Imagine it's the early 1960s. The world is looking forward, captivated by new technologies and growth industries. The coal industry, by contrast, looks like a relic of a bygone era—dirty, inefficient, and in terminal decline. Most investors wouldn't touch a coal company with a ten-foot pole. But Benjamin Graham, the father of value investing, wasn't most investors. He wasn't looking for a glamorous story; he was looking for a bargain. And in the obscure corners of the Japanese stock market, he found an extraordinary one: the Takashima Coal Mine. On the surface, Takashima was everything an investor was supposed to hate. Its primary business, digging coal out of the ground, had a bleak future. The market knew this, and it had punished the company's stock, driving its price down to rock-bottom levels. But Graham and his partners did what they always did: they ignored the story and read the financial statements. What they discovered was astounding. Takashima, while operating a poor business, had wisely squirreled away its past profits. It was sitting on a massive pile of cash and, more importantly, a large portfolio of stocks in other successful Japanese companies. Here's the kicker: the value of this investment portfolio alone was worth more than Takashima's entire market capitalization. In simple terms, the stock market was valuing the entire company—the coal mine, the equipment, the land, and the huge stock portfolio—for less than the value of just the stock portfolio. An investor could theoretically buy the whole company, sell off the marketable securities, pay off all the company's debts, and be left with the coal mining business for free, plus a tidy profit. This is the very definition of a “cigar butt” investment, a term famously coined by Graham's most celebrated student, Warren Buffett.
“If you buy a stock at a sufficiently low price, there will usually be some hiccup in the fortunes of the business that gives you a chance to unload at a decent profit, even though the long-term performance of the business may be terrible. I call this the 'cigar butt' approach to investing. A cigar butt found on the street that has only one puff left in it may not offer much of a smoke, but the 'bargain purchase' will make that puff all profit.” - Warren Buffett
The Takashima Coal Mine was the perfect cigar butt. The business itself might have been fading, but its balance sheet offered one last, glorious, and virtually guaranteed puff of profit. Graham's firm invested, the market eventually recognized the absurd discrepancy between price and value, and the investment was a resounding success.
The Takashima story isn't just a historical anecdote; it's a foundational parable for value investors that teaches several timeless lessons.
The Takashima Coal Mine is the poster child for a specific strategy Graham developed called “Net-Net” investing. The goal is to find stocks trading for less than their net current asset value, which is a rough, conservative proxy for a company's liquidation_value.
The calculation, often called Net-Net Working Capital (NNWC) or Net Current Asset Value (NCAV), is straightforward. First, you calculate the company's Net-Net Working Capital: `NNWC = (Cash and Short-Term Investments) + (0.75 * Accounts Receivable) + (0.50 * Inventory) - (Total Liabilities)` 1) Second, you find the NNWC Per Share: `NNWC Per Share = NNWC / (Shares Outstanding)` Finally, you compare this to the market price. Graham’s strict rule was to only buy stocks trading at a significant discount to this value. Graham's Buy Trigger: `Market Price ⇐ (2/3 * NNWC Per Share)` If you found a stock meeting this criterion, you were essentially getting all the company's long-term assets (like factories, buildings, and land) for free, while buying the highly liquid current assets for just 66 cents on the dollar.
A stock that qualifies as a net-net is, by definition, quantitatively cheap. The interpretation is less about the quality of the business and more about the scale of the discount.
Let's imagine a modern, hypothetical company to see how this works. “Rust Belt Manufacturing Inc.” (RBM) makes a simple, low-margin industrial component. The industry is in decline due to foreign competition, and the stock has been hammered. Here's a simplified look at RBM's balance sheet:
| RBM Balance Sheet (in millions) | |
|---|---|
| Assets | |
| Cash and Short-Term Investments | $20 |
| Accounts Receivable | $15 |
| Inventory | $30 |
| Total Current Assets | $65 |
| Property, Plant & Equipment (Long-term) | $40 |
| Total Assets | $105 |
| Liabilities | |
| Total Liabilities (short and long-term) | $25 |
| Shareholder Equity | $80 |
And some other key data:
Now, let's apply Graham's conservative NNWC formula: 1. Calculate NNWC:
2. Calculate NNWC Per Share:
3. Apply Graham's Buy Trigger: