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.
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