“While Graham recommended that investors lean toward profitable, dividend-paying net nets, as we have seen, it is in fact loss-making net nets that tend to outperform profitable ones and non-dividend paying net nets outperform dividend-paying net nets.”
―Tobias E. Carlisle, Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations
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Ben Graham’s Net Nets: Seventy-Five Years Old and Outperforming
Abstract
The strategy of buying and holding “net nets” has been advocated by deep value investors for decades, but systematic studies of the returns to such a strategy are few. We detail the returns generated from a net nets strategy implemented from 1984 – 2008, and then attempt to explain the excess returns (alpha) generated by the net nets strategy. We find that monthly returns amount to 2.55%, and excess returns using a simple market model amount to 1.66%. Monthly returns to the NYSE-AMEX and a small-firm index amount to 0.85% and 1.24% during the same time period. We conclude by examining potential factors to explain the excess returns on the net nets strategy. We examine the market risk premium, small firm premium, value premium, momentum, long-term reversal, liquidity factors, and the January effect. Of the various pricing factors, we find only the market risk premium, small firm premium, and liquidity factor are significant. We also note about half of the returns are earned in January. However, inclusion of these factors still does not explain the excess return available from the net nets strategy. Thus, we are left with a puzzle.
Links
See here for full PDF.
See here for Tobias Carlisle’s blog Greenbackd.
Disclosure: I wrote this article myself. I am not receiving compensation for it. I have no business relationship with any company or individual mentioned in this article. This article is informational and is in my own personal opinion. Always do your own due diligence and contact a financial professional before executing any trades or investments.
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