Graham's emphasis
"The value of a common stock depends primarily on the company's earning power and assets." - The Intelligent Investor, Ch. 11
"Stocks selling below liquidation value are in most instances worth considerably more than their market price." - Security Analysis, Net-Current-Asset Stocks
Graham flexes between two anchors: earnings power for steady businesses, asset value for distressed or overlooked balance sheets.
When to favor asset value
- Earnings are depressed or erratic.
- Tangible current assets clearly exceed all liabilities.
- Inventories and receivables can be haircut to realizable levels.
- Catalysts exist (asset sales, liquidations, buybacks).
When to favor earnings power
- Long, stable record of profits and dividends.
- Business model is understandable and durable.
- Normalized earnings can be estimated without heroic assumptions.
- Balance sheet supports the earnings (no fragile leverage).
How to compute each
- Asset value (NCAV): Cash (100%) + receivables (70-90%) + inventory (0-50%) - total liabilities.
- Earnings power: Normalize over a full cycle, haircut outliers, apply a cautious multiple, and demand a discount to that value.
Blending for safety
- Take the lower of asset value and earnings-based value as your base.
- Demand a margin of safety to that lower number.
- Size positions based on which anchor is firmer and how far price sits below it.
Takeaways
- Pick the anchor the business justifies: assets for balance-sheet bargains; earnings for durable, steady firms.
- Haircut aggressively; assume you are roughly right, not precisely right.
- Use the lower value and add a margin of safety before you act.
Internal links and tools
- Balance-sheet events: Shares outstanding changes
- Volume tell: Interesting volume events
- Price pressure: Near-lows scanner
- Sentiment: Short interest changes
- More reading: Resources hub
Compliance note
This guide is educational and not investment advice. Do your own research or consult a professional adviser.