts can access an NNN (or Net Current Asset Value, NCAV) screener here.

Here’s a shot of this screen:


Graham is said to have picked only those stocks that were available at less than 66 percent of NCAV.

However, it is recommended that this could be the initial check for value, to be followed up with other methods of appraising the investment.

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