Definition of Net-Net Investing
Net-Net Investing is a value investing strategy centered around the concept of purchasing stocks for less than their net current asset value (NCAV). The foundation of this strategy lies in taking a company’s current assets, which include cash and cash equivalents, and adjusting them for accounts receivable (accounting for doubtful accounts) and inventories (liquidation values). The goal is to find stocks trading at prices less than their net-net value, which is calculated by deducting total liabilities from the adjusted current assets.
Net-Net Investing vs Double Net Lease Comparison
| Aspect | Net-Net Investing | Double Net Lease |
|---|---|---|
| Definition | A value investing strategy focused on net current assets | A lease structure where tenant pays property taxes & insurance |
| Focus | Short-term liquidations of current assets | Long-term commercial rental agreements |
| Long-term Assets Considered | No | Yes |
| Strategic Goal | Find undervalued stocks | Generate rental income with reduced landlord risks |
| Historical Proponent | Benjamin Graham | N/A |
Key Concepts and Examples
Example of Calculating Net-Net Value
Assume a company has the following current assets:
- Cash: $100,000
- Accounts Receivable: $50,000 (after adjusting for a doubtful allowance of $10,000)
- Inventory: $30,000 (with a liquidation value of $10,000)
And the total liabilities are:
- Total Liabilities: $70,000
Calculating Net-Net Value:
\[ \text{Net-Net Value} = (\text{Cash} + \text{Adjusted Accounts Receivable} + \text{Liquidation Value of Inventory}) - \text{Total Liabilities} \]
\[ = (100,000 + (50,000 - 10,000) + 10,000) - 70,000 = 80,000 \]
The company is seen as a bargain if its shares sell for less than $80,000 total net current assets.
Related Terms
- Net Current Assets (NCA): Total current assets minus total liabilities.
- Liquidation Value: The perceived amount that could be realized from selling an asset quickly.
- Benjamin Graham: A legendary investor known as the “father of value investing,” who introduced the net-net strategy.
Visualization
To illustrate the concept of net-net investing, here’s a simple diagram:
graph TD;
A[Total Current Assets]
B[Cash + Accounts Receivable + Inventory]
C[Total Liabilities]
D[Net-Net Value]
A --> B
B --> D
C --> D
Humorous Quotes & Historical Facts
- Wise Quote: “Value investing is like fishing. The net-net strategy is your trusty net – just don’t forget to check which fish are actually swimming!” 🎣
- Fun Fact: Benjamin Graham was so devoted to value investing that his friends said he could take a company’s annual report and make it sing, or at least hum! 🎶
Frequently Asked Questions
Q1: What is the main focus of net-net investing?
- A1: The primary focus is on acquiring stocks priced below their adjusted net current assets.
Q2: Is net-net investing a long-term strategy?
- A2: It is primarily considered a short-term strategy, as it does not factor in long-term assets or liabilities.
Q3: Who is the father of value investing?
- A3: Benjamin Graham, who formalized the approach and philosophy behind net-net investing.
Suggested Online Resources
Suggested Books for Further Studies
- “Security Analysis” by Benjamin Graham and David Dodd
- “Value Investing: From Guru to Guru” by Tren Griffin
Test Your Knowledge: Net-Net Investing Quiz
## What does “net-net” refer to in investing?
- [x] A method of analyzing stocks based on their liquid assets
- [ ] A type of hedge fund investment strategy
- [ ] A double-layer security in global investments
- [ ] A type of net fishing strategy used by fishermen
> **Explanation:** “Net-net” refers to a method of evaluating stocks based on liquid current assets, famously recommended by Benjamin Graham.
## Which is NOT considered a current asset in the net-net approach?
- [ ] Cash
- [ ] Accounts receivable
- [x] Long-term investments
- [ ] Inventory
> **Explanation:** Long-term investments are not considered current assets; net-net investing focuses strictly on current assets.
## In net-net investing, which of the following would be subtracted from current assets?
- [ ] Total revenues
- [ ] Current liabilities
- [x] Total liabilities
- [ ] Federal taxes
> **Explanation:** Total liabilities are deducted from current assets to derive the net-net value.
## What does Benjamin Graham advise on in his net-net strategy?
- [ ] Investing solely in technology stocks
- [x] Focus on undervalued companies with attractive current asset values
- [ ] Only investing in banks
- [ ] Following market trends closely
> **Explanation:** Benjamin Graham advises value investors to focus on undervalued companies based on their current asset valuations.
## Why can relying solely on net-net investing be criticized?
- [ ] It’s never worked for anyone
- [x] It ignores long-term assets and liabilities
- [ ] It counteracts a healthy investment strategy
- [ ] It focuses too much on cash flow
> **Explanation:** Critics argue that net-net investing overlooks valuable long-term assets and liabilities, which can skew an investment’s potential.
## What is the potential downside of net-net investing?
- [ ] What happens in Vegas, stays in Vegas
- [ ] Sometimes the assets are not as liquid as they appear
- [ ] It requires too much paperwork
- [x] You might end up with a lot of fish that spoil quickly
> **Explanation:** The metaphorical fish becoming a problem illustrates that such investor behavior can lead you to stocks that might not hold their value, especially those based on cosmetic liquidity.
## What calculation helps determine if a stock is a net-net bargain?
- [ ] Price to earnings ratio
- [ ] Weight of evidence theory
- [x] Net current asset value per share (NCAVPS)
- [ ] Average cost of goods sold
> **Explanation:** Net current asset value per share (NCAVPS) is the key calculation to identify if a stock is a net-net bargain.
## What would be a good sign of potential investment in a net-net stock?
- [ ] High debt levels
- [ ] Declining asset valuations
- [x] Low corporate stock price relative to the net-net calculation
- [ ] Overspending by management
> **Explanation:** A low stock price compared to its net current asset value per share is a promising indicator of potential value in net-net investing.
## In what market scenarios is net-net investing most likely to flourish?
- [ ] Bull markets
- [ ] Stable markets
- [ ] High dividend yield scenarios
- [x] Bear markets
> **Explanation:** Bear markets often cause stock prices to decline significantly, allowing savvy net-net investors to find great bargains.
## Which of these accurately represents the goal of net-net investing?
- [ ] Speculating on future net income
- [ ] Waiting for dividends
- [ ] Only investing in dividends for guaranteed returns
- [x] Acquiring undervalued companies with solid current assets
> **Explanation:** The essence of net-net investing is to acquire companies trading below their adjusted current asset values, offering solid investment prospects.
Thank you for diving into the mysterious waters of net-net investing with us! Remember, just like fishing, it takes skill and patience to reel in the big catches or to assess true value. Happy investing! 💰🐟
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