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

[Orange]

Does anyone remember RSKIA? Do you remember MHH, which went nowhere for 3 years before promptly becoming a 4 bagger? I remember back when SPA was turning their business around, selling below asset value at $4 a share. Now it's at $25. How about LOAN? Or JCTCF? GTSI?

 

All those names could be found via screener. They were all profitable. They were all being discussed by multiple bloggers, seeking alpha writers, people on message boards and twitter. What makes net net investing successful is not obscurity (although that plays a role), but temperament. And beauty-or lack thereof. When you buy a stock for less than current assets, you get the business for nothing. It might be an ugly business, but you get it for nothing. It's a 66 cent dollar plus a free call option on unexpected business success.

 

Those arguing that net net investing doesn't work anymore haven't paid very much attention to the space. It has worked beautifully over the last 5 years.

[oddballstocks]

Does anyone remember RSKIA? Do you remember MHH, which went nowhere for 3 years before promptly becoming a 4 bagger? I remember back when SPA was turning their business around, selling below asset value at $4 a share. Now it's at $25. How about LOAN? Or JCTCF? GTSI?

 

All those names could be found via screener. They were all profitable. They were all being discussed by multiple bloggers, seeking alpha writers, people on message boards and twitter. What makes net net investing successful is not obscurity (although that plays a role), but temperament. And beauty-or lack thereof. When you buy a stock for less than current assets, you get the business for nothing. It might be an ugly business, but you get it for nothing. It's a 66 cent dollar plus a free call option on unexpected business success.

 

Those arguing that net net investing doesn't work anymore haven't paid very much attention to the space. It has worked beautifully over the last 5 years.

 

+1, and a variety of other names...

 

I'm not convinced any stock is obscure, someone somewhere always seems to know about any company.  I would argue that temperament is really the key to this investing style.

 

Research, be confident in your decision, and be patient.

[DoddDisciple]

Hi, Orange. Do you have any screeners to recommend? The most cost effective ones seem to be screener.co and value-investing.eu. I know GuruFocus recently updated for international screening, but I'd rather not toss $1k their way with no free trial.

 

Any idea of general data trustworthiness? I've done by hand and by the screens and the aggregate differences make it seem not worth doing by hand analysis. Just check validity of it being a net-net, maybe look at 1 - free float/shares outstanding as insider ownership proxy, and trust in the screen's generated FMZ scores.

[Orange]

Greetings, I'm not a big screener guy. I've used value investing.eu with some success, and other than that I'll occassionally use something like free and simple, like google finance. This is also useful for a couple of ideas: http://www.grahaminvestor.com/screens/graham-number-ncav-screen/

 

[DoddDisciple]

Interesting. Value-investing.eu does seem to be the easiest global screening I've come across so far. Their NCAV template is fixed at 66% and less however. I've checked them against screener.co and a few hand calculations on F, M, and Z score metrics and they seem to be close enough to be useful as a group investing tool.

[Orange]

Also, if you want to use the gurufocus screener but don't want to pay the money, you could consider writing for them. Once you submit 10 articles, you get a free premium membership. You can also get paid to write. Pretty good deal if you like writing and have some ideas.

 

 

http://www.gurufocus.com/news/70028/writers-compensation-program--writers-wanted

[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.

 

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.

yeah but you still need to find a basket. Gl with that. Unless you want to go through the pink sheets. But then you really want to find a catalyst. I mean sure in bear markets you can find 10, but why would you if you can buy companies with a moat for a PE of like 7 or 8. Id much rather have those. Just seems with all the opportunities out there, why the hell bother with this outdated strategy. You had great returns when markets were less efficient then they are now. But I searched in the US for net nets, and I could find like 2 good ones. But that would only be a v small portion of your holdings then.

 

I supose it could work in like Japan now. And it probably worked in Korea like 8-9 years ago.

 

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.)

 

Yeah but a much better strategy is to have a watch list of like 100+ good to great companies. And then buy the ones you like when they get really cheap. I would rather put 100% of my stock portfolio in that when everything is cheap, then in some v mediocre company trading at 20% assets. If i can buy a growth story with a PE of 7 or 8 I will make more on that, and it seems less risky.

[DoddDisciple]

Also, if you want to use the gurufocus screener but don't want to pay the money, you could consider writing for them. Once you submit 10 articles, you get a free premium membership. You can also get paid to write. Pretty good deal if you like writing and have some ideas.

 

http://www.gurufocus.com/news/70028/writers-compensation-program--writers-wanted

 

Interesting. I think this is just the domestic $300 premium membership with access to US screeners and newsletters (speaking of which, how is the net-net one doing?)

 

In regards to yadayada, you can easily develop a high quality, non-pinksheet global net-net basket right now. The US net-net offerings aren't the best now, but there are enough that there would be at least some representation in a 30 stock basket.

 

In regards to risk, I've never understood why a $50M market cap is considered too small or subject to scams. It's certainly large to an individual, just look around at most small businesses. People buy and sell those with a lot less information than we have on even the smallest listed stock. Most small businesses would be terrible stocks, but somehow, operating at say 1% net in comparison to total sales, provides tens of peoples with jobs and keeps the business afloat.

 

By looking through stocks instead of local business listings, you at least gain a method of quick liquidity though exchanges (you may not get the price you want, but you can get a price) and can avoid all the small businesses like restaurants and gift shops that routinely pop up and disappear a year or so later. If you see a company with large insider ownership, you can at feel more confident that greed and self preservation on the side of owner-operators will make them not want to screw themselves (as stockholders) over. Can outside minority holders get a raw deal? Sure. But at least you're getting a deal at all and more than likely, when something like this happens, you are in the green on that particular deal.

[oddballstocks]

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.

yeah but you still need to find a basket. Gl with that. Unless you want to go through the pink sheets. But then you really want to find a catalyst. I mean sure in bear markets you can find 10, but why would you if you can buy companies with a moat for a PE of like 7 or 8. Id much rather have those. Just seems with all the opportunities out there, why the hell bother with this outdated strategy. You had great returns when markets were less efficient then they are now. But I searched in the US for net nets, and I could find like 2 good ones. But that would only be a v small portion of your holdings then.

 

I supose it could work in like Japan now. And it probably worked in Korea like 8-9 years ago.

 

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.)

 

Yeah but a much better strategy is to have a watch list of like 100+ good to great companies. And then buy the ones you like when they get really cheap. I would rather put 100% of my stock portfolio in that when everything is cheap, then in some v mediocre company trading at 20% assets. If i can buy a growth story with a PE of 7 or 8 I will make more on that, and it seems less risky.

 

It sounds like your mind is made up, this is some old fuddy-duddy strategy that doesn't work anymore.  I guess my question is why are you still even thinking about it?

 

I'm going to go get my cane and flip through some Moody's manuals looking for pink sheet stocks, maybe an old timer like me with out-dated old fashioned tastes can find a few cheap companies.

 

On, and just curious, what companies are you talking about with a defensible moat and a P/E of 7?

[oddballstocks]

Also, if you want to use the gurufocus screener but don't want to pay the money, you could consider writing for them. Once you submit 10 articles, you get a free premium membership. You can also get paid to write. Pretty good deal if you like writing and have some ideas.

 

http://www.gurufocus.com/news/70028/writers-compensation-program--writers-wanted

 

Interesting. I think this is just the domestic $300 premium membership with access to US screeners and newsletters (speaking of which, how is the net-net one doing?)

 

In regards to yadayada, you can easily develop a high quality, non-pinksheet global net-net basket right now. The US net-net offerings aren't the best now, but there are enough that there would be at least some representation in a 30 stock basket.

 

In regards to risk, I've never understood why a $50M market cap is considered too small or subject to scams. It's certainly large to an individual, just look around at most small businesses. People buy and sell those with a lot less information than we have on even the smallest listed stock. Most small businesses would be terrible stocks, but somehow, operating at say 1% net in comparison to total sales, provides tens of peoples with jobs and keeps the business afloat.

 

By looking through stocks instead of local business listings, you at least gain a method of quick liquidity though exchanges (you may not get the price you want, but you can get a price) and can avoid all the small businesses like restaurants and gift shops that routinely pop up and disappear a year or so later. If you see a company with large insider ownership, you can at feel more confident that greed and self preservation on the side of owner-operators will make them not want to screw themselves (as stockholders) over. Can outside minority holders get a raw deal? Sure. But at least you're getting a deal at all and more than likely, when something like this happens, you are in the green on that particular deal.

 

I write the GuruFocus article and so far I don't have access to the site, so I'm not sure how true that page is, although I do get paid to write monthly.

 

That said the newsletter is hit and miss, partially because of some constraints imposed by GuruFocus.  They want net-nets that are listed, US preferably and are liquid.  I've tossed in some international ones and a few illiquid ones (which have done very well), but it's tough.

[Kraven]

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.

yeah but you still need to find a basket. Gl with that. Unless you want to go through the pink sheets. But then you really want to find a catalyst. I mean sure in bear markets you can find 10, but why would you if you can buy companies with a moat for a PE of like 7 or 8. Id much rather have those. Just seems with all the opportunities out there, why the hell bother with this outdated strategy. You had great returns when markets were less efficient then they are now. But I searched in the US for net nets, and I could find like 2 good ones. But that would only be a v small portion of your holdings then.

 

I supose it could work in like Japan now. And it probably worked in Korea like 8-9 years ago.

 

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.)

 

Yeah but a much better strategy is to have a watch list of like 100+ good to great companies. And then buy the ones you like when they get really cheap. I would rather put 100% of my stock portfolio in that when everything is cheap, then in some v mediocre company trading at 20% assets. If i can buy a growth story with a PE of 7 or 8 I will make more on that, and it seems less risky.

 

This post is great. You are absolutely right. Net nets are no good. Don't even bother looking at them. I don't even think there has been one since the 1950s or something. Even if there has it's probably some crappy company that doesn't even have a moat or any kind of competitive advantage whatsoever. What kind of compounding machine is that?  Stay away.

[Orange]

Just seems with all the opportunities out there, why the hell bother with this outdated strategy. You had great returns when markets were less efficient then they are now. But I searched in the US for net nets, and I could find like 2 good ones.

 

http://replygif.net/639

 

[DoddDisciple]

I write the GuruFocus article and so far I don't have access to the site, so I'm not sure how true that page is, although I do get paid to write monthly.

 

That said the newsletter is hit and miss, partially because of some constraints imposed by GuruFocus.  They want net-nets that are listed, US preferably and are liquid.  I've tossed in some international ones and a few illiquid ones (which have done very well), but it's tough.

 

Such constraints probably make working on the newsletter tough. I remember someone compared StocksBelowNCAV's index to the newsletter and the index was up ~40% while the newsletter hadn't moved overall.

 

I think the best easily accessible support for a net-net strategy is on Old School Value's screener page. From 2000-2012, it registers 18% annually for the NNWC method. These are probably the worst NNWC stocks since they have to be in Compustat (meaning they are larger), have high-ish liquidity requirements, and were rebalanced every 6 months with 1% slippage; yet they still clock at an obscene rate.

 

I agree that there are fewer of these in the US that are appealing, but you can go out right now and build a 30 stock portfolio using value-investing.eu and some pretty stringent criteria. Z score above 1.81 and F score above 4. And, this screen is fixed to only look at 66% and less NCAV. If you relax the NCAV constraint and just look at "net-nets," you could raise Z score above 3 and F score above 6 and still be able to build a basket.

 

Like I mentioned earlier, Gannon did something similar with the Compustat data and got a 30% possible return for ranking by insider ownership and 20% for ranking by F score. So returns may be 18%-30%; let's just lob off half for problems. I think most people would be thrilled with 9% per year for the last decade.

[yadayada]

Just seems with all the opportunities out there, why the hell bother with this outdated strategy. You had great returns when markets were less efficient then they are now. But I searched in the US for net nets, and I could find like 2 good ones.

 

http://replygif.net/639

Well I went through alot of net nets with a filter, and generally they are cheap for a v good reason. And not just because the business didnt have a moat. Wouldnt want to hold 10, and wouldnt want to hold 1. If finding them is as simple as a few mouseclicks , then obviously this is now nowhere near as easy as it was even 20 or 30 years ago, when you had to request for some book work with financial statements, and manually go through them. Also being able to just buy up the commpany and dismantle it is a pretty huge advantage. Especially when costs of liquidation were lower back in the day.

  If there are better strategies out there for a small enterprising investor, why the hell do net net investing? Even buffet didnt advocate it in this day and age. He basicly said, look for small companies in the progress of building a moat if your a small investor now. to have any kind of significant impact on your portfolio you need a basket of them. And finding a basket of decent net nets is really hard. Because it is made so easy now.

 

I know of a guy who bought liquidations in the pink sheets, and did v well. But even he wouldnt touch those without catalyst somewhat quick.

 

I mean nowadays you have the internet, and you can look for great ideas that are misunderstood by the market on a dozen good blogs and sites like VIC and this. It is much easier to really dig into a company. And even easier to find other people who already did before you.

 

On, and just curious, what companies are you talking about with a defensible moat and a P/E of 7?

They were out there in 2008 and 2009... Im not saying they are out there now. ALlthough I know of one that trades at 7.5 currently with a pretty nice moat and share holder friendly management.

Also didnt buffet switch to fisher in the 70's? Why the hell would he do that when he was still pretty small, and really cheap net nets were all over the place? He still quotes graham because he tought him the principle of buying a 1$ for 50 cents, but the majority  of his career was not actually net net investing. His method of buying a 1$ for 50 cents just changed.

 

I agree that there are fewer of these in the US that are appealing, but you can go out right now and build a 30 stock portfolio using value-investing.eu and some pretty stringent criteria. Z score above 1.81 and F score above 4. And, this screen is fixed to only look at 66% and less NCAV. If you relax the NCAV constraint and just look at "net-nets," you could raise Z score above 3 and F score above 6 and still be able to build a basket.

 

Like I mentioned earlier, Gannon did something similar with the Compustat data and got a 30% possible return for ranking by insider ownership and 20% for ranking by F score. So returns may be 18%-30%; let's just lob off half for problems. I think most people would be thrilled with 9% per year for the last decade.

Is that data really different then the regular google stock screener? I looked for companies by that criteria, and couldnt even find 5 good ones. Let alone if i would rank for something by insider ownership. Or was this after a large stock market drop?

 

FWIW if i pick the ones with at least positive ebitda margins, price to book of 0.7 and lower and market caps of over 9 million to 1 billion$ with positive Ebitda margins, I get about 200 results. But alot of them have intangible assets or v shareholder unfriendly. Alot of them are bleeding money like crazy, or are just shady (chinese) in general. About half way through I found 2 that didnt even much upside potential. Would love to know where to find enough to make a basket?

[Palantir]

PE of 7.5.

 

Which stock?

[yadayada]

its pretty illiquid, and im not fully invested, ill make a post about it in a month or so. It has about a 320 million$ market cap. srry for the tease lol.

[matjone]

Saw this and thought of this thread.

 

http://www.bloodhoundsystem.com/blog/index.php/2013/11/ncav/