Warren Buffett’s one of the best and most popular investors around today. From 1965 to 2016, Buffett has helped grow the book value per share of his investment vehicle, Berkshire Hathaway, by an incredible 19.0% annually. And each year, tens of thousands of people flock to the annual shareholders’ meeting of Berkshire.
Standing on the shoulder of a giant
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But Buffett wasn’t born with the skills to invest. He had to learn how to do so. And, he learnt it from a less well-known, but still very successful investor, the late Benjamin Graham.
Graham was more than just an investor though. He was an exceptionally intelligent person. Before he graduated from Columbia College, he was offered teaching positions in three different departments: English, Mathematics, and Greek and Latin. Ultimately, Graham chose to dedicate the bulk of his adult years to investing.
In his career as an investor, Graham penned two investing books that eventually became classics: Security Analysis and The Intelligent Investor. The impact of the latter on the world of investing cannot be overstated – Buffett has publicly said that the book “changed [his] life.”
Investing with a legend
Graham brought rigor to the world of investing, by preaching that investors should be buying stocks for less than what their businesses are worth. This eventually came to be known as value investing.
When Graham was investing money professionally, one of the methods he used to determine if a stock was a bargain was to compare a stock’s market capitalisation with its net current asset value. (The net current asset value of a stock can be found by subtracting a stock’s total liabilities from its total current assets). Graham wanted to find stocks with market caps that are lower than their net current asset values. Such stocks are also known as net-net stocks.
The problem with net-net stocks is that they are typically mediocre companies at best, or poor ones at worst. Companies that become net-net stocks often have no competitive advantages and can be in serious business trouble. That’s why Graham advocated diversifying widely when investing in net-net stocks.
Applying it today
I wanted to see what stocks in Singapore’s market today would qualify as net-net stocks, using the database of S&P Global Market Intelligence.
Turns out, of the 700-plus Singapore-listed companies, there are currently around 90 net-net stocks. But, I also wanted to refine my search to net-net stocks that are facing less risks. To do so, I added two more criteria: (1) A debt-to-equity ratio of less than 50%, and (2) a positive net income over the last 12 months. They are meant to help find companies that are not dangerously leveraged and that are profitable.
Source: S&P Global Market Intelligence
The trio of Cortina, Creative Technology, and UOB Kay-Hian could be companies that could interest Graham in the Singapore market of today given their low valuations and financial characteristics.
But it’s worth noting that none of the above should be seen as formal recommendations of the three aforementioned stocks or the use of the net-net methodology to pick stocks. Instead, see the information presented in this article as useful starting points for further research.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing owns shares in Berkshire Hathaway.