BENJAMIN GRAHAM NET NET VALUE APPROACH TO SHARE INVESTMENT
Posted on November 30, 2014 by Calvin Tan
Benjamin Graham – The Father of Net Net Value Investing Advocates The Need For Buying Stocks With The Concept called
THE MARGIN OF SAFETY
Example: If you build a bridge for a 5 ton lorry to cross; you should build it to withstand up to 10 tons. Because an 8 ton lorry might ignorantly drive through someday. If you only build the bridge to withstand only 5 tons – you don’t have “A Margin for Safety” should an 8 ton lorry drive through – and that bridge might collapse!
At the Core of the Concept for “Margin of Safety” is NTA – Or NET TANGIBLE ASSETS. Yes! NTA – The More The Better.
So Ben advocate buying stocks with at least 30% Discount to NTA. Example you should not pay more than $7.00 for a share with NTA of $10.00. The 30% or more discount is “Your Margin of Safety”.
Calvin Tan Research presents
“9 REASONS WHY WE MUST INVEST IN STOCKS WITH HIGH NTA”
1) NTA IS CASH IN SOLIDIFICATION
NTA Could be in the Form of Lands, Houses, Factories, Shopping Malls, Machinery, Gold, Farm Lands. Before You Can Own Any Assets You Have To Earn The Cash First. Then You Use Cash To Buy Assets. And All Assets Were First Cash – Now Cash in Solidification. And Assets can in turn be sold off for Cash.
2) NTA IS TANGIBLE (Net TANGIBLE Asset)
Draw a line in the water. The water immediately regroup again and you can hardly see the line drawn.
Draw a line on the sand. The line or footprint on the sand will last till the tide comes in or the next rain fall before they are all washed away.
Now carve your name on a tree trunk. On solid wood your name will endure as long as the tree rot or decay.
Now use a chisel and chip off a line or some initial on the face of a Granite ROCK. Now this imprint might last a very long time as Solid Rock lasts for centuries.
So you see. Assets Are TANGIBLE.
3) NTA Changes Slowly While Earnings Can Evaporate Overnight.
In Singapore there was a Sars Epidemic in Year 2003. It was so infectious that people stayed away from all enclosed shopping malls. One Business called 1.99 was hit so badly that it went bankrupt. Without people their sales plummeted and Earnings evaporated instantly. If you have invested in Shops then prices would have gone down much less.
Suppose you are in Japan Sendai seaside. 2 persons were each allotted $10 Millions each to start a fishing industry.
One invested 80% of the capital to construct a solid 5 storey factory for processing seafood. And only 20% in fishing boats
The Other Invested 80% in the latest fleet of modern fishing boats and the rest 20% in a flimsy 2 storey wooden factory.
One has High Defense Against Tsunami but less income while the other has high Earnings with less margin of safety.
Now The Tsunami with 3 waves as high as a 3 storey building struck!
The One with the 5 Storey Building Withstood the Onslaught While The Wood Factory perished. Having ROCK SOLID NTA CAN WITHSTAND ANY CRISIS!
4) NTA IS ENERGY OR CASH IN RESERVE
In lean times A Company can survive by drawing on its reserve. You can convert assets for cash to tide out bad or tough times. Before winter arrives hibernating bears store up fat by eating as many salmon as possible. Without the store of fat some bears don’t make it through the winter.
In the desert the camel has 2 humps for storing fat and water. And the camel’s reserve will outlast him for many weeks which other animals can’t stand a chance. So NTA enables a company to last longer in tough times.
5) NTA CAN INCREASE IN VALUE (VALUE UPON VALUE)
Many Companies Grow by Earnings. Some Grow By Assets. Take Bukit Timah for example. Factories dotted left and right of the road. With the opening of China many factories in Singapore could not compete against low end manufacturing. But Surprise of Surprises These Factories were torn down & Expensive high rise condos came up – making great fortune to the land owners. They Made Much Much More From ASSETS than from their former business.
6) NTA CAN BE USED AS A LEVERAGE
Now let’s look back at the Fishing Industry in Sendai, Japan. Tsunami has wiped off his neighbour; but his 5 storey Building still stand. He has RM8 Million Equity in the Solid Building. Now he can use that building as a collateral to start his business again. He can get a 50% loan from the Bank & restart his business from scratch again.
Or think of a successful business. Its Assets Could be Mortgage .to the bank to expand his business.
7) BUYING DISCOUNT TO NTA IS LIKE PAYING PENNIES FOR DOLLAR.
If you can determine the NET NET ASSET Of A COMPANY ahead of time. When opportunity present itself in a market crash – just buy it up. Be Greedy when others are Fearfully selling. Market always move from undervaluation to overvaluation and then from overvaluation to undervaluation again.
So we must find its Intrinsic Value. What is Intrinsic Value? Or What is your actual weight? To find out – just step on a weighing machine. So to find that Intrinsic Value you Must Find That Sum Total of A Company CASH & ASSETS and Minus All Debt & Liability. You will get the NET NET CORE VALUE.
8) BUYING UNDERVALUE SECURITIES WITH BIG DISCOUNT AND HOLD IT LONG TERM UNTIL VALUE EMERGES
Peter Lynch of Magellan Fund advocate buying a basket of Value Shares & hold it for long term. Say, out of 10 stocks 2 might fail but if one stock can go up 10 times (10 baggers) it will more than cover the lost of 2. So a Basket of 30 stocks with Huge Discount to NTA IS THE WAY TO GO!
9) WALTER SCHLOSS – PROVEN SUCCESS – A TESTAMENT TO GRAHAM NET NET METHOD WORKS
For 40 long years Walter Schloss (The Most Faithful Disciple of Ben Graham in NET NET VALUE INVESTING) Bought Undervalue Shares. He bought it year in, year out; year after year. He doesn’t care about the business itself. He said that if he can buy a share with deep discount to NTA something good might come out of it. He doesn’t care whether it is monday or friday; he doesn’t care whether it is the beginning of the year or end of the year; he doesn’t care if it’s January,May or December.
He just buy if he sees undervalue stocks selling at deep discount to NTA.
Of Course Such Stocks are Unloved, Under Researched and unwanted by the market. Most of them have real or perceived problems one kind or another. And many would classify them as “Junk” stocks.
And that’s what Walter Schloss does – Buying “Junk”.
But The Greatest Investor of All Times – Warren Buffet – gave high praise to Walter & named him among the Very Top in the
“THE SUPER INVESTORS OF GRAHAM & DODDSVILLE”
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