How to buy a company for nothing

Back when Benjamin Graham trolled the market, value investors could find great deals on stocks simply by doing the heavy lifting that lazy investors weren’t willing to do. sale-tim-parkinson Analyzing balance sheets and income statements is a lot of work. Graham loved buying companies with a particular kind of balance sheet. Take a company’s current assets (that is, cash and inventory), subtract all of their debt and liabilities, and pay no more than two-thirds of that per share.

What does that mean in lay terms? In short, he’d find out how much cash a company would have if they simply liquidated everything they could on short notice and paid off all their debts. Then, he’d pay no more than TWO-THIRDS of that price per share. He’d basically get one-third of the company’s cash and inventory and all of its non-liquid assets, like factories and equipment, for nothing.

Unfortunately, in the age of the stock screen, investors tend to snap up those deals quick.

But right now, investors seem to be so scared of equities that even a simple stock screen comes up with several such companies. John Spears, one of the principals at Tweedy Browne, a value fund manager, told me: “That was a formula that tended to work before computers. We used to go page by page through the stock guide to find these things. They’re starting to show up again though.”

As always, use this screen as the start of your research, not the end. But, hell, if I could find a solid company that could pay me more–in cash–right now than I’d have to pay for their shares, you can count me in.

– Joe Light


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