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Ben Graham’s Net-Net Strategy Delivers Extraordinary Returns In a Down Market

May 01, 2009
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Ben Graham’s net-net strategy worked well for him, would it still work today? GuruFocus users created a number of net-net portfolios. The net-net portfolios created 5 months ago have gained more than 50% in this rocky market. Thank you, Ben!

In his book “The Intelligent Investor”, Ben Graham, the father of value investing, found that one strategy that worked well for him was to buy companies that are sold at below its net current asset value. He called those bargains.

He wrote:

“The idea here was to acquire as many issues as possible at a cost for each of less than their book value in terms of net-cirrent-assets alone – i.e., giving no value to the plant account and other assets. Our purchases were made typically at two-thirds or less of such stripped-down asset value. In most years we carried a wide diversification here – at least 100 different issues.”

Modern value investors rarely have had the opportunities to invest in these “bargains”, until very recently, the market is at its lowest valuation in decades. Inspired by our users, GuruFocus developed a “Graham Net Current Asset Value Screener”, to find these companies:



  • The stock prices are less than the net current asset value of the companies – Benjamin Graham

  • During the past 12 months, the companies generated positive operating cashflow.

  • The company has no meaningful debt compared to its cash position.

  • As requested by users, now you can also see the companies had negative operating cashflow over the past 12 months.



GuruFocus users have created portfolios based on of Ben Graham Net Current Asset Value Screener. How have these portfolios performed? Does Ben Graham strategy still work? This is a review of the recent performances of Ben Graham Net Current Asset Value Bargains.

In order to test this screener, GuruFocus created a net-net portfolio on Nov. 24, 2008 with the top Ben Graham bargains . Since then the market recovered a bit, S&P500 grew from 851 to its Thursday close of 872, or 1%. Small caps, which most of these bargains are, did similar. The Russell Micro Cap index grew 1.07%. How did the Ben Graham bargains do?

This is the list of Ben Graham bargain portfolio GuruFocus created on Nov. 24, 2008.

SymbolBuy Price ($)Close PRICEGain/Loss
ACTS1.431.7421.68%
ATV1.293.24151.16%
AVNX*0.873.06252%
DRAM1.21.3210%
GSIG11.1313%
LTON0.731.46100%
MTSN1.321.15-12.88%
NCST0.630.3899-38.11%
RACK3.874.5617.83%
SOAP2.153.772.09%
TSPT5.452.9-46.79%
VPF1.41.28-8.57%
VVTV0.510.7241.18%


*Acquired at $3.06/share.


This portfolio generated an astonishing gain of about 51% in about 5 months. One of the companies, Avanex was acquired at $3.06 a share. When we added it into the list, it was sold at 87c a share, far below its cash value even as the company generates positive cash flow. None of the companies in the list went bankrupt or delisted.

In the meantime, a few other users also generated their portfolios using Benjamin Graham Net Current Asset Value Screener. The summary of the performances is below:

User Portfolio Created on Net-Net Portfolio Gain S&P500 Russell Microcap Link
taurusco

12/18/2008

14.5%

-5.19%

-4.45%

Go to Portfolio
gurufocus

12/25/2008

25.7%

-1.49%

-0.64%

Go to Portfolio
cavallino200

12/27/2008

19%

-0.87%

-1.69%

Go to Portfolio
anthonyvigneron

1/1/2009

43%

-5.05%

-7%

Go to Portfolio


All these portfolios delivered great returns even as the market declined. The investment strategy Ben Graham found more than half a century ago finds its opportunities again today!

Please remember, as written by Ben Graham, you need to buy a basket of these stocks to reduce risk, as some of the company may go under as situations worsen. Also does buy & hold work for this portfolio? Maybe not.

If you like to see the current list of Ben Graham bargains, go to: Benjamin Graham Net Current Asset Value Screener. This is for Premium Members only. If you are not a Premium Member, you are invited to Take a 7-day Free Trial of GuruFocus Premium Membership.

Rating: 2.5/5 (31 votes)

Comments

k8627jtm
K8627jtm - 5 years ago
gurufocus
Gurufocus premium member - 5 years ago
Thank you very much for pointing that out. That increase the gain of the portfolio to 54% during the 5 months. It also increases the gain of all the other net-net portfolios.

The little was flood with cash, they paid a lump sum to shareholders that was more than they paid. That is the power of net-nets.

Please leave your comment:


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