"Net-Net" bargains

In a net-net situation, an investor estimates a liquidation value for a company, then tries to pay a fraction of that value in the market. Ben Graham loved these types of situations, defining the net-net value as:

Cash and short-term investments + (0.75 * accounts receivable) + (0.5 * inventory) - total liabilities

Graham looked for companies whose market values were less than two-thirds of that net-net value, for two reasons. First, he wasn't sure he would receive the full value for accounts receivable and inventory before paying off the creditors. Second, he wanted to make sure he had a margin of safety to fall back on, in case it didn't work out. After all, if the market valued the company this low, something was certainly wrong with it.

Graham's idea was to bet on a situation with asymmetrical odds. In such situations, the probability of losing money is fairly high, but the magnitude of any loss would be small. However, the potential payoff is large, despite having a lower probability of success. That's why these situations are special and worth looking for, even today.

For some current equities who meet this criteria read here