When Warren Buffett graduated from Columbia University in 1952, his dream job was to work for Benjamin Graham, the author of Security Analysis and father of Value Investing. Buffett took a course on value investing with Professor Graham in Columbia and was a star student in the class. However, when he proposed himself to Graham for a job at Graham-Newman Corporation, he did not get the job immediately for reasons beyond the scope of this article.
Two years later in 1954, he got a call from Graham--Newman and he hopped to work in New York City all the way from Omaha, Nebraska, on the very next day, one month ahead of his agreed-on start day.
What stuff exactly did he learn under Graham, stuff that he felt he couldn’t have learned enough after taking Graham’s class in Columbia? Figuratively speaking, and this may turn you off: mostly, Buffett learned from Graham on how to pick up “cigar butts” -- not the soggy stuff that smokers spit on the sidewalks, but the stocks that so disliked by the stock market that they are traded below the net working capital – hence they are also called “Net-Net” stocks.
In Ben Graham’s version of investing in these cigar butts stocks, he would buy a large number of them and wait. There was no active investing, no visit of management, no board room wrestling and proxy fighting. As Graham told Buffett, the cigar butts typically had one puff left, either the market would turn around and recognize the value or some other investors would come along and buy the company out completely.
Buffett was more confident in his judgment and hence much more concentrated in his holdings. Still as the history went, Buffett practiced Net-Net investing until he got so much more money that continuing the same drill became inconvenient and until he met Charlie Munger – but that is another story.
Times are different now and companies traded below net working capital are kind of rare. But they do still exist. Unlike Graham and Buffett in their times, who had to burn oil and read pages after pages of Moody’s Manual, now you have some better tools.
GuruFocus has a feature called Benjamin Graham Net Current Asset Value Screener. The screener looks at all the stocks traded in the major US stock exchanges and identifies the ones that are traded below or slightly above the net current asset value. Yes, it is premium member feature, but you can always sign up for a 7-day trial membership and have a good look at the list. If you are not a premium member, click here to sign up or upgrade for a 7-Day Free Try.
Does the investment strategy still have merits? At GuruFocus, we set up a trial portfolio on December 25, 2008 -- yes during the hay days of financial crisis. Those were the days when such opportunities were relatively more abundant. We did not catch the market low of March 9, 2009, because, well, we are mere mortals and did not know there would be better days to buy stocks ahead of us. Next time when you figure that one out, please give us a call.
On December 25, 2008, we picked the top 20 stocks on the Benjamin Graham Net Current Asset Value Screener and started to track their performances. After setting up the portfolio, we just left them there unattended. There were a number of M&A’s during the past two years, and we did not bother to re-invest the proceedings; we did not do what Ben Graham did – selling positions in order to chase stocks offering better returns. Here are the results through September 15, 2010, a little less than two years after:
Some observations:
Benjamin Graham would be proud that he way of investing still works.
GuruFocus would have made Buffett’s life easier if he only had $1 million to invest and he wanted to return 50% per year (please read Warren Buffett, 50% Return). He could start with the stocks showing up on the screen and research and invest in them as he sees fit. Bottom line: no oil burning.
To find out what’s on the Graham Net Current Asset Value Screen today, click: here.
GuruFocus also produces a monthly newsletter highlight two Cigar Butts a time, click here to see details.
Graham Net Current Asset Value Screen is a premium member feature and one of the many features. You may wonder whether it worth the money, click here to discover why Barron’s recommended GuruFocus recently.
If you are not a premium member, click here to sign up or upgrade for a 7-Day Free Try.
Two years later in 1954, he got a call from Graham--Newman and he hopped to work in New York City all the way from Omaha, Nebraska, on the very next day, one month ahead of his agreed-on start day.
What stuff exactly did he learn under Graham, stuff that he felt he couldn’t have learned enough after taking Graham’s class in Columbia? Figuratively speaking, and this may turn you off: mostly, Buffett learned from Graham on how to pick up “cigar butts” -- not the soggy stuff that smokers spit on the sidewalks, but the stocks that so disliked by the stock market that they are traded below the net working capital – hence they are also called “Net-Net” stocks.
In Ben Graham’s version of investing in these cigar butts stocks, he would buy a large number of them and wait. There was no active investing, no visit of management, no board room wrestling and proxy fighting. As Graham told Buffett, the cigar butts typically had one puff left, either the market would turn around and recognize the value or some other investors would come along and buy the company out completely.
Buffett was more confident in his judgment and hence much more concentrated in his holdings. Still as the history went, Buffett practiced Net-Net investing until he got so much more money that continuing the same drill became inconvenient and until he met Charlie Munger – but that is another story.
Times are different now and companies traded below net working capital are kind of rare. But they do still exist. Unlike Graham and Buffett in their times, who had to burn oil and read pages after pages of Moody’s Manual, now you have some better tools.
GuruFocus has a feature called Benjamin Graham Net Current Asset Value Screener. The screener looks at all the stocks traded in the major US stock exchanges and identifies the ones that are traded below or slightly above the net current asset value. Yes, it is premium member feature, but you can always sign up for a 7-day trial membership and have a good look at the list. If you are not a premium member, click here to sign up or upgrade for a 7-Day Free Try.
Does the investment strategy still have merits? At GuruFocus, we set up a trial portfolio on December 25, 2008 -- yes during the hay days of financial crisis. Those were the days when such opportunities were relatively more abundant. We did not catch the market low of March 9, 2009, because, well, we are mere mortals and did not know there would be better days to buy stocks ahead of us. Next time when you figure that one out, please give us a call.
On December 25, 2008, we picked the top 20 stocks on the Benjamin Graham Net Current Asset Value Screener and started to track their performances. After setting up the portfolio, we just left them there unattended. There were a number of M&A’s during the past two years, and we did not bother to re-invest the proceedings; we did not do what Ben Graham did – selling positions in order to chase stocks offering better returns. Here are the results through September 15, 2010, a little less than two years after:
| Performance of Graham NCAV Stocks | ||||
| (December 25, 2008 to September 15, 2010) | ||||
| Symbol | Price Bought | Current Price | Gain (Loss) (%) | Comment |
| ACSEF | 0.91 | 1.35 | 48.35 | |
| ACTS | 1.6 | 2.06 | 28.75 | |
| AVNX | 1.04 | 2.17 | 108.65 | Bought out |
| AZSEY | 10.14 | 11.19 | 10.36 | |
| DRAM | 1.15 | 1.75 | 52.17 | |
| HLYS | 2.52 | 2.46 | -2.38 | |
| LASR | 0.55 | 2.3 | 318.18 | |
| LTON | 1.13 | 1.48 | 30.97 | |
| MSN | 0.51 | 2.47 | 384.31 | |
| MTSN | 1.2 | 2.2 | 83.33 | |
| NCST | 0.85 | 1.77 | 108.24 | Bought out |
| ORBK | 4.06 | 10.05 | 147.54 | |
| PDII | 3.39 | 8.85 | 161.06 | |
| PIII | 2.1 | 5.86 | 179.05 | Bought out |
| SGI | 3.76 | 7.56 | 101.06 | |
| SLTM | 1.35 | 1.57 | 16.30 | |
| SOAP | 2.46 | 0.014 | -99.43 | |
| TSPT | 5.45 | 7.23 | 32.66 | |
| VPF | 1.45 | 2.39 | 64.83 | |
| VVTV | 0.29 | 1.86 | 541.38 | |
| Average | 115.77 | |||
| S&P 500 | 29.61 | |||
Some observations:
1. On average, the 20 stocks returned 115.77% during the past less than two years. S&P 500 returned 29.61%. Dividends are excluded in two cases.
2. Of the twenty stocks, three got bought out by some other companies and ceased to trade. The transaction prices were much higher than the prices on December 25, 2008.
3. Only one stock, SOAP would have rendered investors permanent capital loss. The stock is down 99.43%.
Benjamin Graham would be proud that he way of investing still works.
GuruFocus would have made Buffett’s life easier if he only had $1 million to invest and he wanted to return 50% per year (please read Warren Buffett, 50% Return). He could start with the stocks showing up on the screen and research and invest in them as he sees fit. Bottom line: no oil burning.
To find out what’s on the Graham Net Current Asset Value Screen today, click: here.
GuruFocus also produces a monthly newsletter highlight two Cigar Butts a time, click here to see details.
Graham Net Current Asset Value Screen is a premium member feature and one of the many features. You may wonder whether it worth the money, click here to discover why Barron’s recommended GuruFocus recently.
If you are not a premium member, click here to sign up or upgrade for a 7-Day Free Try.
