oddballstocks

I invest in net-net's write about them on my blog, maybe you're referencing me, who knows.. anyways I've done well with them, but it's really only a small portion of what I do reason being there just aren't enough quality net-net's to fill a portfolio at this point. I know it's an oxymoron but net-net land is 1/3 falling knives, 1/3 value traps, 1/6 companies teetering on the brink of bk and 1/6 potentially good investments. As for a track record, I know Tweedy Brown did some research on them that was updated by Oppenheimer in the 80s. Basically there is enough of a record going back to Graham in the 30s up to the 80s. You can find some of that out on greenbackd. Montier did some number crunching on them as well although the paper regarding returns isn't available online anymore. I have a thesis someone sent me that studied net-net returns from 1984-2008 there were some interesting conclusions. The first being value weighted (cheapest get the highest weight) beat the market but only by a few points, 3% over 1 year, actually lost on a 3yr, and about 6% on a 5yr basis. What's fascinating is an equal weighting strategy crushed the market, almost doubled the market returns on a 1/3/5yr basis (rolling periods for the entire time). Here's part of the reason why this is hard to be successful with, I've attached a graphic showing the number of net-net's in the US each year since 1984, and the number of net-net's trading at less than 66% of NCAV. Remember my breakdown above, given 100 net-net's you might have 16 that are worth a shot, for a few years in the 80s there were only 6 net-nets at all, not good odds. For myself I invest my own money (6 figure portfolio) so I'm not bumping into any problems with size, heck I could probably run a 100% net-net strategy for 10 years plus before I got priced out of some of the smaller ones. I've had the same observation as you, a lot of value bloggers writing about the same stocks. When I see that it means that a lot of investors are probably in there as well, I'd rather go in uncharted territory, so I have traveled abroad in search of net-net's. I've ended up purchasing a few across Europe and Japan. I've ended up making contact with some value bloggers/investors looking at net-net's in Europe and Japan but it's a VERY small group, almost non-existant compared to the US. I'm also digging into some of the unlisted stocks people have never heard of, lots of discounts there as well. Just found one today, company trading at 90% of NCAV (which is mostly cash and marketable securities) earning $1 a year trading at $11.80. I'm long winded, sorry. I guess if you had to boil this down, net-net investing isn't as easy as some might claim, and two look where no one else is looking. Thoughts?

I hate replying to myself but... I have the 02-03 book, and it's incredible. There's a page per company lots of interesting data. I know the biggest rub is that the data is out of date usually the financials are from 98-02. I'm not finding that's an issue at all, with most of these companies that were very over capitalized in 2002 they are still over capitalized. Other companies that grew their earnings in the 01-02 have grown their earnings through the 08-09 as well. I've been finding probably 1/3 of the companies in the book no longer exist, they've gone private (fully) or they've been merged or acquired or gone belly up. To me this is a bit of an endgame for an unlisted stock investor, some sort of liquidity event. Still interested in the 06/07 edition if anyone has anything. I'd also be interested in knowing what Harry Eisenberg is up to these days.

And the debt is non-recourse, so if SnS went belly up BH would get to keep the cash without having any obligation to SnS. I've never looked at BH's financials but I'd assume they own enough of SnS that they have to consolidate so the debt should be listed on the balance sheet.

do you just post on this forum to make money? This is the second post today alone. I don't see how that book link will make Farnam Street money. Maybe I'm missing a connection. In any case whomever runs FS blog does a very good job and must spend a lot of time, gathering extremely interesting content. All on a free/ad free site. If he/she/it wants to try to make money on something like a painstakingly recorded Munger transcript, and let people know it exists, so be it. Agreed. Also, it's quite an ironic statement about it being Farnam's 2nd post of the day from someone, especially a new poster, who is averaging over 5 posts a day himself. Ha! Noticed that myself.. Along with the piling on, I love the Farnam Street stuff, follow them on Twitter for even more links. The quality of content they dig up is excellent.

So I talked to my Fidelity broker about this. Apparently, they don't do the trade OTC, so whenever I trade "FRFHF" they actually get a Canadian broker to make the trade for me rather than going through pink sheets. Doesn't make much sense to me, but that's what they do. Perhaps that it is also the case with Ameritrade/others? I use Fidelity and you can trade directly in Canada in loonie with them if you want. You have to call and ask for the International Trading but they allow it. They also have something like 10 or 12 other countries you can invest in. In the case you find something they don't let you trade directly online you can still buy it over the phone. I purchased a Swiss stock in my IRA this way, it's a bit pricier ($80) which is more in line with a full service broker, but it's still possible. So if you decide to use the full service route at Fidelity you can literally buy any stock in the world no matter where it's traded. Call and ask for the International Trading, ignore the net worth stuff on the website, I don't meet it and was able to get enrolled right away.

The flip side is currently a company that can't make their cost of equity because of labor costs would leave the country and look for a location with cheaper labor. Under this proposal it might remain possible for those companies to remain which would help keep up employment. I think capital will always flow to high return companies regardless of the tax situation.

This is big, I wish other countries would consider this as well.

Ahhh, yes children's books, there are some books I probably read to my son a dozen times in the same day but somehow he still loves them. I've read the Bible multiple times, gone through Security Analysis twice, re-read parts of the Intelligent Investor multiple times as well as You Can Be A Stock Market Genius. I'm not big on wholesale re-reading books, usually I'll re-read a few chapters at a time.

Liberty, You're not missing anything each investor has to find a style they're comfortable with. Some of it is diversification, some is just being lazy. I'll use an example. So I want to be in Europe, the market in general is at an attractive P/E10. So I put some of our funds in an IRA into a European index, I can forget about it for 5-10 years. On the other hand in an account that allows international trading I'm buying European equities that I think are extremely attractive on an individual level. The problem is I can only trade in eight markets over there, but I want the performance of the whole continent so the index is the answer. I'm doing the same thing in Japan, I have an index fund to capture the market but I do some net-net's as well in my international account. I guess when you boil it down a lot of it is due to account limitations. In my 401k and IRA's I can't easily trade international stocks, yet I still want to capture some of that performance. I have an international small cap ETF in my IRA, this is something I can't grab in my IRA in any meaningful way in individual issues. As I said I have a taxable account where I can invest in 12 markets cheaply, and in theory anywhere in the world for about $80 a trade. In that account I only have one fund that's about 7% of the account value. I own three active mutual funds, and my theory with those is I really like the manager, and I trust them to manage a portion of my money. There's a lot to be said about just capturing the market return it takes no time. I think what's often lost on this board is the opportunity cost of researching investments especially if you don't get paid for it. As an individual I probably grossly underperform the market if you impute my personal time. I love doing this stuff so I don't care, but on a dollar for dollar basis I'd probably be better off billing all my research hours for work where I get a guaranteed hourly payout. For this to make sense you either need a lot of money under management, or need to spend very little time researching. On a $750k account you'd need a 15% return or higher to make $100 an hour. As a cynic I think this is why a lot of smart investors go into fund management. It's a lot easier to get $25m and scrape 1% for $250k than to invest for a 15% year in year out return. Managing a fund investors are happy if you only lose 10% when the market's down 25%, managing for myself I can't live off negative returns. Now scale this up, a manager with $1b AUM, that 1% is $100m of which they might get $1m to run the fund, that's a $1m return guaranteed.

If these areas are outside of your circle of competence or if you think they are too efficiently priced to gain an edge, why even own anything in those areas? Isn't it diworsification? Why not concentrate where you think you have an edge? If someone put a gun to my head and said that I had to own something in some industry or country that is outside of my circle of competence, I'd buy an index. But I don't have to own anything I don't really want... So I'm just wondering why you feel you need to own something in those areas? Thanks. Good questions, so the idea is this... Some things like Australia I'd like to have money there, yet right now I just don't have time to investigate good stocks there, so I bought an ETF. I also want exposure to large caps and mid caps, but as I've explained I just don't think I'm going to be the one to uncover a ton of value there, so I'm content to buy an index fund. I'm not sure if it's a circle of competence thing, if I wanted I could dive in and read and understand, but I'd rather not, I want to focus my energy on an area I know better, but at the same time I do want the broad market exposure. The other thing is I have money in a 401k that has to be in funds (my only option), so I just allocate there as I'd want sector-wise. In my taxable account I only hold one fund which is a global fund, I've held it for years it seems to do well and I feel that they can plug holes I might not find myself. Does this clarify at all? I understand some people really understand insurance and banks so they might have a portfolio of 10-15 bank and insurance companies. The problem for me is I want some broad market exposure, and I just don't have the time to manage a portfolio to get a good amount of exposure. I think this really isn't an issue for someone who does it full time either professionally or just managing their own funds.

This is huge, seriously huge, probably the biggest secret to investing no one will tell you. You will screw up, you'll lose money, no one bats 100%, learn from your mistakes, think them over that's where the growth really occurs. It might have been John Templeton who said that if 60% of the time you're right you will be rich, whereas if you're only right 40% of the time you'll be broke. Probably a paraphrase, and wrong attribution, but the key is even being wrong 40% of the time and you'll do really well. Just be mindful of the 40% and why those mistakes happened.

[amazonsearch]Walker's Manual[/amazonsearch] Anyone familiar with this book? I have the 2002-2003 edition on order but I was hoping to find the 2006 edition somewhere. From what I've heard the 2006 copy was never published but a stop gap paperback was sent out to people who had pre-ordered. Can anyone vouch for the usefulness of this book?

When I read the book I actually liked the commentary by Zweig. I'll even admit to a heresy on this board, I own some index funds and a few mutual funds. I think what Zweig adds is showing the difficulty in beating the market, often people will get interested in investing and believe that buying CAT, PEP and JNJ they'll clobber the market and be some sort of investing genius. The reality is much different there's a large knowledge base necessary, and a lot of experience needed as well. What I always think about is that a good portion of mutual fund managers don't beat their respective index. These are all very smart people, I realize there are AUM limitations etc but still all things considered these are people with years of experience and knowledge and they still fail to beat the index. So as an individual investor I will look at sectors that I just don't have the time or inclination to become an expert on and will buy an index (bonds for example). I'm also content to buy an index for large caps because this is an area of the market that's over covered and over played. Often there are niche pockets of value (tech sector right now) but I just can't compete in the large cap space. I try to handicap success, so for me this means buying investments I can understand, and where I might have an edge (often small caps). If I can't do this I don't mind buying an index and doing other things like spending time with my family or relaxing.

That makes sense--do you generally try to diversify on these small cap stocks (or said another way, not take large positions)? I've been keeping my portfolio at less than 10 stocks (I'm actually more like 4 at this point), but it seems like these smaller caps are much more prone to going under than the big ones and/or it would be harder to get as much details about them. I know Greenblatt talks about having 20 or so, but he doesn't bother to analyze, so that's probably not as relevant. As a side question, does anyone know if Greenblatt's system actually works? The numbers he puts in the book are pretty high and the backtesting data from other sources I read could not reproduce them--it seemed like he cherry picked the best back test for his returns. I know a lot of investors on this board really love concentrated investing, knowing everything about a company and then dividing investments into 10 or 20 holdings. I know Buffett and Munger have talked about this, some discussion recently about Pabari as well. The idea is that the 25th idea isn't as good as the 1st idea. This sounds good, and I'm sure there's some merit in it for the full time guys. The problem is as an external investor you are always at a disadvantage, no matter how much you know you're still an outsider. I know this is true for companies that I've worked in, I've read some of the most detailed industry analysis and research reports yet the information is lacking compared to what I knew working in the company, and lacking in a large way. Having that intimate knowledge is critical, I think this is what Wall Street misses the most. Obviously you can handicap that a lot and that's what most people do, but I just can't get comfortable myself with this approach. I take a bit of a different approach, I diversity because this isn't my full time job and I can't spend hours each day keeping pace with each investment. All I care about is that a business is cheap enough, and has a large enough margin of safety, if it meets these requirements I'll usually add it to the portfolio. Sometimes I'll add a small position and increase it over time as I learn more or as I'm looking and realize that the idea is a lot better than others out there. Sometimes the position will stay small because I find better ones. The advantage of the concentrated approach is that with five stocks if you get a five-bagger your portfolio rockets to the moon. I prefer to look for $.50 dollars. A lot of these can be chumpy companies and I've had a few go under, but I've also had a lot do really well, enough to more than compensate for the disasters. I recognize that holding a bunch of stocks (20 currently, not evenly distributed) could limit my gains, but I'm fine with that. I'm more concerned about my downside, if I have a large margin of safety the gains will take care of themselves. In addition if I can't check a company for a few weeks because of other obligations I'm not concerned that some development will wipe me out. Hope this helps!

I tend to favor small caps, I'll really look at anything from the Magic Formula stuff, to net-net's. I like small caps because they're often a lot simpler so it's quicker to analyze. As an example I was looking at Renault recently and to get a good grasp on their operations I'd have to dig through about 150pgs of reports and filings. I also looked at a small pink sheet company, the annual report was 15 pages long. To me the goal is to turn over as many rocks as possible, the more rocks overturned the better the chance of finding the fat pitch. I would rather sit on cash and look than invest in marginal investments. Small caps make it easier because I can read the annual reports of 10 companies in the time it takes me to read about one mid/large cap. I don't limit myself to any size though, I'll invest in anything. I own shares of Intel ($127b) and shares of Titon Holdings ($6m) and anything in between.

I don't think there's anyway to find out buyback information in near real time for US stocks. You can get insider buys a few days after the insider has purchased or sold, but nothing like that exists for stock buybacks. It's good to know this exists for Canadian companies, I know UK companies have to report this quickly as well.

You can also set up a RSS feed off the SEC website. Just create a search for the specific company and forms you want and you can export that search into RSS. Each time RSS updates it'll pick up new filings. So for example, I just went and did a search for 13E filings which is a going private filing. I have the link below, as you can see right about the "1 2 NEXT" there is the RSS Feed, just import that into whatever reader you want and you will get the latest results of the search when RSS refreshes. http://www.sec.gov/cgi-bin/srch-edgar?text=13E3&first=2011&last=2011

This intrigued me, so I just did a simple screen, P/E less than 8, Large cap, dividend yield of 1% or greater. Unsurprisingly 90% of the results are European companies. I'm just curious as to a few of the US companies, there's obviously value in some US large caps, but I'm not seeing the 5-8 P/E with sizable moats.

Cardboard, the way I have always approached risk mitigation is through capital allocation. If you looked at my portfolio it would be very similar to Mr. Kahns, whos 13F I recently uploaded or Pabrai's. It is a concentrated portfolio of not more than 20 names, and each name, as you mentioned has different risk profiles. I can look through my holdings and say just as you just did that some may or may not survive a depression, but that is conjecture. How do I know if a depression is truly coming, and if it is how do I know what the ultimate reality will be in such depression. To say BP survives and BAC doesn't is conjecture, how do you know that? How do you know oil doesn't drop to 40$ on a depression but banks get flooded with deposits, in which case BAC survives and BP goes to hell. All I am trying to accomplish with my posts, is to provide a consistent tone from an investor that is following the principles of graham & dodd. In a few years some of you will look back and realize that while many emotions were thrown around, there were a core group of investors on this board that maintained their confidence and kept following the principles we are all supposedly adhering to. Regarding your "disappointment", I think you need to realize that investors allocate risk capital to hedge fund, and our job is to see through the forest and look for returns while focusing, as you say on prevention of permanent losses of capital. I do not feel that any of my positions will deliver such losses. The difference is that you may change your mind due to the moods of Mr. Market while I retain conviction. It has only been 3-4 months of this BS. Last year at this time markets were truly roaring, and that is the name of this game. Its all very reflexive. Today there is an overwhelmingly amount of negative data, and tomorrow there could be just the opposite. Take a look at my post history, you will see that I get very active when the market is down, because I find myself able to contribute more given the incremental increase in non-sense on the board. In October when things were roaring I had nothing to contribute and most of the posters that delivered this nonsense were gone as well. I am just trying to provide balance, I don't need anyone to think I am right or wrong, and I definitely don't need anymore AUM. This is not an attempt at self marketing, just an attempt to provide in real time, my thoughts and actions in a market that most feel is "unprecedented". Almost every time I dug into the person behind the computer screen I found that the nervous posters were either new to the game, or had very little invested in the market. And that corroborates with what I have seen my whole life. You guys think Buffett sits there and contemplates whether the world is going to end every day.. nope not a chance, he spends his time looking for opportunities. And for a value investing board, some of you come off as real sissies, as I see an obvious increase in threads relating to Shorts, and Hedging Strategies when stocks are at 52 week lows, instead of seeing threads relating to incredible bargains, of which there are SO MANY right now. Cool post, if I can boil down the essence, you're saying invest with a margin of safety, and I mean a real margin of safety. To me this is investing in companies with slugs of cash that have been proven to survive past recessions. A margin of safety isn't estimating that a DCF values the stock at $80 and it's trading at $50. A margin of safety is that the company can take a 35% hit in sales and still operate cash flow positive, or they have enough of a war chest to last a few years of down earnings. Another margin of safety is a bonified moat. When I think of moats I think of something like Mastercard or Visa, even in a depression people will choose to pay with plastic. Sure maybe volume declines, but MA and V have such a simple cost structure even in the more dire situation they will be profitable. After reading this post I thought about some of the companies in my portfolio and how they qualify. I own one company that's operated since 1931 in Europe, they lasted the depression, WWII, and the past 80 years while earning a return for investors. The company is operated conservatively with shareholders in mind, I bought at a significant discount to tangible book, to me I have a margin of safety. I also own some net-net's, classic net cash companies that in a depression I would actually do well if they liquidated since they have more assets than market cap. And thirdly I own some moat type companies, I own Mastercard as mentioned above. I also own America Movil, the largest wireless carrier in Latin America. If the world enters a depression I can't imagine things would get any worse than the last 20 years in Latin America where America Movil (and TelMex before) has been able to turn solid profits. Even in the worst of times people need to make calls. I recognize that if the market drops 50% my portfolio might drop my 50% as well, but I'm confident in the companies that I own, I'm confident in their financing and that they'll be around on the other side, and through it all I'll do ok. I do hold between 5 and 10% of dry powder so I have some ammunition at all times. I try to keep this at a steady level, and I haven't had a problem deploying cash recently. Best of luck!

Just a random datapoint from Fidelity from the retail standpoint As of now BAC is the top transacted stock with 3198 buys to 998 sells so far this session.

Dividends are taxed at 15% as well no matter how long you've held the stock.

I'm not ERICOPOLY but I can answer a) After tax money, really from the company's perspective it's the same as paying a dividend. b) 15% for stocks held one year and a day, less than that is ordinary income, so 25%, 33% or 35% tax rate c) The rate doesn't change once a year is exceeded, it stays at a flat 15%

I think the problem with buybacks is a behavioral one, most (all?) CEO's are always bullish on their company and seem to always believe it's undervalued. If a CEO is a prudent capital allocator then I think buybacks can be good. If they're the classic run of the mill CEO then buybacks are a waste of money. I had a public company as a client, they were buying back their shares at $40 to no end in 07 early 08. The stock cratered in 08/09 to $8, and the CEO was asked why not buy back stock now, if it was cheap at $40 then it is cheaper now. And I remember him saying that he thought the stock was probably a good value but they'd rather have the cash. Well if they hadn't blown the cash at $40 they'd have it at $8. So instead they started issuing bonds at 14% at the market bottom of 09. The stock is back in the $40s and they're buying back again. To tie this into my other point I saw how they managed capital allocation on internal projects and it was as misplaced as the stock buybacks.

Threads like this make me sad because it just highlights the mismanagement of both companies. The reason I get sad is I use both products, Netflix and Salesforce and they're both absolutely killer. I worry that management will somehow find a way to destroy the companies and the products that I like..

Great discussion, sounds like a good exercise to go through. I'm a bit scared to undertake it, mostly because I fear what it might reveal. I think the end result will probably result in some sort of strategy clarification for me. So how do you measure, only sold positions?