Here's a transcript of the interview:Net-Net: A Formula for Value
J. Royden Ward is an expert on value investing strategies. Here, the chief analyst of Cabot Benjamin Graham Value Investor, explains the “net-net” indicator and looks at a stock that earns a buy rating from this value metric.
Steven Halpern: Joining us today is Roy Ward, editor of Cabot Benjamin Graham Value Investor. How are you doing today, Roy?
Roy Ward: I’m fine, thanks Steve.
Steven Halpern: Well, thanks for joining us. Most all investors are familiar with Warren Buffett, but not all know about his mentor, Benjamin Graham, who’s considered the father of value investing. Could you give us some background about Ben Graham?
Roy Ward: Yes, certainly. He was born in London in 1894, but his family moved to New York City when he was a boy and he spent most of his life in New York City.
He wrote several books and among them is a book entitled Securities Analysis, which is somewhat complex, but it gives several ideas on how to measure a company’s intrinsic value and a lot of other ideas.
His most readable book in my opinion, which is an easy read, is The Intelligent Investor, and again he gives several examples of how to measure a company’s value and how to apply that in the current market.
Steven Halpern: What’s interesting, really, is that those strategies that he put down many years ago are just as applicable in the investment markets today.
Roy Ward: They are. It’s pretty amazing. Still get excellent results using his analyses today and it’s held through all for about 80 years.
Steven Halpern: Now you’ve followed Ben Graham’s criteria for many years, but you’re only now introducing one of his indicators which is known as the “net-net” or NCAV. Could you explain what this indicator is and perhaps touch on your decision to introduce it to your strategy now.
Roy Ward: Sure, the net-net—or net current asset value approach—is based on a simple calculation, which Ben Graham describes in both of his books.
The calculation simply is: you take total current assets and you subtract total liabilities from it and then you take that result and divide it by the number of common shares outstanding.
I started using the NCAV or net-net strategy to find undivided stocks after discovering that when you compare the current price to its net current asset value you don’t need to limit the results to stocks with ratios of less than 0.67, which Ben Graham suggested.
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