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Value Investing: Tools and Techniques for Intelligent Investment by James Montier

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Chapter 22. Graham's Net-Nets: Outdated or Outstanding?[22]

  • Warren Buffett once described Ben Graham's approach as 'cigar butt investing'. The basic idea was that the stocks which Graham liked were akin to cigar butts found on the street, still smouldering, from which it was possible to snatch one or two last puffs. This appeals to the cheapskate in me.

  • It is well known that simple strategies based on cheapness (as measured by variables such as P/E, or P/B) tend to generate outperformance over the long term. However, as I have noted before, Ben Graham often preferred valuations based upon the balance sheet. In particular, he liked stocks trading at less than two-thirds of their net current assets.

  • Testing such a deep value approach reveals that it would have been a highly profitable strategy. Over the period 1985–2007, buying a global basket of net-nets would have generated a return of over 35% p.a. ...

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