The methods of Ben Graham

[luutzu]

If I were to buy a 'business trading at a discount to net current asset value', what amount of discount would that be? For example, if Commonwealth Bank has a 'net current asset value' of $60 would I buy next day when the price crossed below $60? If the price continued lower to $50 do I still hold this stock at a "discount"?

GFC was an example where great companies were at discount prices but was anyone to know how much discount there was to be? No.

I'm pretty sure you will always find a good bank to always have a negative net working capital (net current assets. ie. Current Assets minus Current Liabilities). I haven't look at any banks so i could be wrong here, but since NWC is found by subtracting current liabilities from current assets, and deposits or deposits at bank are, i'm pretty sure, considered liabilities... a good bank ought to have a lot of that kind of liabilities.

But more to the point, i don't think people ought to make decisions based on one or two single formula. In recommending a stock selling below its NWC, Graham was referring to industrial, utilities or railroad kind of enterprises (see Graham and Meredith - interpretation of financial statements).

Since in these heavy industries, if, and assuming its debt level or at or below its equity... if a stock is selling at or below the net current assets, chances are it is selling at below its book value. That is, you could buy it at the assets it currently have at the banks or due to it within a year, and get all the other assets for free.

If you could find that kind of opportunities, chances are you're going to do OK.

And if the company isn't going to roll over and would actually earn money as a business would, it's going to be more than OK for the investor to get in at below current, net, asset backing price.

 

[luutzu]

Started a long reply then realised this link covers it all in my opinion

http://blog.rogermontgomery.com/should-a-value-investor-imitate-ben-graham/

Monty haven't read Graham properly.

E.g. He, and a lot of people it seem, thinks that Graham's model of 'intrinsic value' is something like looking for NWC, assets, book value and ignore growth or future earnings or quality of earnings and business position etc.

but here:

"We must recognize, however, that intrinsic value is an elusive concept.
In general terms it is understood to be that value which is justified
by the facts, e.g., the assets, earnings, dividends, definite prospects,
as distinct, let us say, from market quotations established by artificial
manipulation or distorted by psychological excesses. But it is a great
mistake to imagine that intrinsic value is as definite and as determinable
as is the market price.

Some time ago intrinsic value (in the case of a
common stock) was thought to be about the same thing as “book value,”
i.e., it was equal to the net assets of the business, fairly priced. This view of intrinsic value was quite definite, but it proved almost worthless
as a practical matter because neither the average earnings nor
the average market price evinced any tendency to be governed by the
book value."
--- Security Analysis, 2nd ed. pp. 22-23

Intrinsic Value and Earning Power:
Seems to imply that an average of previous earnings, or a trend indicating growth or decline... could be useful in predicting the future, but history has shown it has not... hence "...the concept of “earning
power,” expressed as a definite figure, and the derived concept of intrinsic
value, as something equally definite and ascertainable, cannot be safely
accepted as a general premise of security analysis." - p. 23


That is, if you had somehow come to definitive figure as to a company's value, Graham: Hence any figure of
“real” or intrinsic value derived from this average must be characterized as equally accidental or artificial.

User of Intrinsic Value:
"The essential point is that security analysis does not
seek to determine exactly what is the intrinsic value of a given security.
It needs only to establish either that the value is adequate””e.g., to protect
a bond or to justify a stock purchase””or else that the value is considerably
higher or considerably lower than the market price. For such
purposes an indefinite and approximate measure of the intrinsic value
may be sufficient." p.24.


Flexibility of the Concept of Intrinsic Value:
"Our notion of the intrinsic value may be more or less distinct, depending
on the particular case. The degree of indistinctness may be expressed
by a very hypothetical “range of approximate value,” which would grow
wider as the uncertainty of the picture increased..." p.25

-----


All that from the first 25 pages, and i've skipped the other 22 pages.

I haven't read Graham closely but each time I thought i read something new from other authors, I now and then turn back to Graham and found he already knew about it.

So while Graham might have actually only buy stocks where he could see its current assets, pay no attention to brand or position etc... That's more due to his conservative nature and not from his not seeing the value of the intangibles.

I mean, even if that's what Graham did, from memory he actually did earn over 22% gains per year for his investors over his career... so whatever he's doing, it's not bad.