Wednesday, November 24, 2010

Benjamin Graham’s Number

Any value investor should have heard of Benjamin Graham. He was the teacher of Warren Buffett at Columbia University and was known as the ‘Father of Value Investing’. Graham is famous for his stringent stock criteria to pick the undervalued stocks. His idea was to buy the liquid assets such as cash and its equivalent of a company at a discount which is known as the Net Current Asset Value (NCAV).

Here’s the calculation: Take the total current assets of a company, minus the total short term and long term debt of the company, the value times two-third.

Formula = (Current asset – Total Debt) x 2/3

This means that Graham is only willing to pay 2/3 of the net current assets of the company!

In layman term, you are actually looking for a campany with solid financial position that can pay off all its short term and long term debt in a short period of time.

To give you an idea how stringent the criteria is I have calculated some cash rich companies in our Bursa Malaysia. Many stocks are in negatives with this NCAV formula, however I managed to scout for a few that are with positive NCAV per share:

Genting Malaysia RM0.73
Maybulk RM1.01
Petronas Gas RM0.47

And Graham was only willing to pay 2/3 of the above values! You may say
that’s impossible! However, in modern days, we may improvise the formula and work out one that is suitable for your risk profile and your investment plan.

Happy investing,

Pauline Yong

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