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Hi guys, my name is Evan Bleker and I'm author of Net Net Hunter, a site dedicated to international net net stocks. I've been investing and involved with startup businesses for years now. My investing focus is on small cap, micro cap, nano cap net net value stocks. That's partly situational but... More
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  • NCAV Stocks: How To Get Explosive Returns

    It's just not true that all NCAV stocks are created equally. While they work out great together as a group, some NCAV investments are way more promising than others.

    A NCAV Investment Checklist?

    Checklists have been tremendously valuable in all sorts of industries for reducing or eliminating human error. Pilots, for example, go through a list of things they need to check on an airplane before takeoff in order to reduce any factors that could lead to a devastating crash.

    More recently, investors such as Monish Pabrai have incorporated checklists into their own investment process to make sure they don't leave out any critical pieces of information when researching a stock. Warren Buffett and Charlie Munger are no different - though they call their checklist items "filters".

    While it's just not possible to eliminate all human error, you can go a long way towards reducing your own mistakes by putting together a scorecard that you can use when assessing potential investments. Of course, you could use mine, as well.

    Building My NCAV Scorecard

    I've spent a considerable amount of time combing through Benjamin Graham's books, Warren Buffett's partnership letters, and a number of different scientific studies that examined NCAV stocks. In the process, I've kept notes on the investment tactics that produce the highest possible returns using this strategy.

    I've put those best practices together into an investment checklist that I've found invaluable when selecting NCAV stocks. Given my NCAV portfolio's exceptional returns over the last 3 years, I've decided to update this checklist for 2014.

    The checklist runs through critical elements that must be in place before I'll even consider a stock before covering other key factors important in the selection process and eventually moving on to some of the qualitative facts that I look for.

    Want to earn +25% annual returns? Sign up for Net Net Hunter membership right now!

    It's important to remember that this checklist serves as a great first run through for any net net stock that you're assessing but it doesn't cover some of the qualitative aspects that separate the promising NCAV stocks from the ones that will see stratospheric returns. I don't think any checklist can successfully cover those soft facts because recognizing these types of patterns takes significant experience in business and investing.

    My NCAV ScorecardCore Criteria

    This is the first set of criteria that I use. To me, this set of 7 criteria is black and white and can lead me to immediately exclude a company from being an investment candidate.

    NCAV Core Criteria

    NCAV Core Criteria

    Not Chinese - I won't buy a net net stock of a company that is based in China or has major operations in China. Basically, I'm trying to avoid reverse takeover scams. While there are probably good Chinese net net stocks I just feel it's better to avoid this group as a whole.

    Low Price-to-NCAV - Less than 50%. The reality is that the the smaller the price to NCAV the better the returns will be as an average. The difference between a stock trading at 40% of it's NCAV and one trading at 60% of its NCAV is striking. While the company trading at 60% of its NCAV only has to rise 66% to be fully valued on a net current asset value basis, the company trading at 40% needs to rise 125% to reach fair value. On top of that, the higher priced NCAV stock has a greater likelihood of falling further in price while the cheaper priced company can provide great returns even if it doesn't reach full net current asset value.

    Low Debt-to-Equity - The same reasoning works for debt-to-equity levels. If the company has too much debt, making for the spread between total liabilities and current assets too thin, then the company's NCAV can easily be wiped out. Having a low debt-to-equity ratio means having a large margin of safety. I won't invest in a company that has a debt-to-equity ratio of over 25%.

    You should keep in mind that a key part of calculating a firm's NCAV is taking into account any preferred shares that are part of the company's capital structure, and the off balance sheet liabilities that the company is on the hook for. I don't screen out companies that have unfunded pensions - which are a common source of off balance sheet liabilities - but I do make sure to include the unfunded pension in the company's total liabilities section. You should do the same since this is an obligation the company has made which amounts to a debt. Unfortunately, unfunded pensions aren't included as part of the balance sheet so you have to dig for the information.

    Adequate Past Earnings or Catalyst - I want my companies to have shown an adequate record of earnings in the past. While I don't spend a lot of time measuring net profit margins and comparing those margins to the company's peers, a history of low profitability tends to produce perennial NCAV stocks, stocks that always seem to trade below their net current asset value. Barring suitable profitability, I'd like to see some obvious catalyst on the horizon that would lead to either improved business results or a meaningful rise in the stock price. For example, if management suddenly put the company up for sale then I would expect that the company could be sold for at least the value of its net current assets.

    An adequate past record also means a fairly stable past record. How stable is stable? Tough to say. This is a qualitative figure but I can recognize a company with an unstable past record of earnings as I see it.

    Past Price Above NCAV - While its true that the past price of a company is not a good predictor of the future price of the stock it can serve as a warning sign. To me, when a company's stock has traded below NCAV for years it's a big red flag. Typically, NCAV stocks tend to rise within 3 years because a firm buys the company, the company liquidates, or the company is able to solve the problem that pushed it deep below NCAV in the first place. If the stock has traded below NCAV for a good number of years than it's a sign that management is having a tough time addressing the business issues they were facing and that their either unwilling or unable to sell the firm. Sometimes parasitic management is just complacent and content to suck back fat salaries while the business does nothing for investors.

    Existing Operations or Liquidation - Another great way to burn your money is by buying companies that don't have existing operations. This includes things like legal entities (corporations, LLCs, etc) sitting on a bank account but not much more, with only faint promises of future business operations or, more commonly, pharmaceutical research companies which always seem to burn through their working capital without much to show for it. In cases like these, you may never see your stock rise up to its NCAV. You could wait forever only to disappoint your grandchildren by leaving them the deadbeat stock in your will. An obvious exception to this is buying a pile of assets that are going to be liquidated.

    Not Selling Shares - What could be worse than a company that's selling its own shares while they trade below NCAV? When a company buys its own stock while the stock is undervalued the excess value accrues to the remaining shareholders but when a company sells shares below fair value then it destroys value for current shareholders. Given that obvious fact, management sends investors a strong signal about the health of the company or their own attitude towards shareholder value when they sell shares below fair value. Either case is bad - but it can be difficult to know the actual reason management has chosen to destroy value. Assume the worst to protect your downside.

    Key Quantitative Criteria

    Some of these criteria below are not make-or-break items but they do play a role in helping me decide which stocks to invest in. If two NCAV investments are pitted against each other than these criteria can come into play to help make a decision. As well, some of these criteria well cause me to strongly lean away from a company but not exclude it altogether.

    Large Current Ratio - As large as possible. I want as large of a gap between the current assets and the current liabilities of a company. Having a large gap serves as a margin of safety of sorts. If the company has a couple current assets go sour, asset backed mortgages or bonds of junior mining companies for example, the large spread between current assets and current liabilities acts as a buffer ensuring that the NCAV of the company isn't significantly impaired.

    Small Market Cap - I try my hardest to invest in tiny companies. The profits an investor can make from a handful of tiny companies dwarfs the profits he or she can make from a portfolio of small or mid cap companies. When it comes to size, I like companies smaller than $50 million USD. Yes, I still find these NCAV stocks easy to buy - and you likely will, too.

    Low Price-to-Net-Cash - I consider price-to-net-cash a bit of a bonus. The main thing that price-to-net-cash does is insure the quality of the assets. Think about this for a second: which is cheaper, a million dollar bond I sell you at $50 thousand or a million dollar house I sell you at $50 thousand? A lot of people automatically assume that a company which is trading at a low price-to-cash figure is cheaper than one trading at a high price-to-cash figure. There's much more that comes into play, though. Essentially, in the example above, both investments were just as cheap. A key advantage that the bond had, though, is that there is a much more liquid market for bonds than there is for houses. Because of that you can be more certain of the value of the bond. There is much less risk when it comes to value assessment. The house, ultimately, might get offers that don't even come close to $1 million. Since no two houses are exactly the same, people may assess the value of the house differently. There is much more uncertainty in terms of real value. Similarly, when it comes to receivables and inventory, investors only have a best guess at what they're worth while cash has a bulletproof value.

    Key Qualitative Criteria

    Quality Control and Your NCAV Stocks

    Quality Control and Your NCAV Stocks

    Financial/regulated/ADR/Real Estate/closed fund - I generally try to stay away from any financial, real estate, or regulated businesses, as well as ADRs, and closed funds. I basically only try to invest in industrials or retail companies, and other similar firms. I have bent this rule in the past when it comes to financial companies but it's not something I will be trying to do in the future. It can lead to a lot of problems if an investor is not careful. Just look at the balance sheet of a bank, for example. Banks operate with a slim sliver of equity compared to the size of its assets and liabilities. If the bank breaths wrong then the equity can be completely wiped out. Peter Lynch said that the best banks to invest in were the boring predictable ones since they were the safest… but not many of those seem to fall into the net net stock universe.

    Regulated companies may need government approval for turnaround plans, buyouts, etc, and all of this may make a company much less appealing to firms who would otherwise be interested in purchasing it.

    I don't know much about ADRs. I could learn, but there are other things I would like to do with my time - like research the suitable companies I find in Canadian, British, and Australian markets. The same goes for real estate firms and closed funds.

    Company is Buying Back Stock - Every time a net net company buys it's own stock it increases the value of my own holdings. That's because for every dollar a company spends on it's stock, as a net net company, it takes back a disproportionately large share of its net net value which is then shared by the remaining shareholders. When a company buys back its own stock it also makes a strong vote of confidence in its own future.

    Insider Ownership - Insiders who own stock act as owners rather than just employees. They have a chunk of their own net worth on the line. This means they're well motivated to see the company recover and their interests are also aligned with my own.

    Major/Minor Insider Buys Vs. Sells - My ideal NCAV stock has a large number of insiders who are busy buying even more stock. Insiders can sell shares for many different reasons but they only buy stock for one reason - they see a significant opportunity to earn capital gains. Insiders have the best understanding of how the company is currently doing. If you see insiders buying the company's stock during a time of crisis then it's a good sign that the company will survive the crisis and see better days. If insiders are gobbling up buckets of stock than I immediately get on the phone with my broker.

    Burn Rate Low or Positive - I've dubbed one of my key considerations "burn rate". Burn rate is the percentage change in NCAV from year to year, or quarter to quarter. I don't want to invest in a company whose net current asset value is rapidly eroding. If that's happening, then so is my profit potential. Of course, I will overlook either of these if there is a large enough margin of safety in terms of overall NCAV-to-revenue or profits…. and if the company is trading at quite a low price.

    Catalyst - A catalyst is something that will happen in the future which will spark a return to fair value. For example, NCAV stock GTSI had been punished by the government, preventing it from bidding on government contracts for ~ 3 years. It was trading far below net net value. It was also a great net net stock because eventually the ban would be lifted allowing the company to return to former profitability.

    Insider Pay - I don't like it when managers of tiny companies have large salaries relative to assets or revenue. I specifically gage insider salaries relative to assets or revenue since these two metrics are a lot more stable than a company's market capitalization is. Net earnings are even less stable. When a company's market cap slips down below its NCAV, the market cap ends up being substantially smaller than it once was. When management solves the business problems the company is facing, market cap will rebound.

    But What About….

    Notice in my list that I didn't include profitability? There is a very good reason for this. Profitability doesn't matter. I'll have more on that later but if you want to take a look at other ways of assessing a net net stock then make sure you join our community.

    One of the biggest issues with net net investing is finding investment candidates. You can solve this problem by signing up for full Net Net Hunter membership. The money you could make off of even just one international net net stock would be enough to pay for full membership access for years. …and right now we have over 400 stocks to look at. It's free to try and you can cancel monthly membership any time without penalty. What's the risk?

    Not ready for full membership? That's fine. Get free net net stock ideas by clicking right here. No commitment, no obligation, and we keep your email address 100% confidential. Don't wait. Sign up now so you can start making over 25% annual returns through net net stocks.

    May 06 10:48 AM | Link | Comment!
  • Have You Been Sucked Into The Warren Buffett Trap?

    (click to enlarge)

    (Link to original article.)

    This will probably be the most controversial article on this website.

    Warren Buffett is a legend among value investors - and for good reason. His investment record is unmatched by any other investor who existed in the last 100 years. Value investors, understandably, have tried to emulate Buffett's approach to investing in order to snag a sliver of his returns. This typically means being glued to CNBC in the hopes of catching an interview, pouring over a mountain of books written about him, or combing through Warren Buffett's annual letters for nuggets of wisdom.

    Unfortunately, trying to emulate Warren Buffett has led investors to adopt a less than ideal strategy.

    Don't get me wrong. I like Warren Buffett - a lot. I think he has a lot to teach investors. I appreciate his frank communication style and his generosity as a financial teacher. I just don't think that his contemporary investment style, one based around buying very profitable large cap companies with sizeable moats at fair prices, is the best strategy for people like you and me. Blindly adopting it after watching TV interviews, reading a couple books about the man, or taking a peek at his past record constitutes falling into the Warren Buffett trap. If you're sitting on a portfolio of less than $10 million USD then - as those who have signed up to receive free net net stock ideas ultimately know - there are a lot better ways to make money in stocks.

    Golden Nuggets From Warren Buffett

    Now, I'm not trying to tell you that Warren Buffett is full of crap. Warren Buffett is incredibly intelligent with a far better investment record than I have (and, coincidentally, a lot more money, too) so I'm not trying to say that I know better than Buffett when it comes to investing. That would be silly. But, there is a large body of material out there in the form of interviews, his own articles, as well as his shareholder letters, and all of that has to be made sense of.

    Let's start with the major pieces of advice that you should be taking from Warren Buffett. Buffett came from the Benjamin Graham school of investing and even today embraces most of its philosophy. Graham taught investors for years, for example, that a stock is just a fractional piece of ownership in a business. Its value is derived in large part from that business so a huge driving factor in earned capital gains when investing in stocks is tied to the performance of the underlying business. Warren Buffett still echoes that same principle. In his words:

    If a business does well, the stock eventually follows.

    I totally agree.

    This also implies that a stock will fluctuate around it's intrinsic value, the business value that the stock represents. When taking the two investment principles together, it's pretty clear that volatility should be seen as a gift, something to take advantage of. This is exactly what Benjamin Graham's Mr. Market analogy highlights, an analogy Buffet has used many times in the past.

    Warren Buffett's suggestion that you stay within your circle of competence is great. Having well defined boarders is really valuable when it comes to investing and will ultimately lead to better returns. Sticking to what you know means making fewer costly mistakes.

    Speaking of mistakes, my favourite piece of advice Warren Buffett ever gave was his suggestion to follow two simple rules: 1. don't lose money, and 2. never forget rule number one. This piece of advice comes into my own investment strategy in a very powerful way, which I'll talk about more in a bit.

    These are just a few nuggets of gold from Warren Buffett, and all are consistent with the principles that Benjamin Graham originally taught decades earlier.

    The Warren Buffett Way

    But, while Warren Buffett still embraces the fundamental philosophy of Benjamin Graham, he obviously employs a much different investment strategy than Benjamin Graham argued for years before. In fact, Warren Buffett's investment style has shifted considerably since the 1950s. Rather than look for classic Benjamin Graham value stocks as he did when he ran his investment partnership, Warren Buffett has turned to finding good businesses at decent prices. His stock selection process has become very simple and now consists of only 4 filters. Charlie Munger, Warren Buffett's partner in crime, sums it up this way:

    We have to deal in things we're capable of understanding, and then, once we're over that filter, we have to have a business with some intrinsic characteristics that give it a durable competitive advantage, and then, of course, we would vastly prefer a management in place with a lot of integrity and talent, and then, finally, no matter how wonderful it is it's not worth an infinite price so we have to have a price that makes sense and gives a margin of safety given the natural vicissitudes of life.

    I'm convinced that as those on the top of their game develop more skill and experience they are able to pack a lot more of their philosophy, tactics, or strategy, into their explanations, and use increasingly simple language to do so. Despite how simple Charlie Munger's description is, there's a lot packed into these principles that would have to be unwound for a thorough assessment of the Warren Buffett & Charlie Munger investment style. This is obviously beyond the scope of this article, but Munger's simple explanation goes a long way to identifying exactly what the pair do when selecting stocks.

    Other soundbites and quotes fill in some of the missing pieces:

    It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

    Buffett has turned to buying exceptional companies over the cheap marginal firms he once bought. The focus is very much on buying high quality businesses at adequate prices - often a price far above what Benjamin Graham would have paid.

    Our favorite holding period is forever.

    Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years.

    Warren Buffett also holds his investments for an exceptionally long time - far longer than the bulk of every other "long term" Wall Street investor. While some professional managers talk about holding on to stocks for months or years, Warren Buffett talks about holding onto his investments for decades or for life.

    Warren Buffett's popularity has attracted many new investors to the value investing philosophy. These investors typically get their first experience with value investing through the lens of Warren Buffett's contemporary investment style. Now long time value practitioners are witnessing an ocean of new value investors who seem to think that the best strategy for success is to buy firms with deep moats at adequate prices and to hold them forever. Typically this means buying medium or large cap companies that have been in the spotlight for years - firms with market capitalizations that reach well beyond a billion dollars.

    Unfortunately, this strategy is far from ideal, and could be outright dangerous.

    (click to enlarge)

    Blindly following Warren Buffett is a trap that you should probably avoid.

    Is Warren Buffett's Current Strategy Dangerous?

    Well, not exactly. It really come down to who is trying to use Warren Buffett's current strategy.

    As simple as the strategy sounds, actually employing it successfully is very difficult. Warren Buffett and other money managers, such as David Winters, draw on their long experience in researching and investing, as well as a business acumen oceans deep, to employ the strategy successfully.

    Take assessing the talent and integrity of management, for example. Warren Buffett is great at assessing people. He's been investing for well over 60 years which means he's read thousands of financial reports and shareholder letters. He's also spent time managing businesses. Taking in this much data over the course of a lifetime, and being able to draw on practical business experience, means inevitably being able to spot trends and draw conclusions based on details that a typical retail investor might not even notice.

    The same goes for judging whether a business has a strong competitive advantage or not. Of course, everybody can recognize a competitive advantage after it's been pointed out but picking them beforehand is a whole other story. Warren Buffett has spent thousands of hours diving into industry analysis and reading economic data, on top of his experience combing through thousands of annual reports, so his ability to spot the trends and characteristics that make for a strong competitive advantage is far more developed than even most professional money managers.

    Think judging management or spotting strong competitive advantages is easier than I'm making it out to be? Even Seth Klarman doesn't think he can do it well - and Klarman has one of the best investment records in the industry. From an interview with Charlie Rose,

    I think Buffett is a better investor than me because he has a better eye for what makes a great business. And, when I find a great business I'm happy to hold it …most businesses don't look so great to me.

    Once a company is selected, it still has to be valuated. According to Warren Buffett,

    Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life.

    But it's also a calculation that mere mortals have a very difficult time using with any accuracy. It is very easy to be off by a small margin on any one of your assumptions that make up discounted cash flow. If you're off by more than a hair, you will inevitably be off on your assessment of intrinsic value by a large margin. As Buffett continues,

    The calculation of intrinsic value, though, is not so simple. As our definition suggests, intrinsic value is an estimate rather than a precise figure, and it is additionally an estimate that must be changed if interest rates move or forecasts of future cash flows are revised.

    Some investors might have the skill to be able to use discounted cash flow with some degree of accuracy, but I definitely don't. Before you decide to use Buffett's current strategy, you should take a hard look in the mirror to really admit to yourself whether you're able to perform a detailed discounted cash flow calculation with any degree of accuracy, yourself.

    Typically, a margin of safety is there to absorb the errors you make, and guard against uncertainty. It's unfortunate, then that investors who are emulating Warren Buffett are electing to invest in wonderful companies at fair prices rather than fair companies at wonderful prices. Overestimating the value of a company can lead to significant losses. Just look at Coca-cola - one of Warren Buffett's top investments!

    What is sound in theory can sometimes have very painful consequences in practice; and, what lacks in theoretical accuracy can sometimes yield huge dividends in practice.

    Should Skilled Investors Follow Warren Buffett's Current Investment Style?

    Maybe. Clearly Warren Buffett's investment style suits Warren Buffett, so there must be other investors out there who would benefit from adopting his style - but that investor is very unlikely to be you. Why? Very simply, Warren Buffett moved away from Benjamin Graham's investment style because his portfolio grew far to large to take advantage of classic Benjamin Graham investment opportunities.

    Warren Buffett used Benjamin Graham's investment strategy with tremendous success during the 1950s and 1960s. While he managed his investment partnership, he was able to rack up the best investment results of his career. Buffett was able to earn returns north of 20% over the course of his lifetime - but just look at how well he was able to do using Benjamin Graham's investment approach:

    (click to enlarge)

    Since leaving Benjamin Graham's investment strategy and growing his managed funds his returns have significantly decreased. Of course, you will probably bring up the point that the increase in the amount of money he was managing meant that his returns would inevitably suffer - and you're right. But when asked what he wold do if he was managing small sums of money once again his answer was very telling (fromGuruFocus):

    The best decade was the 1950s; I was earning 50% plus returns with small amounts of capital. I could do the same thing today with smaller amounts. It would perhaps even be easier to make that much money in today's environment because information is easier to access.

    You have to turn over a lot of rocks to find those little anomalies. You have to find the companies that are off the map - way off the map. You may find local companies that have nothing wrong with them at all. A company that I found, Western Insurance Securities, was trading for $3/share when it was earning $20/share! I tried to buy up as much of it as possible. No one will tell you about these businesses. You have to find them.

    Other examples: Genesee Valley Gas, public utility trading at a P/E of 2, GEICO, Union Street Railway of New Bedford selling at $30 when $100/share is sitting in cash, high yield position in 2002. No one will tell you about these ideas, you have to find them.

    The answer is still yes today that you can still earn extraordinary returns on smaller amounts of capital. For example, I wouldn't have had to buy issue after issue of different high yield bonds. Having a lot of money to invest forced Berkshire to buy those that were less attractive. With less capital, I could have put all my money into the most attractive issues and really creamed it."

    Notice that the examples he gives in this quote come straight from the investment strategy of Benjamin Graham - they're very different from the way that Warren Buffett currently invests money. In fact, Warren Buffett often wrote about spectacular classic Graham investments. At a Berkshire Hathaway annual meeting held earlier this past decade, Warren Buffett answered a question which really spells out how he would invest if he wasn't handicapped with a large portfolio. Take a look:

    Yeah, if I were working with small sums, I certainly would be much more inclined to look among what you might call classic Graham stocks, very low PEs and maybe below working capital and all that. Although - and incidentally I would do far better percentage wise if I were working with small sums - there are just way more opportunities. If you're working with a small sum you have thousands and thousands of potential opportunities and when we work with large sums, we just - we have relatively few possibilities in the investment world which can make a real difference in our net worth. So, you have a huge advantage over me if you're working with very little money.

    Click to see Warren Buffett's comment on video.

    So getting back to the question above, whether you're a skilled investor or not is just one factor that comes into play in deciding whether you should adopt Buffett's contemporary investment style - another huge consideration is the amount of capital you have to invest. If you're investing less than $10 000 000 then you would be much better off investing in the Graham styled bargains that Warren Buffett mentioned above - provided that you want the highest possible returns for your money.

    If you don't, that's fine. At some point a person wants to spend a lot less time and effort managing his or her own money. There's nothing wrong with that, and an index fund might be the next best choice.

    How I Have Leveraged Warren Buffett to Yield Spectacular Returns in Classic Graham Stocks

    Seeing as you're now reading an article on Net Net Hunter, it's pretty clear what strategy I've elected to use.

    Not only has Benjamin Graham's investment strategy been shown to work exceptionally well in a number of academic studies, but it's also been used very successfully in practice by professional investors such as Walter Schloss, Benjamin Graham, Tweedy Browne, Seth Klarman, Peter Cundill, and - of course - Warren Buffett. How well does the strategy work? Academic studies consistently show returns of baskets of net net stocks in the 25-35% range. That's not just the results of a single study - those results have been shown by each and every study I've looked at.

    Right now I'm using a range of filters developed through a thorough study of Benjamin Graham, the scientific studies mentioned, and Buffett's own partnership letters. I've put all of this knowledge together into my NCAV investment scorecard and use that scorecard when assessing the merits of an investment opportunity.

    Warren Buffett's influence has been profound. I've taken his advice to concentrate my portfolio and invest in the cheapest net net stocks possible to yield the highest possible returns. I've also kept his focus on not losing money front and center - I screen out companies that have weak balance sheets which ultimately decreases the likelihood that any of my stocks will slip into bankruptcy. As a result, my portfolio returns have been great.

    How have my net net stocks done? Over the last 3 years my portfolio has returned ~140% against the S&P 500′s 41% return. As you can see, this strategy yields returns much higher than the market, and is ultimately a much better strategy than the one that Warren Buffett has been forced into.

    Want similar returns? Start by signing up for free net net stock ideas. Make the most out of your own investments.

    May 01 11:45 PM | Link | 6 Comments
  • Where Are All The Net Net Stocks?

    I know what it's like. You hear about this great investment strategy, you start to use it with amazing results, and then you can't find any more stocks that fit your criteria.

    And that's the problem with hunting for net net stocks. You can have your pick of net net stocks when the market is in turmoil but when the market starts to froth the net net universe seems… as barren as the Sahara. What is an investor to do?

    One Basic Way to Invest in More Net Net Stocks

    One way to get around this problem is to abandon the standards you have for picking stocks. You have a core set of criteria that you use to examine stocks. The criteria is well throughout and proven to work well over a number of years. Not all stocks fit the criteria, obviously, so you abandon it in order to purchase second tier stocks in terms of quality.

    When the stock market is making a peak you still have access to a lot of net net stocks that meet the definition on a statistical basis. The problem is that by abandoning your standards you set yourself up for lower future returns. You may do things like invest in a stock that would otherwise be a good prospect if it wasn't loaded with debt. Or you may pick up a net net stock or two that isn't quite as cheap as you'd like.

    The problem with putting together portfolios like this is that you end up lowing your returns going forward, and may actually face losses. Companies loaded with debt may face large issues going forward. Based on the peer reviewed articles that I've read - the same ones that are made available to Net Net Hunter community members - investing in companies with greater than a 25% debt-to-equity ratio can reduce returns in a massive way. The greater the debt-to-equity ratio, the more profit erosion you see.

    The same goes with shifting from big bargains to buying sort of bargains. In net net stock land, big returns happen when you buy cheap and safe. Cheap doesn't mean 5 or 10% below fair value, either. Buffett wanted to pick up net net stocks that were trading at less than half of the company's NCAV. According to Buffett, there is a world of difference in picking up a stock at 40% of NCAV and picking up a stock at 60% of the firm's NCAV. The further away from fair value you buy, the larger your ultimate payoff. This isn't just speculation, either - it's been demonstrated in nearly every single study that I've read examining NCAV stocks. If you abandon price-value discretion, your results shrink rapidly. Buffett himself, arguably one of the best net net practitioners when he was younger, said that you made profit when you bought - and bought cheap.

    How to Deal With a Market Peak

    If you want to buy net net stocks during the height of a bull market and you want to maintain your profitability then there is only really one course of action to take - you have to look at a larger universe of stocks. If you're investing primarily in your home market or in the American markets, then you're limiting your available investment options. International investing is a great way to increase the number of opportunities available to help maintain the quality of your portfolio. International investing is both easy and safe, too, provided you're investing in businesses in the right countries. Places like Canada, Ireland, the UK, and Australia have a long history of stable, trustworthy, capitalist markets. Investing in any one of these countries means committing your money in geographic areas that are at least as safe as the United States or your home market.

    And it's profitable, too. Back a few years ago the Brandes Institute published a study looking at portfolio returns made up of stocks from countries around the world. They found that value investors can make just as much money from value investments when investing globally. In some cases, value investors can earn much higher returns by investing outside of the USA.

    All this shows that when the going gets tough, the smart invest internationally.

    Give yourself the gift of high return, low risk stocks this year. Sign up for full Net Net Hunter membership right now - click here.

    Feb 24 3:37 AM | Link | Comment!
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Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.