Net-Net is a classic, deep-value investing strategy, and arguably one of the most famous creations of the father of value investing himself, Benjamin Graham. Imagine finding a wallet on the street. You pick it up, and inside you find $10 in cash. Now, imagine you could buy that entire wallet—the leather, the card slots, everything—for just $7. You’d buy it instantly, take the $10, throw away the wallet, and pocket a $3 profit. That, in a nutshell, is the core idea of net-net investing. It involves buying a company’s stock for less than the value of its current assets (like cash, receivables, and inventory) after subtracting all of its liabilities (both short-term and long-term debt). In essence, you're getting the company's working capital at a discount, and all its long-term assets—like buildings, machinery, and brand value—for free.
At its heart, the net-net strategy is a quantitative method for finding ridiculously cheap stocks. It's a search for companies so beaten down by the market that their stock price implies the business itself is worthless, or even worse than worthless.
The calculation is straightforward. First, you determine a company’s Net-Net Working Capital (NNWC), which is a very conservative estimate of its liquidation value.
Notice this is a stricter measure than the standard “Net Working Capital” which only subtracts current liabilities. The net-net calculation subtracts every single liability on the balance sheet. Once you have the NNWC, you compare it to the company's market capitalization (the total value of all its shares). A company is considered a “net-net” when:
For example, if a company has $10 million in current assets and $4 million in total liabilities, its NNWC is $6 million. If the company's market capitalization is only $5 million, it's a net-net. You are effectively buying $6 million of liquid assets for only $5 million.
Warren Buffett, Graham's most famous student, famously described this approach as “cigar butt” investing. He said it was like finding a soggy, discarded cigar butt on the street that had just one free puff left in it. It’s not a glamorous, high-quality smoke that you’d want to own forever, but that one puff is pure profit. Net-net stocks are the market's cigar butts. They are often ugly, unloved, and seemingly failing businesses. No one wants them. But because their price is so low relative to their liquid assets, they offer a “free puff” of potential profit with a significant margin of safety. The idea isn't to hold them forever, but to wait for the market to realize its mistake, pushing the price up toward its NNWC value, and then sell.
While the concept is simple, putting it into practice requires patience and discipline. Net-nets aren't exactly common, but they do appear.
Net-nets are rare, especially in roaring bull markets. They tend to surface during market crashes or periods of extreme pessimism when investors are selling indiscriminately. You can often find them in:
Using an online stock screener is the most practical way to hunt for potential net-net candidates. You can set criteria to filter for companies trading below their NNWC.
The primary reward of net-net investing is the built-in margin of safety. The downside is theoretically cushioned because you're buying assets for pennies on the dollar. However, there are very real risks.
While Graham's original formula is powerful, many modern value investors apply a few extra layers of analysis to increase their odds of success.
To be even more conservative, you can apply haircuts to the current assets, as you might not get full value for them in a real-world liquidation. A common refinement is:
This adjustment acknowledges that some customers may never pay their bills (accounts receivable) and that inventory might have to be sold off at a steep discount.
Graham never advocated for buying a single net-net stock. He stressed the importance of diversification. Because some of these cigar butts will inevitably fizzle out and become worthless, the strategy relies on owning a diversified basket of them (e.g., 20-30 different net-net stocks). The big gains from the winners in the portfolio are expected to more than offset the losses from the losers, leading to strong overall returns. It's a game of statistics, not of picking one perfect stock.