what is Net-Net

Net-net investing is a value investing technique that involves purchasing a company's stock at a price below its net current assets per share (NCAVPS). This strategy was popularized by Benjamin Graham and has been used by investors such as Warren Buffett. Here's a detailed analysis of net-net investing: 1. **Definition and Calculation**: Net-net is a valuation technique that calculates a company's net current assets by subtracting total liabilities from current assets, including cash, receivables, and inventory, adjusted for their liquidation values. The net-net value is the net current assets minus total liabilities and preferred shares. 2. **Investment Strategy**: Net-net investing focuses on companies with a market capitalization less than their net current assets. This approach is based on the idea that even if a company goes bankrupt, the investor would still receive more than the market value of the stock due to the liquidation value of the assets. 3. **Historical Performance**: Net-net stocks have historically provided strong returns. For example, a study from 1983 to 2008 found an average yearly return of 35.3% for net-nets listed on American stock exchanges. Another study from 1985 to 2007 found an average yearly return of 35% for net-nets trading at two-thirds of NCAV or less. 4. **Limitations and Risks**: The net-net strategy has limitations, such as its lack of consideration for long-term assets and growth prospects. It also assumes that the company's assets can be quickly liquidated and that the market will eventually recognize the company's intrinsic value. Additionally, the strategy requires careful consideration of management quality and business model flaws, as these can rapidly deteriorate a balance sheet. 5. **Application and Considerations**: When applying the net-net strategy, investors should consider the net-net working capital (NNWC), which is a more conservative method of valuation that adjusts current assets and liabilities for potential liquidation risks. It's also important to analyze the company's ability to collect cash from receivables and inventory, as this is the true value of a business under the net-net approach. In conclusion, net-net investing can be a effective strategy for value investors looking for undervalued companies with a margin of safety. However, it is crucial to conduct thorough analysis, considering both the potential upside and downside risks, and to ensure that the investment aligns with one's overall portfolio strategy and risk tolerance.