1. To see whether a stock is selling for less than the value of net working
capital (what Graham’s followers call “net nets”),
As of October 31, 2002, for instance, Comverse Technology had
$2.4 billion in current assets and $1.0 billion in total liabilities, giving it
$1.4 billion in net working capital. With fewer than 190 million shares
of stock, and a stock price under $8 per share, Comverse had a total
market capitalization of just under $1.4 billion. With the stock priced
at no more than the value of Comverse’s cash and inventories, the
company’s ongoing business was essentially selling for nothing. As
Graham knew, you can still lose money on a stock like Comverse—
which is why you should buy them only if you can find a couple dozen
at a time and hold them patiently. But on the very rare occasions when
Mr. Market generates that many true bargains, you’re all but certain to
make money.
2. If you live in the United States, work in the
already making a multilayered bet on the
you should put some of your investment portfolio elsewhere—simply
because no one, anywhere, can ever know what the future will bring at
home or abroad. Putting up to a third of your stock money in mutual
funds that hold foreign stocks (including those in emerging markets)
helps insure against the risk that our own backyard may not always be
the best place in the world to invest.
3. Since common stocks, even of investment grade, are subject to
recurrent and wide fluctuations in their prices, the intelligent
investor should be interested in the possibilities of profiting from
these pendulum swings. There are two possible ways by which
he may try to do this: the way of timing and the way of pricing.
Timing is of no real value to the investor unless it coincides
with pricing—that is, unless it enables him to repurchase his shares
at substantially under his previous selling price.
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