Benjamin Graham's Two-Thirds NCAV (Net-Net) Strategy

While Warren Buffett's mentor did mention 2/3rd Net Current Asset Value as one of his own strategies, what he actually recommended for his readers was slightly different.

What Graham Did

Graham did not actually recommend the two-thirds NCAV (or Net-Net) criteria for his readers. He was simply talking about his own investment operations.

"A cost for each of less than their book value in terms of net-current-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."
Chapter 15: Stock Selection for the Enterprising Investor, The Intelligent Investor

What He Wrote

A little later, Graham writes:

"Our own preference, however, remains for other types that show a combination of favorable investment factors, including asset values of at least two-thirds the market price."
Chapter 15: Stock Selection for the Enterprising Investor, The Intelligent Investor

Note that this is the opposite of what he says he did earlier. The stocks here would have prices exceeding their NCAV, and not the other way around.

This is actually a lot closer to his selection criteria for Enterprising investors.

What He Recommended

For his readers, Graham actually recommended NCAV stocks with a positive Trailing 12 months (TTM) Earnings Per Share (EPS).

"If one can acquire a diversified group of common stocks at a price less than the applicable net current assets alone—after deducting all prior claims, and counting as zero the fixed and other assets— the results should be quite satisfactory... If we eliminated those which had reported net losses in the last 12-month period we would be still left with enough issues to make up a diversified list."
Chapter 15: Stock Selection for the Enterprising Investor, The Intelligent Investor

These are the default criteria for NCAV (Net-Net) grade stocks on Serenity.

Advanced Graham Screener

Customized Value Investing

Using Serenity

Serenity does allow screening for stocks using the two-thirds NCAV method as well.

NCAV = (Current Assets - Total Liabilities) ÷ Shares Outstanding

Intrinsic Value

Serenity's screeners support Intrinsic Value(%) > (greater than) filters because — by definition — the higher the Intrinsic Value in relation to the price, the better!

Intrinsic Value(%) = Intrinsic Value ÷ Previous Close

An Intrinsic Value(%) of 100% indicates that the stock completely clears Graham's requirements for its Graham Grade, or that the stock's price is less than its Intrinsic Value.

Note: All metrics on Serenity are designed to have values that are more desirable when they are higher. For example, Serenity lists Equity÷Debt for stocks instead of Debt÷Equity.

A. Classic Graham Screener

One can always find all stocks selling under two-thirds of their NCAV on the free Classic Graham Screener using:

NCAV or Net-Net(%) > 150%

B. Advanced Graham Screener

But to find NCAV (Net-Net) grade stocks selling under two-thirds of their NCAV, one would need to screen for:

Graham Grade = NCAV (Net-Net)
Intrinsic Value(%) > 150%

This can be done using the Advanced Graham Screener.

Graham Resources