Quantitative, Mechanical Net-Net Investing: Foolish or Fantastic?

[DoddDisciple]

I haven't pulled the trigger on this strategy and am still thinking about how to go about it in a way that makes the most sense to me.

 

Almost all research on buying net-nets blindly shows double digit returns as a ceiling. I would say that in the real world, things like slippage will drag that return down, but for someone who is interested in the long-run and doesn't care too much about what they are holding, the possibilities are compelling.

 

 

7. Mechanical screens will always tend to be more volatile than the market, after all you are investing in a small sample of  micro caps, so to protect my stomach lining I complement them with some timing indicators to avoid statistically  "dangerous" markets (like the US currently). 

 

 

Txitxo's 7th point is one reason I don't feel like starting right now. I think I need to either broaden my net, say into OTCBB, PINK net-nets curated by hand, or include an international net-net basket, maybe in a fixed 40/60 ratio with domestic. I was even thinking of a global portfolio, where the highest-ranked F-score and insider holdings net-net stocks are bought, but I honestly don't have the capability to simulate that sort of strategy to see how it performs.

 

very interesting thread, i have tried to monitor actual performance of several net net portfolios that are currently running, the ones i am aware of are

-gurufocus ncav bargains - inception mar 2011 - hand picked

-cheap stocks 26 net net index - inception sep 2011 - mechanical

-canadian net net portfolio - jan 2013 - mechanical?

http://www.theglobeandmail.com/globe-investor/net-net-capital-portfolio-not-for-faint-of-heart/article7016571/

 

when reading about net net performance, it seems as if most studies and articles conclude that a net net strategy will handily outperform the market and that a net net portfolio should return around 20%/year on average

 

however, when looking at the actual performance of the three portfolios, it seems that at least for these three examples, actual performance do not beat the market and are far below 20% average

 

 

Looking at this is another reason why I feel like doing this blind is best. I know the periods under study are short, but with net-nets, you may not be able to predict the high-performers and laggards, so why bother trying. I don't know if anyone has looked at Old School Value:

 

http://www.oldschoolvalue.com/stock-screener.php

 

But of the numerous mechanical strategies on there, only NNWC has something approaching a 20% return, and I would say the metrics used (like 6 months re-balancing), may drag down returns somewhat. There are huge swings, both up and down, but I don't know if these would matter as much unless your whole portfolio was in a single "basket" at a given time.

 

I'm still thinking about this topic though, so I appreciate any more comments :)

[DoddDisciple]

Global Net-Net Search v2.0

 

I've been searching for a way to invest in a mechanical global basket of net-net stocks as an individual investor for a while now, and after a lot of tinkering, I'd like to present a strategy and hopefully hear some advice from those much smarter and experienced than me :)

 

NOTE: I wasn't sure if I should post a new thread or resurrect this one. I did see that in spite of my input, it's generated 3k views so far.

 

The most cost effective screener I've come across is Screener.co. However, value-investing.eu may be another option, but you can't manipulate the datapoints as easily on it.

 

If you've read my other post on here, you see that I've wanted to employ something similar to Geoff Gannon's framework presented in: www.gurufocus.com/news/121824/how-to-pick-netnets.

 

Unfortunately, I've noticed that the main component of his findings, insider ownership, is hard to find. For US stocks, you can use Yahoo Finance, SEC filings, or Compustat, but otherwise, you can't find it.

 

However, I've noticed that Financial Times (as well as Screener.co), have data on "total shares outstanding" as well as "public/free float." While these numbers can't give us insider ownership exactly, I think they provide a good estimate. Take the ratio of free float to total shares outstanding and subtract from 1 to get a rough percentage estimate of insider ownership. Or, just reverse sort free float / total shares outstanding, with 1 meaning no or minimal insider ownership interest.

 

As far as I can tell, this approximates insider ownership, greater than 5% holders, treasury shares, and restricted stock (say for options), but does exclude institutional ownership, which is what we want to avoid. Gannon saw that high institutional ownership is about the only factor that can really hurt basket net-net returns.

 

This forms 1/2 of our ranking criteria for net-nets, using 1 - (free float/total shares outstanding) * 9. The 2nd half is TTM Piotroski F score from Screener.co. Screener.co offers two F score calculators. The 2nd one uses last fiscal year versus prior fiscal year. It seems to me that TTM is the more recent of the two.

 

Here's where things start to differ between data sources. I've looked at screener.co, grahaminvestor.com, value-investing.eu, gurufocus.com, and done the numbers by hand, and we all get different numbers. On the one hand, I am worried about the discrepency, but on the other, I feel that since interpretation can cause the scores to deviate somewhat, I feel more comfortable with having a machine make the calculation. The ratios imbedded in the F score aren't hard, so if there is a mistake due to data, at least that mistake can occur across all stocks.

 

These sites also offer a non-null parameter count, meaning you can see how many of the 9 data points were included in the F score. So if you have an F score of 7, and a non-null of 7, that means that, hypothetically, there are 2 other points the firm could have scored "yes" on and it could actually be a 9 stock.

 

Here, you can do a cutoff of 3 or more if you want and then rank what's left just based on TTM F score.

 

Therefore, combined rank is the insider ownership plug I mentioned earlier + F score.

 

Beyond this, I've selected to only look at stocks with an interim file of 12/31/2012 or later. Utilizing this or an annual filing cutoff takes a full 20% out of the Screener.co database. There's roughly a 2k difference between this date and 12/31/2011 or later annual filing which I may investigate somewhat since I am sure some companies only file once a year and I don't want to exclude them.

 

Screener.co also offers several ZScore calculations, and I've been using TTM with greater than 3. The other options are FY, 3Year, and 5Year average, but I don't feel they are as valuable.

 

Using my parameters and not excluding any markets, and with net-net meaning just total current assets - total liabilities > market cap, resulted in 263 companies. Going by strong form Graham 66% NCAV gets 92 companies. Net cash stocks result in 34.

 

From this, you'll have to go through and figure out which countries/exchanges you can trade in. Interactive Brokers only allows 23, so to ensure that as few stocks are left out as possible, you can go by each of those countries "exchange code" in Screener.co.

 

I've noticed some Chinese companies, possbily some are RTO, and don't know if I would or wouldn't include them. A recent study showed that in aggregate, RTO's may not be as bad as they are made out to be. In my net cash screen, the first stock located in China is traded traded on the Signapore Exchange. The insider plug is 68.37% and the TTM F score is 6. It is also recent in its interim filings and has a TTM Z score greater than 3. Could it be a scam? No clue, but it may work in a basket.

 

The only other data point I'd like would be the M score to detect earnings manipulation, but since it isn't coded in Screener.co, and isn't available on every stock in value-investing.eu, maybe I can do without.

 

Anyway, thanks for reading. I set out with the goal of this post being a little shorter than my last one, but looking at it, I may have failed. Anyway, I really appreciate any thoughts, comments, critiques, or suggestions :) 

 

 

[DoddDisciple]

Looks like I forgot my summary. Using Screener.co:

 

- Last Interim Filing >= 12/31/2012

- Total Current Assets (I) - Total Liabilities (I) > Market Cap

- Zscore TTM > 3

- Piotroski TTM > 3

 

Ranking Criteria:

 

- 1 - (Free Float / Total Shares Outstanding) * 9 = Insider Ownership Proxy

- Piotroski TTM

 

Thoughts:

 

- Anybody check Screener.co data for Z and F score datapoints?

- Will have to isolate stocks by exchange/country upon basket development

 

 

[mcliu]

It's funny that you mention the quantity of net-nets at the moment. One thing I was thinking long-term, though it may involve too much tinkering with a mechanical strategy, is looking at the number of net-nets as an indicator of current market under/overvaluation, and how that should influence, say, the portion of new money that should be directed to funds like Merger (MERFX) and the Arbitrage Funds, along with other special situation and workout stocks/funds. This is inspired by Graham who suggested a general 50/50 split between bonds/supercash and stocks and that the max to push any one area was 75%-80%. Sonkin had a similar structure with his Hummingbird fund, though Tarsier was just raw deep value.

 

The lack of net-nets could be one indicator that domestic markets are overvalued. Greebackd has been doing a series of different studies that all show we are due for a correction. Part of me says to just develop my plan and start now if I am going to follow a mechanical strategy.

 

Would you mind telling where you'd recommend running the screen? I don't have a problem with a subscription service, but would like as much of what I need in one place:

 

(1) global net-net screen in majority of publicly traded markets - probably can't find anything to screen for a lot of unlisted/OTC stocks aside from by hand or with something like Nate's unlistedstocks.net

(2) f-score, z-score maybe, insider ownership

(3) maybe net-net, NCAV, NNWC values - again will still verify numbers are accurate and not the result of a data misread

 

I've seen GuruFocus, Value-investing.eu, StockScreen123, Screener.co, and the Graham Investor screener as possible options so far. I worry about data quality on some, like Graham Investor, of course. 

 

I think the benefit, at least with the backtests Geoff did, is that he used StockScreen123, which uses Compustat and is supposed to be a database that keeps records for liquidations and bankruptcies, as well firms leaving for the OTC index, reducing survivorship biases. You can find a stock like Solitron in CompuStat since it was once in NASDAQ, but for something that has always been OTC, it's not included.

 

I used a Bloomberg terminal which is a little $$$ for most investors.  Also, even Bloomberg isn't perfect when it comes to very small stocks - particularly in Canada.

 

Do you have a study that shows F-Score works for Net Nets?  If -ve earnings helps (still trying to get my head around this one) then F-Score might hurt.

 

Oh, if you've links to Net-Net studies, please share  :)

 

Btw, I've been following Graham's Simple Way for years.  It is a high volatility method.  So high, I'm not sure many would be able to follow it.

 

Oh, and the value premium seems to persist for ~5 years at least but I've not seen a study on it for Net Nets.

 

I'd also opt for an equal weighting method (at least approximately).  Ideally, lots of small bets.

 

Hi NormR, I was wondering, how much does a Bloomberg subscription cost and what do you think of the data integrity? Does Bloomberg have a team vetting the financials (for the larger companies) in their databases like CapitalIQ does?

[DoddDisciple]

I'm not NormR, but I recall reading somewhere (maybe on here) that Bloomberg is around $14k per person, and you may have to start with a 2-3 person subscription. A case of if you have to ask, you can't afford it.

 

If you can't get Capital IQ or Compustat through a school or library, here are some other sites to consider:

 

Portfolio123 uses the Compustat database. It's just US stocks. I recall it was around $100 monthly for the plan with data going back to 1999. Value-investing.eu has about 30k stocks around the worth and is about $400 yearly. GuruFocus has a similar offering, but it's around $1k yearly. Screener.co is $25 monthly and uses Reuters for data I think. It seems fairly accurate for the most part.

 

If you use another screener, you can always give bloomberg.com a quick glance to see how their free snapshot data compares to your own.

[Packer16]

Bloomberg does scrub their data.  They are also stronger than Capital IQ for international securities and fixed income securities, real estate and they have some pretty good industry analytics as they have industry analysts on staff to put together stories and industry data.

 

Packer

[NormR]

Hi NormR, I was wondering, how much does a Bloomberg subscription cost and what do you think of the data integrity? Does Bloomberg have a team vetting the financials (for the larger companies) in their databases like CapitalIQ does?

 

I use terminals at work.  All databases have issues from time to time.  You have to play with them a while to figure out where they fall down.  Microcap / non-US can be problematic on occasion.  Check the data before investing.

[Packer16]

Ben Graham does discuss net nets on pages 587 to 590 of SE 2nd edition and pages 485 to 490 and 713 to 714 in the 3rd edition.  He appears to include only those firms that do not have declining asset values over time and discusses that you need to be selective in purchasing these.  As another reference point, Monish Pabrai has abandoned his Japanese net-net basket.

 

Packer

[DoddDisciple]

True, but as recent counterpoints, both Gannon and Oddball Stocks's net-net Japan portfolios trounced the market. Perhaps there is a size constraint for Pabrai? Then again, Greenbackd's 1 year results of his net cash / negative enterprise portfolios are up and I was really surprised to see upwards of 70% returns on such large market cap stocks.

[yadayada]

Net net investing is more turnaround investing. I mean liquidation is expensive and has hidden costs and can take a while. In the end I like to think, when will the shareholders see cash? If the assets will probably decline in value over time, then you want to see cash sooner then later. So because of this you are more banking on the fact that companies can monetize those assets. Often when I see write ups on net nets, I dont see nearly enough focus on this.

 

The only true net net investment I have seen recently is that piano company in New York. I forgot the name. But they had some real estate on their balance state that went unnoticed, and was being realized by this PE firm. But that seems rare. Also in Graham's time, liquidating a company was much less complicated and less expensive. So you are either investing in liquidations, In hidden assets, or in turn arounds imo. And I doubt the basket aproach works that well in all those cases. Liquidations you probably need to know what will happen, and discover all the hidden risks. Hidden value is something you cant really do the basket aproach on, and with turn arounds you need to figure out how the business works and see how likely it is something good will happen.

[frommi]

True, but as recent counterpoints, both Gannon and Oddball Stocks's net-net Japan portfolios trounced the market. Perhaps there is a size constraint for Pabrai? Then again, Greenbackd's 1 year results of his net cash / negative enterprise portfolios are up and I was really surprised to see upwards of 70% returns on such large market cap stocks.

 

When you look at the greenbackd`s portfolio you see that the outperformance comes only from 1 or 2 stocks, where one was a 4 fold and another an 8 fold. I know that i couldn`t stand the psychologic pressure to hold onto them after they have doubled. But doing so will drive down returns to normal market levels. But when you really can avoid touching these stocks for one year, its possible that you are outperforming the market by wide margins. I can only imagine myself doing that by not looking at the portfolio for one year. (But really who is able to do this?)

[DoddDisciple]

When you look at the greenbackd`s portfolio you see that the outperformance comes only from 1 or 2 stocks, where one was a 4 fold and another an 8 fold. I know that i couldn`t stand the psychologic pressure to hold onto them after they have doubled. But doing so will drive down returns to normal market levels. But when you really can avoid touching these stocks for one year, its possible that you are outperforming the market by wide margins. I can only imagine myself doing that by not looking at the portfolio for one year. (But really who is able to do this?)

 

I agree. 1 year is not long enough to make any real judgments, but I am still amazed at the outcome overall considering these were perhaps the lowest quality net cash stocks out there. The larger the market cap, typically the worse the stock does with strategies like this.

[Packer16]

Part of it may have to do with neglect.  The smaller net nets are not covered by analysts and may not be of interest to even hedge funds.  The larger the company the more suspect that I know something that someone else doesn't and that is not reflected in the stock price.

 

Packer

[txitxo]

 

When you look at the greenbackd`s portfolio you see that the outperformance comes only from 1 or 2 stocks, where one was a 4 fold and another an 8 fold. I know that i couldn`t stand the psychologic pressure to hold onto them after they have doubled. But doing so will drive down returns to normal market levels. But when you really can avoid touching these stocks for one year, its possible that you are outperforming the market by wide margins. I can only imagine myself doing that by not looking at the portfolio for one year. (But really who is able to do this?)

 

I think it is always like that with net-nets. The overperformance comes from a few "rockets". Very difficult to base a whole portfolio on that. If you want to do a Grahamite mechanical portfolio I would combine the three approaches he developed: enterprising investor, the one for more conservative investors and net-nets.

 

[oddballstocks]

Even I don't own just net-net's, they make up maybe 20-25% of my portfolio, potentially less right now.  I own other types of value stocks as well, low P/B, hidden assets, sum of the parts, cheap earnings etc.  I do not concentrate in any holdings, or even in any style.

 

To yadayada's point I think you're looking and thinking about these incorrectly.  People look at some mispriced large cap and say "but with such a brand at 5x earnings it's misplaced."  No one expects that some acquirer will come along and buy it at fair value, they believe in the gravity of the market.  Something so egregiously mispriced will be pulled to fair value eventually.  That's the same thing with net-nets, no one is liquidating these things, these are egregious valuations.  The gravity of the market will eventually pull them towards fair value.

 

It's easy to get hung up on terms or categories of things.  Investors doing Graham net-nets, or Buffett moat stocks or whatever.  Forget the terms and think in terms of the cheapness spectrum.

 

There is a spectrum of value ranging from free to expensive, every company falls on this spectrum.  A net-net is just something that's clearly on the cheap end of the spectrum.  Maybe a high flier is the opposite of a net-net, clearly on the overvalued side of the spectrum.  Yes, some net-nets do self destruct, just like some high flying growth stocks never come back to the ground, they continue to fly higher.  Over time the gravity of the market is strong and pulls all things towards the center. 

 

To me a net-net is a shortcut, I know the company is cheap the second I start looking at it.  I don't have to divine that it's cheap like I might with a moat or some great business at a fair price.  Yes, you could probably compare a net-net to some large company that's hit the rocks, and guess what, if you studied both maybe the large company is much cheaper.  The key is there is a lot more work required.  I go for simple and easy, this is a quantity game.  I'm not looking for the world's cheapest business, I just want to buy a ton of cheap stuff and sell it higher.

 

This is like a garage sale.  I fill the garage with a number of items, I sell some for much more than I paid, some for a little more and maybe some never sell, but overall I generate a satisfactory return.  Many investors approach investing like owning five classic paintings.  They are searching for the absolute best paintings with the most value, they want to maximize the value they sell these paintings for.  They're hunting for these paintings and won't settle until they find the best paintings at fair prices.  That's fine, it works for some.  I'm buying paint by number water colors, and some old grandmother down the street is buying them at my garage sale.  I don't care that it's a paint by numbers of some farm or a rooster.  If I can sell it for more than I paid, and I can do it in quantity I am happy.

 

For me there is no purity in investing.  If I discovered a way to trade options profitably and consistently tomorrow I'd do it.  At the end of the day I start with a pile of money and I want to grow it.  I have found for myself that I do best with the warehouse of cheap stocks approach.  It's the simplest and most reliable way for me to make money.  I don't have pie in the sky hopes for my returns either.  People on here want to do the Buffett 50%, I'll let them have it, I am content with 15%.  If I do 15% for years I'll be a hero to my wife and kids, the ones for whom the money matters.  None of my friends are into investing, they will ask general questions about the market.  There is no pride if I own AIG or BAC or Bowl America, no one recognizes any of the names in my portfolio anyways.

 

This is a small rant, but there are a LOT of smart people on this forum.  I think smart people are prone to tinker and try and figure out the best solution.  I have found in life that being good enough and consistent is much more valuable than being the best at anything.  There is a lot of intellectual thrashing on this board trying to distill the absolute best investments.  I'm happy with good enough investments.  I enjoy investing, I enjoy thinking about business.  But I'd rather play with my kids and spend time with my wife or go running or skiing rather than read an AIG 10-K.  I recognize that this fatal flaw of not being obsessed or committing my life to investing won't make me the best, but I don't care, to me there are much more important things in life.

 

My last thought is this, I'm not surprise that maybe 70-80% of investors dismiss net-nets, that's the reason these companies are cheap.  Most investors, including most on this value board write these types of companies off, that's exactly why they are valued so low.  The arguments that people put up against them make sense, that's why most investors believe them, and that's also the same reason why these opportunities exist.

[Kraven]

Even I don't own just net-net's, they make up maybe 20-25% of my portfolio, potentially less right now.  I own other types of value stocks as well, low P/B, hidden assets, sum of the parts, cheap earnings etc.  I do not concentrate in any holdings, or even in any style.

 

To yadayada's point I think you're looking and thinking about these incorrectly.  People look at some mispriced large cap and say "but with such a brand at 5x earnings it's misplaced."  No one expects that some acquirer will come along and buy it at fair value, they believe in the gravity of the market.  Something so egregiously mispriced will be pulled to fair value eventually.  That's the same thing with net-nets, no one is liquidating these things, these are egregious valuations.  The gravity of the market will eventually pull them towards fair value.

 

It's easy to get hung up on terms or categories of things.  Investors doing Graham net-nets, or Buffett moat stocks or whatever.  Forget the terms and think in terms of the cheapness spectrum.

 

There is a spectrum of value ranging from free to expensive, every company falls on this spectrum.  A net-net is just something that's clearly on the cheap end of the spectrum.  Maybe a high flier is the opposite of a net-net, clearly on the overvalued side of the spectrum.  Yes, some net-nets do self destruct, just like some high flying growth stocks never come back to the ground, they continue to fly higher.  Over time the gravity of the market is strong and pulls all things towards the center. 

 

To me a net-net is a shortcut, I know the company is cheap the second I start looking at it.  I don't have to divine that it's cheap like I might with a moat or some great business at a fair price.  Yes, you could probably compare a net-net to some large company that's hit the rocks, and guess what, if you studied both maybe the large company is much cheaper.  The key is there is a lot more work required.  I go for simple and easy, this is a quantity game.  I'm not looking for the world's cheapest business, I just want to buy a ton of cheap stuff and sell it higher.

 

This is like a garage sale.  I fill the garage with a number of items, I sell some for much more than I paid, some for a little more and maybe some never sell, but overall I generate a satisfactory return.  Many investors approach investing like owning five classic paintings.  They are searching for the absolute best paintings with the most value, they want to maximize the value they sell these paintings for.  They're hunting for these paintings and won't settle until they find the best paintings at fair prices.  That's fine, it works for some.  I'm buying paint by number water colors, and some old grandmother down the street is buying them at my garage sale.  I don't care that it's a paint by numbers of some farm or a rooster.  If I can sell it for more than I paid, and I can do it in quantity I am happy.

 

For me there is no purity in investing.  If I discovered a way to trade options profitably and consistently tomorrow I'd do it.  At the end of the day I start with a pile of money and I want to grow it.  I have found for myself that I do best with the warehouse of cheap stocks approach.  It's the simplest and most reliable way for me to make money.  I don't have pie in the sky hopes for my returns either.  People on here want to do the Buffett 50%, I'll let them have it, I am content with 15%.  If I do 15% for years I'll be a hero to my wife and kids, the ones for whom the money matters.  None of my friends are into investing, they will ask general questions about the market.  There is no pride if I own AIG or BAC or Bowl America, no one recognizes any of the names in my portfolio anyways.

 

This is a small rant, but there are a LOT of smart people on this forum.  I think smart people are prone to tinker and try and figure out the best solution.  I have found in life that being good enough and consistent is much more valuable than being the best at anything.  There is a lot of intellectual thrashing on this board trying to distill the absolute best investments.  I'm happy with good enough investments.  I enjoy investing, I enjoy thinking about business.  But I'd rather play with my kids and spend time with my wife or go running or skiing rather than read an AIG 10-K.  I recognize that this fatal flaw of not being obsessed or committing my life to investing won't make me the best, but I don't care, to me there are much more important things in life.

 

My last thought is this, I'm not surprise that maybe 70-80% of investors dismiss net-nets, that's the reason these companies are cheap.  Most investors, including most on this value board write these types of companies off, that's exactly why they are valued so low.  The arguments that people put up against them make sense, that's why most investors believe them, and that's also the same reason why these opportunities exist.

 

This post is perfect.  It's 100% correct, yet my guess is about 99.9% of board members will dismiss it.  So many people want to collect stocks to fill an art gallery.  Step over here and admire this KO or BRK or WFC hanging on the wall.  The purpose of investing is to make money.  That's it.  If you love it and enjoy it (and I do) that's a bonus.  But at the end of the day it's all about making money.  If you can do so by technical analysis or predicting the future, more power to you.  It's not about being pure.  As the kids used to say back in the day, it's all about the Benjamins.

[hyten1]

agree!

 

that is why i am always looking for "situations", "opportunities", not net-net or, low PE or great companies with moat

 

i look for "situation/opportunity" that provide me the best risk reward adjusted return base on what i know (that might be a net-net or a company buffett invest or a company i read about on this board etc.)

 

hy

 

Even I don't own just net-net's, they make up maybe 20-25% of my portfolio, potentially less right now.  I own other types of value stocks as well, low P/B, hidden assets, sum of the parts, cheap earnings etc.  I do not concentrate in any holdings, or even in any style.

 

To yadayada's point I think you're looking and thinking about these incorrectly.  People look at some mispriced large cap and say "but with such a brand at 5x earnings it's misplaced."  No one expects that some acquirer will come along and buy it at fair value, they believe in the gravity of the market.  Something so egregiously mispriced will be pulled to fair value eventually.  That's the same thing with net-nets, no one is liquidating these things, these are egregious valuations.  The gravity of the market will eventually pull them towards fair value.

 

It's easy to get hung up on terms or categories of things.  Investors doing Graham net-nets, or Buffett moat stocks or whatever.  Forget the terms and think in terms of the cheapness spectrum.

 

There is a spectrum of value ranging from free to expensive, every company falls on this spectrum.  A net-net is just something that's clearly on the cheap end of the spectrum.  Maybe a high flier is the opposite of a net-net, clearly on the overvalued side of the spectrum.  Yes, some net-nets do self destruct, just like some high flying growth stocks never come back to the ground, they continue to fly higher.  Over time the gravity of the market is strong and pulls all things towards the center. 

 

To me a net-net is a shortcut, I know the company is cheap the second I start looking at it.  I don't have to divine that it's cheap like I might with a moat or some great business at a fair price.  Yes, you could probably compare a net-net to some large company that's hit the rocks, and guess what, if you studied both maybe the large company is much cheaper.  The key is there is a lot more work required.  I go for simple and easy, this is a quantity game.  I'm not looking for the world's cheapest business, I just want to buy a ton of cheap stuff and sell it higher.

 

This is like a garage sale.  I fill the garage with a number of items, I sell some for much more than I paid, some for a little more and maybe some never sell, but overall I generate a satisfactory return.  Many investors approach investing like owning five classic paintings.  They are searching for the absolute best paintings with the most value, they want to maximize the value they sell these paintings for.  They're hunting for these paintings and won't settle until they find the best paintings at fair prices.  That's fine, it works for some.  I'm buying paint by number water colors, and some old grandmother down the street is buying them at my garage sale.  I don't care that it's a paint by numbers of some farm or a rooster.  If I can sell it for more than I paid, and I can do it in quantity I am happy.

 

For me there is no purity in investing.  If I discovered a way to trade options profitably and consistently tomorrow I'd do it.  At the end of the day I start with a pile of money and I want to grow it.  I have found for myself that I do best with the warehouse of cheap stocks approach.  It's the simplest and most reliable way for me to make money.  I don't have pie in the sky hopes for my returns either.  People on here want to do the Buffett 50%, I'll let them have it, I am content with 15%.  If I do 15% for years I'll be a hero to my wife and kids, the ones for whom the money matters.  None of my friends are into investing, they will ask general questions about the market.  There is no pride if I own AIG or BAC or Bowl America, no one recognizes any of the names in my portfolio anyways.

 

This is a small rant, but there are a LOT of smart people on this forum.  I think smart people are prone to tinker and try and figure out the best solution.  I have found in life that being good enough and consistent is much more valuable than being the best at anything.  There is a lot of intellectual thrashing on this board trying to distill the absolute best investments.  I'm happy with good enough investments.  I enjoy investing, I enjoy thinking about business.  But I'd rather play with my kids and spend time with my wife or go running or skiing rather than read an AIG 10-K.  I recognize that this fatal flaw of not being obsessed or committing my life to investing won't make me the best, but I don't care, to me there are much more important things in life.

 

My last thought is this, I'm not surprise that maybe 70-80% of investors dismiss net-nets, that's the reason these companies are cheap.  Most investors, including most on this value board write these types of companies off, that's exactly why they are valued so low.  The arguments that people put up against them make sense, that's why most investors believe them, and that's also the same reason why these opportunities exist.

[DoddDisciple]

Thanks to oddballstocks for raising some excellent points. I would say that net-nets as well as other similar strategies work in an odd  part of the investing spectrum where you have to have accounting and financial knowledge above the average person and at the same time be willing to knowingly ignore aspects any analyst would look at. You could say such basket strategies operate on two twin, opposing concepts: logic and faith.

 

Additionally, I don't really get a sense of pride from any particular company. I don't care how large or respected the company is, I can guarantee some people there hate their job and their negative relationship spills over to other parts of their life. I know I'm a little odd in this regard, but whenever I see say a movie or similar time-based experience, I can't help but briefly consider the aggregate human suffering that had to happen to bring us say an hour or two of entertainment.

 

Anyway, I just brought the post back alive since I had been investigating the actual mechanics someone could employ to cost-effectively develop a global portfolio and wanted to provide an update. It's not the ideal solution and the data isn't always exact in places, but it's there if anyone wants to use it. Most people are pretty restricted with how they can manage their retirement assets, so being able to do something odd outside of them may be an option.

 

[Straddle]

I had a bad experience with investing based on quantitative tests. 2 years ago I read the Ivy Portfolio (still a good book) which presented a very (very) simple trading system in which you would invest your money in 10 different asset classes (through the etf's). You would simply allocate the largest part of your money to the asset class with the strongest momentum and next moment you would sell it and then buy the asset class with the strongest momentum. Backtesting was simple and the results were simply excellent. I added 2 things to the system based on the backtest results: a stop loss order at 8% and I would use leverage to buy more once a position was up 7%.

After 8 or 9 months I threw in the towel. I lost almost 46% of my account and was getting sick from the disappointing results. Just buying SPY would have been much better.

 

Maybe other investors have more luck (or are better at it) than me, but I surely haven't met people making money this way. It seems appealing and simple once you read a book from Greenblatt or O' Shaughnessy, but in reality it tends to go wrong badly. I also know a few traders who had the same experience with investing in the magic formula as presented by Greenblatt.

[DoddDisciple]

A strategy like that is more likely to experience the problems that most people bring up in regards to a quant/mechanical style. I had a professor who did something similar and I just don't see how it makes any intuitive sense. He looked at 10 different asset classes, many of which were stock index funds, but I recall several commodities. He'd rank them, invest everything in the one with greatest momentum, and hold and redo a month later. It's likely the same strategy.

 

That seems like actively participating in greater fool theory to me. Many of these ETFs are composed of 1000s of positions. How can we make a meaningful prediction over the short or even the long term? Additionally, it is very easy for institutions and large funds to game the strategy. The different variants of the Vanguard Total Stock Market alone are what, $500B-$1T?

[yadayada]

The whole idea of net net investing doesnt work anymore. Its too easy to screen for them now. In graham's time you could find 10 companies that were trading at like 25% of their assets. Nowadays every net net has something seriously wrong with it. Maybe in Japan you can find a few, but even then the attractive thing is that they are trading at a discount to cash flow.

 

Seems like speculating, your holding some asset that might or might not be worth alot more indefinately, that is barely generating any cash. Or losing money. Your basicly waiting for a liquidation or turn around, or a greater fool bidding the price up.

[blainehodder]

The whole idea of net net investing doesnt work anymore. Its too easy to screen for them now. In graham's time you could find 10 companies that were trading at like 25% of their assets. Nowadays every net net has something seriously wrong with it. Maybe in Japan you can find a few, but even then the attractive thing is that they are trading at a discount to cash flow.

 

Seems like speculating, your holding some asset that might or might not be worth alot more indefinately, that is barely generating any cash. Or losing money. Your basicly waiting for a liquidation or turn around, or a greater fool bidding the price up.

 

Pretty much every study on the matter disagrees with your hypothesis.  Net net investing still very much works. I agree many net nets are hideous companies with poor management, but the strategy still works.  Simple strategies based on valuation almost always outperform the broad market over time, even if they are widely know and followed.

[Packer16]

I think a different way to think about net-nets is to include RE and other assets at appraised value.  US GAAP does not require thin but IFRS does.  So there are some interesting net-nets outside the US by this definition.  This is an area Marty Whitman specializes in.

 

Packer

[frommi]

The outperformance of the strategy comes from the years after big market crashes and you can only expect to outperform with stocks <50M market cap. This seems to capture the price-to-book premium and the smallcap premium. When you look at the data on greenback`s site you can see that the -ev strategy with <50m stocks is only loosing money in recessions, what is exactly the kind of behaviour i expect from a value investing approach.

Perhaps its a good idea to start with a small part of the portfolio to get in touch with the approach.

 

And its totally clear that these stocks are something where you are better off not thinking about what you buy, because its allways something ugly otherwise it wouldn`t be so cheap. The only thing to do is perhaps try to detec fraud. (so exclude chinese stocks for example.)

 

 

[matjone]

The whole idea of net net investing doesnt work anymore. Its too easy to screen for them now. In graham's time you could find 10 companies that were trading at like 25% of their assets. Nowadays every net net has something seriously wrong with it. Maybe in Japan you can find a few, but even then the attractive thing is that they are trading at a discount to cash flow.

 

Seems like speculating, your holding some asset that might or might not be worth alot more indefinately, that is barely generating any cash. Or losing money. Your basicly waiting for a liquidation ower turn around, or a greater fool bidding the price up.

 

It's true that there are few net nets now in the U.S. but I wouldn't take that to mean they'll never appear again or that you can't invest this way at certain times.  Like you said there are still some in Japan.  Also, not every one is a terrible business.  BSHI was one I looked at recently in the U.S.  I admit that's not a great business but they were holding steady if I remember right.  I didn't buy it but if I had I would have made money so far.