Net net investing is a classic value investing strategy originally promoted by Benjamin Graham in the 1930s. The core of this strategy is to buy stocks that are incredibly undervalued compared to their intrinsic value. By purchasing shares of companies trading significantly below their net current asset value, net net investors aim to profit when stock prices eventually reflect the true worth of the businesses. This article will explore the key concepts, assumptions, and valuation models behind net net investing, as well as examine why this approach continues to attract followers almost a century after its inception.
Net net investing relies on market overreactions and divergence between price and value
The strategy of net net investing is built upon two critical assumptions. Firstly, Benjamin Graham believed that the stock market tends to overreact to both good and bad news, leading to mispricing that leaves quality stocks undervalued. Secondly, he focused on the discrepancy between a stock’s market price and its intrinsic value as estimated through thorough analysis. Graham sought to profit from situations where Mr. Market’s temporary pessimism allowed him to purchase shares far below conservative valuations of business worth.
Two key models for determining a net net stock’s intrinsic value
Graham employed two major models to arrive at the intrinsic value of prospective net net investments. The first was the dividend discount model (DDM), which values a stock based on the present value of its estimated future dividend stream. The second was Graham’s own Gordon growth model (GGM), which assumes dividends will grow at a constant rate and determines worth as current dividends divided by the excess of the required rate of return over the dividend growth rate. While simplifying assumptions limit their applicability, these models give a baseline indication of whether a stock is significantly underpriced.
Extremely stringent valuation criteria identifies the cheapest opportunities
Central to net net investing is buying stocks trading at huge discounts to book value, specifically below net current asset value. This means paying less for the shares than the value of a company’s cash and short-term investments minus all liabilities. By targeting stocks meeting this stringent criterion, net net investors concentrate their research on the deepest value opportunities with the largest margins of safety.
An investing approach demanding patience to see gains realized
The key challenge of practicing net net investing is having the discipline to hold cheap stocks long enough for market prices to reflect fundamental value. Since factors causing short-term undervaluation can persist, practitioners must be patient and withstand price volatility until other investors recognize the discounted opportunities. Successful net net investors are those able to take a long-term perspective and wait for Mr. Market’s views to turn in their favor.
Net net investing represents a contrarian value investing strategy focused on purchasing stocks at steep discounts to intrinsic value. By concentrating their analysis on quantitatively cheap companies, net net investors seek to profit over the long run when stock prices recover and reflect business fundamentals.