Net-Net Number: Implications & Conclusions

Abstract

“Perhaps one could even determine whether the market level was getting too high or too low by counting the number of issues selling below working capital value.” Benjamin Graham.Most are aware of modern market valuation indicators include the trailing, median P/E ratio, Q ratio (market price relative to replacement cost) and the dividend-price ratio among others. Leaving the utility of these leading indicators aside, there is a method which remains altogether ignored and under-appreciated by the vast majority of market participants today. That is, the number of net-nets (companies valued below their net working capital minus all liabilities, ignoring the property and other assets completely) present at any given time on domestic US markets.The modest objective of this paper is to present the implications of this oft-overlooked indicator relative to market over/under valuation as a whole in the past (1929-2011) and therefrom help draw conclusions as to its ultimate utility in the present.