About three quarters of the Fund’s common stock portfolio are invested in what Fund Management describes as Net-Nets. A Net-Net is defined as a common stock issue where the market value of high quality assets, usually readily saleable, exceeds by a comfortable margin the market value of the company’s equity capitalization after deducting all liabilities.
The concept of Net-Nets was invented by Graham and Dodd, the godfathers of value investing. Third Avenue has refined the Graham and Dodd definition of Net-Nets. Graham and Dodd define Net-Nets on pages 561 and 562 of the 1962 edition of Security Analysis, Principles and Technique as follows:
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The concept of Net-Nets was invented by Graham and Dodd, the godfathers of value investing. Third Avenue has refined the Graham and Dodd definition of Net-Nets. Graham and Dodd define Net-Nets on pages 561 and 562 of the 1962 edition of Security Analysis, Principles and Technique as follows:
“Net-Current-Asset Value – We feel on more solid ground in discussing these cases in which the market price or the computed value based on earnings and dividends is less than the net current assets applicable to the common stock. [The reader will recall that in this computation we deduct all obligations and preferred stock from the working capital to determine the balance for the common.] From long experience with this type of situation we can say that it is always interesting, and that the purchase of a diversified group of companies on this ‘bargain basis’ is almost certain to result profitably within a reasonable period of time. One reason for calling such purchases bargain issues is that usually net-current asset values may be considered a conservative measure of liquidation value. Thus as a practical matter such companies could be disposed of for not less than their working capital, if that capital is conservatively stated. It is a general rule that at least enough can be realized for the plant account and miscellaneous assets to offset any shrinkage sustained in the process of turning current assets into cash. [This rule would nearly always apply to a negotiated sale of the business to some reasonably interested buyer.] The working capital value behind a common stock can be readily computed. Consequently, by using this figure (i.e., net net asset value) as the equivalent of ‘minimum liquidating value’ we can discuss with some degree of confidence the actual relationship between the market price of a stock and the realizable value of the business.”Read the complete shareholder letter
Editor: GuruFocus created a list of Net-Nets which is listed here, it is for Premium Members only. Free Trial
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