Net-Net Investment Strategy

Hi, what do you guys think of Ben Graham's net-net investing strategy (ie if the stock price is less than 2/3 of the difference between its current assets and liabilities, it is a Net Net stock.) ? A lot of such net-net stocks seem to be companies that are mediocre and have run into problems. Isn't it dangerous to follow such a strategy as many of these net-net companies can go bust any time ?

(01-06-2020, 05:20 PM)CaiGengYang Wrote: Hi, what do you guys think of Ben Graham's net-net investing strategy (ie if the stock price is less than 2/3 of the difference between its current assets and liabilities, it is a Net Net stock.) ? A lot of such net-net stocks seem to be companies that are mediocre and have run into problems. Isn't it dangerous to follow such a strategy as many of these net-net companies can go bust any time ?

The answer is in your question. Just buy those few that you think are not mediocre and with serious problems.

I think the right strategy is to hold a portfolio of companies that exhibit these qualities. In this way, using probability of large numbers, the number of failures will be offset by multi-baggers in your portfolio.

I read that net-net investing strategy works well up to only a certain point (ie a certain fund size) and is not scalable beyond that. Does anyone know what roughly is the maximum size of fund suitable for net-net investing ? Thanks ..

(01-06-2020, 06:31 PM)ghchua Wrote: I think the right strategy is to hold a portfolio of companies that exhibit these qualities. In this way, using probability of large numbers, the number of failures will be offset by multi-baggers in your portfolio.

I read about this strategy many years ago and I am thankful I didnt follow it for Spore stocks else I would be holding many China stocks listed here.

Probably only useful if you have enough funds to (1) do due diligence on the company (2) buy over entire company, to liquidate assets (a la Warren Buffett, Ben Graham), if the stock you buy doesn't "revert to mean" in due time (3) diversify into enough counters (20-30) so if a couple fail, they don't wipe you out; (4) works better in the 1950s - 60s where information is less accessible, when there are more low hanging fruits in the market.

https://www.netnethunter.com/value-inves...0portfolio.

Net-nets worked for a generation after the Great Depression, by scaring that Generation off stocks for a long time. During that era where information wasn't as free flowing as now, having information was power. It is up to us to figure out the odds of making money now with net-nets.

Personally, I have done some net-net analysis on Spore companies some time back. I was glad that i didn't execute the investments because some of them subsequently went into JM/liquidation. The shortlisted companies had too small a sample size to diversify the individual stock risk.

Couple of years back, there has also been some net-net investing done by a value-based manager, specifically in Japan after the 2011 Tsunami. Japan has had its infamous reputation of having poor corporate governance. The performance was reported to be profitable and beneficial then.

(02-06-2020, 08:30 AM)weijian Wrote: Net-nets worked for a generation after the Great Depression, by scaring that Generation off stocks for a long time. During that era where information wasn't as free flowing as now, having information was power. It is up to us to figure out the odds of making money now with net-nets.

Personally, I have done some net-net analysis on Spore companies some time back. I was glad that i didn't execute the investments because some of them subsequently went into JM/liquidation. The shortlisted companies had too small a sample size to diversify the individual stock risk.

Couple of years back, there has also been some net-net investing done by a value-based manager, specifically in Japan after the 2011 Tsunami. Japan has had its infamous reputation of having poor corporate governance. The performance was reported to be profitable and beneficial then.

Net Net will work when u have enough diversification, management interest are aligned to shareholders & things which don't blow up. Reality is Net Net companies are the one where intrinsically Asset/Liquidation value is high vs. stock price & ROE/ROCE is poor or they micro/small cap which no one cares. As a Net Nets strategy one needs a large portfolio of assets, as lot of times one is dependent on management to unlock value. The longer you hold these companies - your returns start declining as your COE is higher than ROE which  business generates. Hence diversification & patience is key & you hope management interest are aligned to yours.

Personally I think for Net-Net and Deep Value to work you must be able to control management either by representation in the board or distressed. That's not the game for OPMI

(02-06-2020, 09:20 AM)buddy Wrote: As a Net Nets strategy one needs a large portfolio of assets, as lot of times one is dependent on management to unlock value. The longer you hold these companies - your returns start declining as your COE is higher than ROE which  business generates. Hence diversification & patience is key & you hope management interest are aligned to yours.

Hi bubby,

I disagree with your view on the part when you say dependent on management to unlock value. There is no need to do so. Management can choose not to unlock value but you can still benefit from an exit offer via a management buyout. After delisting, management can choose unlock value themselves without minorities.

There are many cases of low ball delisting offers for companies listed on SGX. These are potential exit for net net investors if they manage to buy those stocks at a very low level prior to delisting.