Takashima Coal Mine

• The Bottom Line: The Takashima Coal Mine is Benjamin Graham's legendary “cigar butt” investment, a masterclass in buying a company for significantly less than the value of its readily available cash and marketable securities.
• Key Takeaways:
• What it is: A deep-value investment made by the Graham-Newman partnership in an obscure, unloved Japanese coal company that was rich in liquid assets.
• Why it matters: It is the quintessential example of net-net_investing, a strategy that prioritizes a company's balance sheet reality over its gloomy business narrative, creating an immense margin_of_safety.
• How to use it: The story teaches investors to look for opportunities where the market price has become completely detached from the company's tangible, easy-to-sell asset value.

Imagine it's the early 1960s. The world is looking forward, captivated by new technologies and growth industries. The coal industry, by contrast, looks like a relic of a bygone era—dirty, inefficient, and in terminal decline. Most investors wouldn't touch a coal company with a ten-foot pole. But Benjamin Graham, the father of value investing, wasn't most investors. He wasn't looking for a glamorous story; he was looking for a bargain. And in the obscure corners of the Japanese stock market, he found an extraordinary one: the Takashima Coal Mine. On the surface, Takashima was everything an investor was supposed to hate. Its primary business, digging coal out of the ground, had a bleak future. The market knew this, and it had punished the company's stock, driving its price down to rock-bottom levels. But Graham and his partners did what they always did: they ignored the story and read the financial statements. What they discovered was astounding. Takashima, while operating a poor business, had wisely squirreled away its past profits. It was sitting on a massive pile of cash and, more importantly, a large portfolio of stocks in other successful Japanese companies. Here's the kicker: the value of this investment portfolio alone was worth more than Takashima's entire market capitalization. In simple terms, the stock market was valuing the entire company—the coal mine, the equipment, the land, and the huge stock portfolio—for less than the value of just the stock portfolio. An investor could theoretically buy the whole company, sell off the marketable securities, pay off all the company's debts, and be left with the coal mining business for free, plus a tidy profit. This is the very definition of a “cigar butt” investment, a term famously coined by Graham's most celebrated student, Warren Buffett.

“If you buy a stock at a sufficiently low price, there will usually be some hiccup in the fortunes of the business that gives you a chance to unload at a decent profit, even though the long-term performance of the business may be terrible. I call this the 'cigar butt' approach to investing. A cigar butt found on the street that has only one puff left in it may not offer much of a smoke, but the 'bargain purchase' will make that puff all profit.” - Warren Buffett

The Takashima Coal Mine was the perfect cigar butt. The business itself might have been fading, but its balance sheet offered one last, glorious, and virtually guaranteed puff of profit. Graham's firm invested, the market eventually recognized the absurd discrepancy between price and value, and the investment was a resounding success.

The Takashima story isn't just a historical anecdote; it's a foundational parable for value investors that teaches several timeless lessons.

• Balance Sheet Over Narrative: In an age obsessed with “disruption,” “growth stories,” and “TAM” (Total Addressable Market), Takashima is a stark reminder that tangible reality trumps exciting fiction. The story about the coal industry was terrible, but the mathematical reality of the company's assets was spectacular. A value investor learns to trust numbers more than narratives.
• The Ultimate Margin of Safety: Graham's core principle was to always buy with a margin of safety. Buying a dollar's worth of assets for thirty cents, as was the case with Takashima, is the ultimate expression of this principle. When you buy that cheaply, a lot can go wrong with the underlying business and you can still come out ahead. Your protection isn't based on future earnings projections, but on the cold, hard assets on the books today.
• Exploiting Mr. Market's Pessimism: The only reason the Takashima opportunity existed was because the market, in its collective depression about the coal industry, had sold the stock down to a foolishly low price. This is Mr. Market at his most manic-depressive. The value investor's job is not to agree with his pessimism, but to thank him for the bargain price and take advantage of it.
• Profit in Obscurity: The best bargains are rarely found in the headlines of the Wall Street Journal. They are found in neglected, boring, and sometimes foreign industries that other investors have written off. The Takashima story champions the diligent investor who is willing to turn over rocks that others ignore.

The Takashima Coal Mine is the poster child for a specific strategy Graham developed called “Net-Net” investing. The goal is to find stocks trading for less than their net current asset value, which is a rough, conservative proxy for a company's liquidation_value.

The calculation, often called Net-Net Working Capital (NNWC) or Net Current Asset Value (NCAV), is straightforward. First, you calculate the company's Net-Net Working Capital: `NNWC = (Cash and Short-Term Investments) + (0.75 * Accounts Receivable) + (0.50 * Inventory) - (Total Liabilities)` ¹⁾ Second, you find the NNWC Per Share: `NNWC Per Share = NNWC / (Shares Outstanding)` Finally, you compare this to the market price. Graham’s strict rule was to only buy stocks trading at a significant discount to this value. Graham's Buy Trigger: `Market Price ⇐ (2/3 * NNWC Per Share)` If you found a stock meeting this criterion, you were essentially getting all the company's long-term assets (like factories, buildings, and land) for free, while buying the highly liquid current assets for just 66 cents on the dollar.

A stock that qualifies as a net-net is, by definition, quantitatively cheap. The interpretation is less about the quality of the business and more about the scale of the discount.

• A “Buy” Signal: When the market price is well below the NNWC per share, it signals that the market is excessively pessimistic. The company is being valued by the market as being worth less than if it were to shut down its operations, sell off its current assets, and pay off all its debts.
• A Quantitative Screen, Not a Qualitative Analysis: This is crucial. A net-net is almost always a statistically cheap, but fundamentally troubled, company. You are not buying a wonderful business like Coca-Cola. You are buying a statistical bargain, betting that the price is simply too low and will eventually correct upwards, regardless of the company's long-term prospects. This is why diversification across a basket of net-nets is essential.

Let's imagine a modern, hypothetical company to see how this works. “Rust Belt Manufacturing Inc.” (RBM) makes a simple, low-margin industrial component. The industry is in decline due to foreign competition, and the stock has been hammered. Here's a simplified look at RBM's balance sheet:

And some other key data:

• Shares Outstanding: 10 million
• Current Stock Price: $2.50 per share
• Market Capitalization: $25 million ($2.50 * 10 million shares)

Now, let's apply Graham's conservative NNWC formula: 1. Calculate NNWC:

• Cash: $20M
• Receivables (75%): 0.75 * $15M = $11.25M
• Inventory (50%): 0.50 * $30M = $15M
• Total Liabilities: $25M
• `NNWC = ($20M + $11.25M + $15M) - $25M = $46.25M - $25M = $21.25M`

2. Calculate NNWC Per Share:

• `NNWC Per Share = $21.25M / 10 million shares = $2.125 per share`

3. Apply Graham's Buy Trigger:

• Graham's target price would be `2/3 * $2.125`, which is approximately $1.41 per share.
• The current price is $2.50. So, in this case, even though RBM looks cheap, it does not meet Graham's incredibly strict criteria for a net-net purchase. This illustrates how high Graham set the bar for safety.

²⁾

• Exceptional Margin of Safety: The strategy has a massive, built-in margin of safety. Your investment is backed by tangible, liquid assets, not hopeful future growth.
• Reduces Emotional Bias: It's a purely quantitative approach. You run a screen, check the numbers, and buy. This helps remove the emotional storytelling that can lead investors astray.
• Historically Proven Returns: Numerous academic studies and back-tests have confirmed that, as a group, a diversified portfolio of net-net stocks has historically produced market-beating returns over the long term.

• Scarcity: True net-nets are rare, especially in developed markets and during bull runs. They are most often found after a market crash or in obscure, overlooked markets.
• The Value Trap: The primary risk is that you've bought into a company whose business is so bad that it will burn through its current assets before the market price can recover. The value can literally evaporate while you wait.
• Requires Broad Diversification: Because any single net-net could be a value_trap, the strategy is only viable when applied to a broad basket of stocks (Graham suggested 30 or more). You are betting on the statistical success of the group, not the success of any one company.
• Management Risk: The management of a company trading this cheaply may be inept or, worse, not shareholder-friendly. They could make poor acquisitions or otherwise destroy the very asset value you're relying on.

• net-net_investing
• cigar_butt_investing
• margin_of_safety
• benjamin_graham
• liquidation_value
• mr_market
• value_trap