Net Net Portfolio

[heifien91]

I have done research in this area and would say that with Singapore, there exists a couple of net nets. However, none would really satisfy the original strategy by Graham of a minimum of 33% discount to NCAV. While those that do are mostly China companies. While the remaining companies that still qualifies as a net net in Singapore, does not offer huge margin of safety.

Currently, I am researching on the Japanese market and would say that if you would want to construct a basket of net net stocks, you would have much better luck there.

On your point about catalyst being increased earnings, being bought over etc. It really depends to be honest. The research I have done on Japan has shown that sometimes prices just shoot up, giving you a 2 bagger within months or maybe a week or so. Essentially some would say value itself is the catalyst. However, even Graham commented that why these stocks normalises back is a mystery with his talk with Senator Fulbright.

Hope you find this useful

[thinleyw]

Hi,

i have been considering the idea of forming a basket of net net stocks that will form 20-30% of my portfolio.

there are easily 50 net net stocks on the SGX, however most of them happen to be S-chips.

normally, i find higher quality net nets such as PNE industries and Koyo. I think these are single investments that can be good investments by themselves.

was wondering if any buddies have tried making a basket of net nets of shoddy companies and manage to get a decent return from such a strategy.

many companies are selling at a substantial discount and i think that, not all have to come to fruition to actually make a decent return.

seems risky and safe at the same time.

personally, i can stomach the volatility, question is if it is actually a logical choice.

what do you think?

I did a screen and found only 3-5 good net net stocks... IDK how you managed to find 50... Are they PRC companies?

[CY09]

I will like to highlight the net net approach is pretty weak in singapore due to:
1) lots of fraudulent company
2) 'deaf management' often many such listed companies have management who are just hoarding cash and not doing anything to enhance minority interest - such example include sing holdings, unifood and lion asia pac and affiliates

I personally feel Japan has the same problem where the mgmt just get paid and do a terrible job, closely held by family members and absolutely deaf to minority shareholder.

[thinleyw]

Do you mind sharing the list so some of us could analyze the companies...

[CY09]

Hi thinleyw,

6 of them can be found here. All are s chips

http://www.valuebuddies.com/thread-5178-page-2.html

[Jacmar]

Hi thinleyw,

6 of them can be found here. All are s chips

http://www.valuebuddies.com/thread-5178-page-2.html

For those keen on net-net, you should read this article. I think it nicely sums up what not to do in asia re net-nets. Bottom line is forget about this strategy.

http://www.fool.sg/2014/10/16/a-chat-wit...eml0070001

[heifien91]

Indeed, it does somewhat sum up what how you should be navigating asia regarding net nets, however, I do not believe the bottom line is about forgetting such a strategy. The key point is about knowing how to navigate correctly through these net nets.

Firstly, Prof Greenwald did mention the ones people should be finding are the ones where management are buying back shares or distributing dividends. These would be the two of the key qualities I look for when filtering through Japanese net nets. I would add other qualities like not issuing shares over the last 10 years, debt to equity < 25%, discount to NCAV of minimally 33%, P/B < 0.7 etc.

With regards to finding the right management it is true. But think about it this way. These Japanese companies have been around for decades probably since the early 1900s. If the net nets have only been around for a few years, yes throw them out as we cannot assess how management is. The key would be choosing those with more than 30 years of experience. With such management that have weathered these companies through so many cycles, I believe that they essentially know what they are doing. Filter out those where you see stuff like management exploring new business avenues/ investing into a new venture totally different from their core business. Usually these companies are quite dangerous as management is venturing into new territories, where they aren't experts in. This is another reason why I stated to choose companies with very low debt to equity ratios as it is the high debt that kills these companies. For companies that have low debt, the just keep on surviving. They wont be fantastic but they survive.

Personally, I have seen it work on the Singapore and Japanese markets. For Singapore look at past stocks that have run up like PNE, Jason Marine, Penguin etc. With regards to the Japanese market, I know retail investors adopting such a method and even superinvestors like Guy Spier went in adopting the same method of just buying a basket of Japanese net nets and have fared well. However, he has liquidated his basket already given better opportunities elsewhere. With regards to the Korean market I have started looking into it and undervalued stocks there are pretty interesting but it isn't because of a net net strategy. However, there are opportunities abound and we shouldn't just disregard it because management do not listen - Petra Capital has a fantastic performance in the korean market in this regard.

One last comment, with regards to Lion AsiaPac, there are potential red flags in my opinion and have written an article on it before. Hence, I would say whilst it may be a net net, it would be filtered away. Sorry for the lengthy post.

Hi thinleyw,

6 of them can be found here. All are s chips

http://www.valuebuddies.com/thread-5178-page-2.html

For those keen on net-net, you should read this article. I think it nicely sums up what not to do in asia re net-nets. Bottom line is forget about this strategy.

http://www.fool.sg/2014/10/16/a-chat-wit...eml0070001

[specuvestor]

I do not think any strategy should be thrown away, just like anything being branded as s-chip or dot-coms. There is a time and place for everything under the sun. Key is to understand the why and when

With ref to my 3 layered model, net net is concerned with the asset layer but makes no reference to the business or structure layer. What happens if the business require high working capital or accumulating cash for business expansion up or downstream? What happens if management and major shareholders wants to retain cash for their own personal benefit?

It is but one screening tool but doing homework is still most important

[Dividend Hermit]

Net-net strategy still workable but the basket is getting smaller, especially if you filter out S-chips (which I do). I have vested in PNE, Jason Marine and Penguin but such promising candidates are harder to find in local market now. So my portfolio has transformed from pure net-net to include substantial dividend and growth stocks. If one is confident and has done proper research, can venture overseas for net-net stocks.

[paullow]

I do not think any strategy should be thrown away, just like anything being branded as s-chip or dot-coms. There is a time and place for everything under the sun. Key is to understand the why and when

With ref to my 3 layered model, net net is concerned with the asset layer but makes no reference to the business or structure layer. What happens if the business require high working capital or accumulating cash for business expansion up or downstream? What happens if management and major shareholders wants to retain cash for their own personal benefit?

It is but one screening tool but doing homework is still most important

that i totally agree. what good will it do to shareholders when they pay 40c for something worth $1, when it will stay undervalued for a long time, and worse if no decent dividends.

unlocking of gems or GO presents opportunities to gain a great deal over the purchase price, but totally relevant questions to ask would be

1) what if this unlocking doesn't occur?

2) what if this GO doesnt take place?

3) in the meanwhile, we need to ask ourselves, are the returns increasing justified for each passing year of waiting?

4) like what MR Specuvestor has raised, I would not just look at the net net concept, but would look at the company ABS concept and dividends as a translationary effect of this to the small shareholders' pockets.

paullowinvestmentjourney.blogspot.sg